Morning Wrap: ASX 200 to fall, S&P 500 slips as yields soar + RBA set to leave rates unchanged

Major US benchmarks finished lower as Treasury yields rallied on concerns the Fed may not cut rates as much as expected, Tesla shares hit a 9-month low, US services PMI rebounds much stronger than expected, the Fed says banks experienced weaker demand for almost all loan types, iron ore prices hit a 3-month low and the RBA is set to keep rates on hold at 2:30 pm AEDT.

Let's dive in.

S&P 500 SESSION CHART

A weak start and a weak finish for the S&P 500 (Source: TradingView)

MARKETS

• S&P 500 finished lower but well above session lows of -0.82%

• S&P 500 up 4.3% year-to-date vs. equal-weight S&P 500 up just +0.1% and Russell 2000 down -3.4%

• Russell 2000 finished lower last week for a fifth time in the last six, and undercut its 50-day moving average for the first time since November 2023

• S&P 500 and Nasdaq higher in 13 of the last 14 weeks, the best streak since 1986

• Markets currently pricing in just over 105 bp of rate cuts this year, down from 115 bps post-US jobs report on Friday, 140 bps before the report and 175 bps earlier in January

• US Dollar Index jumped to its highest level in almost three months, up 3.6% since late December low

• US bond yields rally to 5 week highs, the 10-year yield is up 28 bps in the last two sessions

• February represents the third-worst month for S&P 500 returns in the last 30 years, behind September and August (Bloomberg)

• Global hedge funds poised to profit from selloff in US regional banking stocks last week, according to a JPMorgan prime brokerage report (Reuters)

STOCKS

• Amgen's weight loss drug shows lasting results in early study, keeping weight off up to 150 days after stopping use (Bloomberg)

• Microsoft in deal with Semafor to create news stories with aid of AI chatbot as tech giant faces multi-billion-dollar lawsuit from New York Times (FT)

• SAP to stop using Tesla as a car supplier due to late deliveries and price fluctuations (Reuters)

• Hertz pauses plan to buy Polestar EVs after agreeing to buy 65,000 cars over five years (FT)

• Snap to cut 10% of staff as part of restructure amid ad revenue slowdown (Bloomberg)

EARNINGS

Caterpillar (+1.9%) – Earnings beat but revenue miss, revenue rose 3% year-on-year in Q4 thanks to price realisation offsetting lower sales volumes, management anticipate full-year 2024 sales and revenues to be broadly similar to 2023. It's worth noting the stock opened 6.3% higher and faded most of its gains.

McDonald's (-3.7%) – Earnings beat but revenue miss, Q4 comparable sales up 3.4% vs. 4.7% expected (international sales underperformed), going after Starbucks with new CosMc's business, France is the most pressured market right now, the US is cycling tough comps but expect the second half to be stronger.

CENTRAL BANKS

• Powell says the Fed still expects to make about three 25 bp rate cuts this year (CBS)

• Chicago Fed's Goolsbee says he wants to see more good data, but doesn't rule out March cut (Bloomberg)

• Minneapolis Fed's Kashkari says policymakers can take their time on cutting rates (CNBC)

GEOPOLITICS

• White House says US intends to launch further airstrikes at Iran-backed groups in the Middle East (Bloomberg)

CHINA

• China stock traders unwinding margin debt rapidly, underscoring how a prolonged selloff may be leading to some forced share liquidation (Bloomberg)

• China's Caixin PMI services activity expands at slightly slower pace in January (Reuters)

• China producer prices down for 15 months in a row (Reuters)

• China to push up financing for home projects in coming days as part of broader support measures but banks wary of risky developers (Reuters)

• China will impose additional trading restrictions on domestic institutional investors to support stock market (Bloomberg)

ECONOMY

• US ISM Services rebound but continue to track weaker than official data (ING)

• Fed Senior Loan Officer Opinion Survey (SLOOS) reports tighter standards and weaker demand for commercial and industrial segment in 4Q23 for firms of all sizes (Fed)

• German exports fell more than expected in December due to weak global demand (Reuters)

• Eurozone PMI services for January shows tentative signs of recovery (Reuters)

• Eurozone economic sentiment improves for fourth consecutive month (Reuters)

Sectors to Watch: Bond Yield Pains

A pullback in Fed rate cut expectations (due to pushback from Fed policymakers and robust economic data) has sent bond yields and the US dollar soaring. And that's not good for risk assets and commodities.

Singapore iron ore futures undercut recent lows to hit a 3-month low.

Singapore iron ore futures daily chart (Source: TradingView)

Copper has a bit more breathing room but down 3.6% in the last four sessions.

Copper futures daily chart (Source: TradingView)

The above ETF watchlist is a sea of red (minus semiconductors), led by resources-related ETFs such as battery metals, lithium, gold and copper.

RBA Decision

The Reserve Bank hands down its rate decision and Statement on Monetary Policy at 2:30 pm AEDT. The market expects the RBA to hold rates at 4.35%. The main risk here is that commentary comes with a tightening bias and pushes back growing rate cut expectations.

"While inflation looks to be headed back to the top of the target band by the end of this year, sticky services inflation, pending income tax cuts and rising house prices argue against a February turn in guidance from the RBA Board," noted Citi analysts last week.

"We continue to expect 50bps worth of cuts this year, with 25bps in Q3 and Q4 for 3.85% by the end of the year."

S&P 500 Seasonality

The fourth year of a new President tends to see choppy price action in the first quarter, according to Carson Investment Research. The market has the tendency to top in the second week of February and weaken through to late March.

Source: Carson Investment Research

ASX corporate actions occurring today:

• Trading ex-div: None

• Dividends paid: None

• Listing: None

Economic calendar (AEDT):

• 2:30 pm: RBA Interest Rate Decision