Morning Wrap: ASX 200 to fall, S&P 500 lower + Oil prices dip below US$70 a barrel

ASX 200 futures are trading 34 points lower, down -0.47% as of 8:20 am AEDT.

US stocks finished lower overnight as markets continue to take a breather from the recent rally, WTI crude prices fall below US$70 a barrel for the first time since June, strategists express concerns that rate cut expectations are to aggressive, a closer look at yesterday's lithium rally and why quiet price action is good for markets.

Let's dive in.

S&P 500 SESSION CHART

S&P 500 sold off intraday to finish near worst levels (Source: TradingView)

MARKETS

• S&P 500 lower, finished near worst levels from session high of 0.52%

• No major drivers at play, markets continue to take a breather after the outsized bounce over the past five or so weeks

• Mixed moves in bond markets, with 2-year inching higher while the 10-year fell 4 bps to a fresh 3-month low

• Copper prices fell for a third straight session, down 5% since its brief 5-month high last  Friday

• WTI crude on pace for sixth weekly decline in the past seven and currently below US$70 a barrel, the lowest since early July

• Oil selloff comes despite OPEC+ efforts to deepen cuts into 2024, which have been offset by underwhelming demand from China and rising production in the US

• Markets betting other central banks will join Fed in cutting rates in 2024 (Bloomberg)

• Aggressive rate cut expectations sets markets up for disappointment (Bloomberg)

• Traders anticipating 44% further devaluation of Argentine Peso (Bloomberg)

STOCKS

• Amazon slashes fees for merchants products below $20 amid price war (Bloomberg)

• Nvidia says working closely with US government to ensure China-bound chips compliant with export curbs (Reuters)

• Walmart CEO warns consumers may not be as resilient next year (CNBC)

• AMD unveils new chip to challenge Nvidia; predicts US$400bn market for products over next four years (Bloomberg)

• McDonald's to open 8,800 new locations, add 100m loyalty members by 2027 (CNBC)

• Google to release Gemini AI model, which outperforms OpenAI's GPT-4 (Bloomberg)

• Citi said it sees lower expenses in 2H24, revenue at low end of guidance (Bloomberg)

CENTRAL BANKS

• Economists see Fed holding off on rate cuts until at least mid-2024 (FT)

• Markets potentially pricing in too aggressive ECB easing (Bloomberg)

• BOJ's Himino says inflation progress mixed, mulls risks from easing exit (Reuters)

CHINA

• Deteriorating China earnings dent hopes for stock market rebound (Bloomberg)

• Moody's downgrade raises pressure on Beijing to do more to support markets (Reuters)

• PBOC steps up yuan defense following Moody's rating downgrade (Bloomberg)

ECONOMY

• BofA CEO says signs US economy is slowing but remains positive in outlook (Bloomberg)

• German industrial orders fall unexpectedly in October as economy remains on track for Q4 contraction (Bloomberg)

• Japan manufacturer sentiment jumps amid easing of chip shortage and higher auto production (Reuters)

• Australian Q3 GDP growth below market expectations as consumption hits weakest since early 2021 (Bloomberg)

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The Lithium Complex

Wednesday was a wild day for lithium stocks, with most names up around 3-6%. On the same day, China's most active lithium carbonate futures opened another ~9% to 85,650 yuan a tonne (a week ago it was above 100,000 yuan). I talk a little about this dynamic in my piece about Pilbara Minerals yesterday.

A China-listed name like Ganfeng rallied 6.8% on the highest volume since July 2022. This was a day after Jefferies downgraded the stock to Underperform (from Buy) and cut its target price by 78% on expectations of further lithium price declines.

Without falling into the rabbit hole about lithium's downward spiral and still-strong EV demand – Here's my two cents:

• Lithium stocks are heavily shorted (Pilbara Minerals, Core Lithium and Sayona are among the top 5 most shorted stocks on the ASX)

• High short interest can often a scenario where rallies fade but dips bounce

• We've seen the above dynamic happen quite frequently with a name like Pilbara Minerals. I've circled those instances where dips were met with strong buying activity the next day (which would then fizzle after a few days)

Pilbara Minerals daily chart (Source: Market Index)

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Cheap Fuel Incoming

Crude oil prices dipped below US$70 a barrel for the first time since late June.

Since the September 28 high, oil prices are now down around 27%. Prices are falling even as OPEC+ agreed to additional supply cuts last week. The market is unconvinced that amid underwhelming demand from China and strong US production – Where US exports are nearing a record 6 million barrels a day (and offsetting these OPEC supply cuts).

Weaker oil prices is also following through to US gasoline prices, with average national prices sitting at US$3.23 (as of Wednesday) – The lowest since January. A much welcomed development for the Fed and disinflation narrative.

The same can't be said about oil stocks, where most large cap names are down around 15-20% since September. A household name like Woodside (ASX: WDS) has dropped 8 of the last 12 weeks to levels not seen since June 2022.

Woodside weekly chart (Source: TradingView)

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Quiet Strength

The S&P 500 has had a few ups and downs in the past few days but its virtually unchanged since 22 November. And this might be a good thing.

"It has been 12 days (and counting) without a 1% swing in the S&P 500 is the longest stretch since August. When the market goes quiet, it’s usually a sign that strength is building," notes Hi Mount Research.

That said, the overnight session marked a 0.9% intraday swing where the S&P 500 closed 0.4% lower from a session high of 0.5%.

Source: Hi Mount Research

ASX corporate actions occurring today:

• Trading ex-div: Hancock & Gore (HNG) – $0.01, Midway (MWY) – $0.05

• Dividends paid: CSR (CSR) – $0.15

• Listing: None

Economic calendar (AEDT):

• 11:30 am: Australia Balance of Trade (Oct) 

• 2:00 pm: China Balance of Trade (Nov)