Morning Wrap: ASX 200 to bounce, Energy and Materials to lead gains + US earnings in focus

The S&P 500 aggressively sold off in the last two hours of trade, the US unemployment rate ticks lower to 3.6% but the jobs market is beginning to show some cracks, S&P 500 earnings season kicks off this week and analysts expect earnings to fall 7.2% year-on-year and the ASX 200 futures point towards a bounce, led by Energy and Materials.

Let's dive in.

S&P 500 SESSION CHART

S&P 500 fades from session highs to finish at worst levels (Source: TradingView)

MARKETS

• S&P 500 lower, faded from sessions of 0.65% and finished at worst levels

• S&P 500 and Nasdaq finish the week down 1.16% and 0.95% respectively 

• US 2-Year Treasury yield briefly trades above 5.0% again, marking the highest level since 2007 after solid jobs data 

• Market and treasury selloff reflect expectations that the Fed will hold rates higher for longer following the latest batch of strong economic data

• JPMorgan says investors were most bullish on Treasuries since 2010

• Bullish focus points for the week: Rising soft landing expectations, prices paid component falling in both ISM manufacturing and service PMIs, cracks in the hot labor market narrative, optimism around Q2 earnings and retail investor momentum 

• Bearish focus points for the week: Risks of higher-for-longer Fed, median terminal rate now around 5.4% – the highest since March, market positioning and overbought conditions, rising geopolitical tensions and resumption of US student loan repayments 

• Strong US jobs data tempers recession fears, raises prospects of hikes (Bloomberg)

• Narrow, tech-focused market leadership not necessarily a bad thing (Bloomberg)

• Wall St analysts divided about prospects for the remainder of 2023 (Bloomberg)

• Treasury volatility likely to remain until Fed's rate path becomes clearer (Bloomberg)

STOCKS

• Twitter threatens trade secrets lawsuit over Meta's Threads app (FT)

• Renault Chairman Senard warns of a coming storm of Chinese EV imports (Reuters)

• Alibaba shares surge on reports that it would pay a US$984 million fine to Chinese regulators, which would end several years of dispute (Reuters)

• Jeans maker Levi Strauss shares tumble after cutting its full-year guidance (CNBC)

GEOPOLITICS

• EU is pushing China to narrow the scope of metal export controls (Bloomberg)

• Biden weighs controversial decision to send cluster bombs to Ukraine (NY Times)

ECONOMY

• US job gains smallest in two-and-a-half years (Reuters)

• US jobs growth cools but labor market still tight, wages won’t comfort Fed (Reuters)

• Treasury Secretary Yellen says a recession is "not completely off the table" (CBS)

• Chinese authorities under pressure to deliver on economic stimulus (Bloomberg)

• China Premier Li pledges speedy policy support measures (Bloomberg)

• German industrial output declined in May, factory weakness weighs (Bloomberg)

• ECB Lagarde says inflation may remain above target in 2024-25 (Bloomberg)

Deeper Dive

US earnings season

Second quarter earnings season kicks off this week. It's a bit of a slow start and most of the more interesting names that report will be skewed towards the end of the week.

• Thu: Pepsi, Delta Airlines

• Fri: JPMorgan, Citi, Wells Fargo, State Street, United Healthcare

The S&P 500 is expected to report a year-on-year decline of 7.2% for Q2 2023. This would mark the largest decline since Q2 2020 (where earnings fell 31.6%).

S&P 500 second-half expectations

Wall Street analysts are incredibly bearish on the second half and S&P 500 target points are at the most bearish levels on record, according to Bloomberg.

Source: Bloomberg

But every single time analysts were net negative on the S&P 500 in the second half, the market delivered positive returns:

• 1999: 7.0%

• 2019: 9.8%

• 2020: 21.0%

• 2021: 10.9%

Sectors to Watch

The overnight session was a little two-faced. The Index was rather bearish, with the S&P 500 fading a 0.65% gain to finish lower. But most of the ETFs above were positive and up around 1-2%, especially those in the Materials and Energy space. BHP (ASX: BHP) ADRs reversed a 0.76% decline to finish the session 0.4% higher.

• Uranium: The Global X Uranium ETF bounced 2.3% overnight after falling around 6.0% in the previous three sessions. This weakness has dragged a strong trending name like Boss Energy (ASX: BOE) to a 1-month low. Is it time to bounce?

• Energy: WTI crude rallied 2.5% overnight to a 1-month high of US$73.5 a barrel. Energy was also the best performing S&P 500 sector overnight, up 2.06%.

• Lithium: Lithium-related ETFs like the VanEck Rare Earths/Strategic Metals and Global X Lithium & Battery Tech rose 2.04% and 1.85% overnight. Last Friday was a pretty heavy session for local names, with bellwether names like Pilbara Minerals (ASX: PLS) and Allkem (ASX: AKE) down 3.75% and 1.35% respectively. Patriot Battery Metals (ASX: PMT) also tumbled 7.4% following the release of a short report by Night Market Research. Is a bounce in play after a strong showing from overnight peers?

• Defensives: Defensive sectors like Staples, Healthcare, Utilities and Communication Services led to the downside on Wall Street. Do we see a similar theme take place on Monday?

ASX corporate actions occurring today:

• Trading ex-div: Turners Automotive (TRA) – $0.066, Collins Foods (CKF) – $0.15, Red Hill Minerals (RHI) – $0.10 

• Dividends paid: None

• Listing: None

Economic calendar (AEST):

• 11:30 am: China Inflation Rate