Morning Wrap: ASX 200 to fall, S&P 500 gives back early strength + Charts of the Week

Major US benchmarks faded a strong start thanks to a stronger-than-expected US GDP print (which sent yields and the dollar higher) and Bank of Japan yield control speculation, the ECB hikes another 25 bps in-line with expectations, a few minor US earnings overnight including eBay, McDonalds and Royal Caribbean Cruises, gasoline prices hit an eight-month high and the classic Friday Charts of the Week.

Let's dive in.

S&P 500 SESSION CHART

S&P 500 fades intraday to finish at worst levels (Source: TradingView)

MARKETS

• S&P 500 -0.64%, Nasdaq -0.55%, Dow -0.67%, Russell 2000 -1.29%

• S&P 500 declined from session highs of 0.88% to finish at worst levels

• Dow dropped after a record-tying 13 consecutive session rally

• Treasury yields firmer, the US 2-year rose 8 bps to 4.93%

• US Dollar Index bounces 0.7% to a near three week high

• Market reversal blamed on the latest BoJ yield control tweak speculation and upward pressure on bond yields after the stronger-than-expected GDP print  

• Global funds dump Chinese assets in favour of emerging markets (Reuters)

• Traders hedging against risk of yen surging following BOJ meeting (Bloomberg)

• Iron ore prices look set for a tumble as major China stimulus hopes fade (Bloomberg)

CENTRAL BANKS

• ECB hikes 25 bps again, keeps options open for September (Bloomberg)

• Fed hikes by 25 bp, Powell says September could be "live" (Bloomberg)

• Economists predict Fed is done with rate hikes (FT)

• BoJ press leaks flagged expected yield control curve tweak where it could keep the 0.5% ceiling but allow for moderate rises above that level (Nikkei)

STOCKS

• Netflix restructuring its ad partnership with Microsoft (Reuters)

• European banks flag bad loan risks as global economy falters (Reuters)

• Chinese EV shares rally on Volkswagen's investment in Xpeng (FT)

• Samsung anticipates AI-driven rebound in demand over H2 (Bloomberg)

EARNINGS

Royal Caribbean Cruises (+8.7%): Double beat, management said "demand for cruising and our brands is exceptionally strong and we have seen another step change in booking volume and pricing, leading us to now expect double-digit net yield growth for the year."

McDonalds (+1.2%): Double beat, global and US comparable sales also topped expectations led by strength in China.

Chipotle (-9.8%): Earnings beat but revenue miss, quarterly revenue rose 13.6% to US$2.5bn, operating margins improved to 27.5% from 25.2% a year ago thanks to sales leverage and lower avocado prices.

eBay (-10.5%): Revenue miss but earnings beat, third quarter guidance came in below expectations, quarterly revenue rose 5% to US$2.5bn.

ECONOMY

• US GDP grows 2.4% in Q2, topping estimates (Bloomberg)

• Some economists cautious of soft landing after previous false starts (NY Times)

• US durable goods orders jump 4.7% in June (Morningstar)

• Gasoline prices hit eight-month high, posing risk to Biden campaign (Bloomberg)

• German consumer confidence improves on lower propensity to save (Reuters)

• South Korea manufacturers the most optimistic they've been all year (Reuters)

Deeper Dive

What happens when the Fed starts to cut rates?

The S&P 500 has fallen on average 23.5% over a period of 195 days from the first Fed cut to the market low, based on eight instances between 1974 and 2020.

According to the Fed Funds Futures, the market is currently pricing:

• Pause between September 2023 to January 2024

• First cut (25 bps) in March 2024 to 5.0% to 5.25%

• Additional cuts to 4.1% by January 2025

At the same rate, rate hikes have historically hit earnings growth with an on average 17 month lag, according to Game of Trades. The hiking cycle that began in March 2022 implies that earnings are likely to weaken in the second half of 2023.

Charts of the Week

This segment of the morning wrap brings you technical commentary on the ASX 200 and other charts. These are not meant as recommendations and for illustrative purposes only. Any discussion of past performance is for educational purposes only. Past performance is not a reliable indicator of future return. Always do your own research.

ASX 200 – Breakout

ASX 200 daily chart (Source: Commsec)

It was only last week that the index was range bound and looking as though it wouldn’t break, in either direction, ahead of earnings season. A softer-than-expected inflation print and changing expectations around further interest rate hikes have seen the market break higher – and fairly emphatically no less. The ASX 200 is now around 2% from its all-time high and the bulls are looking like they might give that a run in the coming weeks.

Aristocrat Leisure (ALL) – Game on

Aristocrat daily chart (Source: Commsec)

With the market breaking higher there are many strong looking charts on the ASX right now. ALL is one of the best, given the neckline at $40 on a long-term ascending triangle pattern which is highlighted on the chart. Volumes have remained solid all the way through and it appears a breakout is imminent. ALL doesn't report in August either (full year results are in November), so there is no worry of a bad report coming up to derail the momentum should the $40 level be cleared.

CSR Limited (CSR) – Building a rally

CSR daily chart (Source: Commsec)

Whilst ALL needs to break, CSR has already popped. The bulls overcame the $5.55 prior swing high and resistance level a couple of sessions back, retested the level, and the rallied hard off it yesterday. This is now a pretty clean move and any further upside could encourage more buying. Big moves often start new rallies, and CSR is now trading at levels last seen in May last year - so there is plenty of clear air for the price to rally into.

ASX corporate actions occurring today:

• Trading ex-div: Perpetual Credit Income Trust (PCI) – $0.007

• Dividends paid: RAM Essential Services (REP) – $0.0135, Steamships Trading (SST) – $0.25, Turners Automotive Group (TRA) – $0.066 

• Listing: None

Economic calendar (AEST):

• 1:00 pm: BoJ Interest Rate Decision

• 6:00 pm: Germany GDP

• 10:00 pm: Germany Inflation

• 10:30 pm: US PCE Index