Morning Wrap: ASX 200 to fall, S&P 500 lower + Is the market bearish or contrarian bullish?

Major US benchmarks continued to sell off on Friday as investors worried about higher yields and the Middle East conflict, Hewlett Packard and SolarEdge flag weaker-than-expected earnings guidance, Germany's producer prices posted their biggest year-on-year decline in September, China's restricting graphite exports and is the market bearish or contrarian bullish right now?

Let's dive in.

S&P 500 SESSION CHART

S&P 500 lower and finished near worst levels (Source: TradingView)

MARKETS

• S&P 500 lower, finished near worst levels, down 3.4% in the last three sessions

• Yields eased across the board, with the 10-year closing just below the 5.0% level

• Bull focus points for the week: Powell's dovish lean at his latest speech, stronger-than-expected US September retail sales data, contrarian bullish signal for risk assets amid extremely bearish sentiment and positioning indicators, TSMC notes early signs of demand stabilisation in PC and smartphones, more China policy support

• Bearish focus points for the week: Renewed upward pressure on long-term yields, lagged effects of rate hike cycle, growing geopolitical tensions, earnings optimism takes a hit from disappointing earnings like Tesla, ASML and Morgan Stanley

• BofA Flow Show report says nearly US$109bn outflow from cash while Treasuries saw the 36th straight week of inflows, the longest streak since 2010

• Yields hit 5% for the first time since 2007 amid escalating Middle East conflict (Reuters)

• Treasury market braces for months of continued volatility (Bloomberg)

• BofA says extreme bearish sentiment triggers contrarian buy signal (Bloomberg)

• Strong Q3 earnings may fail to reassure investors amid market jitters (Yahoo)

• IPO activity expected to remain muted into year-end (Bloomberg)

• Foreign investors continue to dump shares of Chinese tech giants (Bloomberg)

• China imposes export controls on graphite, a material used in EV batteries (FT)

EARNINGS

Of the 17% of S&P 500 companies that have reported third quarter results, 73% have beaten EPS expectations, below the one-year average of 74% and five-year average of 77%. In aggregate, 77% of companies have topped revenue expectations, below the 69% one-year and 68% five-year averages.

American Express (-5.4%): Double beat, total card spend up 7% year-on-year, Gen Z spend up 18% year-on-year and accounted for ~60% of new membership growth. Consumer remains resilient, travel and entertainment was one of the strongest categories, notably restaurant spending, up 13% in Q3. Reaffirmed guidance (which may have disappointed some analysts).

Hewlett Packard (-6.6%): FY24 earnings guidance below analysts expectations, missed FY24 free cash flow expectations, reaffirmed medium-growth targets.

SolarEdge (-27.3%): Q3 guidance of $720-730m vs. prior $880-920m, slashed guidance, flagged “substantial unexpected cancellations and pushouts of existing backlog from our European distributors,” analysts warn supply chain problems may persist through 1Q24.

CENTRAL BANKS

• Powell says Fed will stay on hold but keep future hike on the table (Bloomberg)

• Fed's Logan not convinced inflation is trending toward 2% (Bloomberg)

• ECB's peak rates to endure economic perils (Bloomberg)

• PBoC injects record amount of cash via short-term repos (Bloomberg)

• BoE's Bailey says we'll see more evidence of falling inflation by year end (Bloomberg)

GEOPOLITICS

• Biden says support for Israel and Ukraine "vital for US security" (NY Times)

• Israel shifting approach amid US warnings of civilian losses (Bloomberg)

• Pentagon says Beijing continues to modernise, expand its nuclear arsenal (Bloomberg)

ECONOMY

• US economists raise growth projections and trim recession odds (Bloomberg)

• China property market shows little signs of revival despite stimulus (Reuters)

• German producer prices fall at fastest rate since 1949 (Reuters)

• UK retail sales slump in September as warm weather influences (Bloomberg)

• Japan's core inflation dip again to below 3% for first time in a year (Reuters)

China Restricts Graphite Exports

China announced export controls on natural and synthetic graphite last Friday, citing national and supply security. Here are the key takeaways from Benchmark Minerals Intelligence:

• "China dominates graphite mining, processing, and anode production, and is set to produce 67% of global natural graphite this year."

• "In the short term the policy could make it more difficult for overseas companies to buy Chinese graphite feedstock products."

• "Longer term, however, the policy could accelerate a build-out of the battery anode supply chain in the West."

These headlines started to emerge around 1:00 pm AEDT on Friday.

A name like Syrah Resources (ASX: SYR) quickly rallied from around -5.5% at 1:00 pm to a +16.5% close.

Syrah intraday chart on Friday, 20 October (Source: TradingView)

Bearish or Contrarian Bullish

The market is in rather bearish place at the moment.

• S&P 500 breadth falls to its lowest level since November 2022

• Just under 32% of S&P 500 stocks are trading above their 200-day moving averages

• Russell 3000 Index is up 9.4% year-to-date but the average constituent is down 2.5% and approximately 60% of the Index is down year-to-date

But more often than not, such bearish becomes contrarian bullish.

• BofA notes its Bull and Bear Indicator has hit an extreme bearish level

• BofA says global equities saw a second straight week of outflows with US$5.2bn leaving the space

• CNN's Fear & Greed Index is a tick away from re-entering 'Extreme Fear'

From a seasonal perspective, a late October flush is pretty normal. But can the market pick up the pieces without anything breaking?

Source: Market Index

Australia Reaches A Wine Deal With China

Australia and China have agreed to suspend the dispute on wine at the World Trade Organisation, pending the outcome of a review on wine tariffs. Here are the key takeaways from Prime Minister Albanese:

• Since the successful removal of duties on Australian barley, we have engaged actively to secure a similar process to resolve our WTO wine dispute with China

• We have now reached an agreement with China to move forward to resolve this dispute

• We welcome China's agreement to undertake an expedited review of its duties

• This process is expected to take five months

• If the duties are not removed at the end of the review, Australia will resume the dispute in the WTO

ASX corporate actions occurring today:

• Trading ex-div: New Hope Corp (NHC) – $0.30

• Dividends paid: None

• Listing: None

Economic calendar (AEDT):

No major economic announcements.