Morning Wrap: ASX 200 to fall, US stocks reverse gains, yield curve inversion deepens

Major US benchmarks rallied around 1% in early trade but closed around -1% lower, the yield curve inversion reaches a new extreme, Credit Suisse posts its worst loss since the Global Financial Crisis, US-BNPL rival Affirm posted abysmal earnings and plans to cut 19% of its workforce, Chinese car sales nosedive as subsidies end and three interesting ASX charts.

Let's dive in.

S&P 500 Session Chart

A trend day towards the downside, the S&P 500 gaps up at the open, erases all of its gains to close at session lows (Source: TradingView)

MARKETS

• S&P 500 reverses a 0.9% rally in early trade to close at session lows

• Peak rate expectations have jumped to 5.2% compared to 4.8% a week ago 

• Market now closest to neutral positioning since Q2-22 after cutting US$300bn of bearish bets (Bloomberg)

• Traders starting to place bets Fed will hike up to 6% (Bloomberg)

• 2-and-10 year yield curve hits deepest inversion level since the early 1980s (Bloomberg)

STOCKS

• JPMorgan cut hundreds of mortgage employees due to lower industry volumes (Bloomberg)

• Toshiba receives US$15bn buyout proposal from private equity group Japan Industrial Partners (FT)

EARNINGS

Hilton Worldwide (+2.3%): Beat both earnings and revenue expectations.

• “Our fourth quarter and full year results surpassed our expectations, with fourth quarter system-wide RevPAR meaningfully exceeding the same period in 2019 driven by growth across all segments …Positive momentum has continued into the new year …” - CEO Christopher J. Nassetta 

Walt Disney (-1.3%): Better-than-expected EPS and revenue, recent price hikes for Disney+ resulted in a loss of around 2.4 million subscribers (but analysts were more than 3 million) and announced plans to cut thousands of jobs as part of a $5.5bn cost cutting initiative.

Credit Suisse (-15.6%): Posted its worst annual loss since the 2008 global financial crisis (-US$1.4bn), fixed-income trading revenue fell -84% as peers recorded double digit gains, equities trading revenue fell -96% and clients pulled approximately $120bn.

Affirm (-17.1%): Earnings and revenue missed analyst estimates, active merchants fell to 243,000 from 245,000 in the previous quarter and plans to layoff ~19% of its staff (approximately 500).

ECONOMY

• German inflation hits five month low of 9.2% (FT)

• China car sales collapse 38% in January as subsidies end (Reuters)

• Economists shift to "no landing" scenario where growth holds up (NY Times)

• Sweden's Riksbank hikes by 50 bps, signals more to come (Reuters)

• President Biden sees no recession in 2023 or 2024 (Reuters)

• Jarden suggests Australia house prices may plunge 15% in 2023 (Bloomberg)

Deeper Dive

Charts of the Week

For anyone who missed the first Charts of the Week instalment last week, each Friday I will be looking at the XJO and three interesting/topical stock charts. I will be looking at them through the technical analysis lens that I like to employ, which includes a host of factors I discuss below. These are not meant as recommendations, more for education and entertainment. Any discussion of past performance is for illustrative purposes only, and past performance is not a reliable indicator of future return.

ASX 200: Bulls baulk at near all-time high

I noted last week that the bulls were stalling just shy of the 7600 level and the all-time high. It’s hardly a surprise. It’s a major technical and psychological level and I maintain that the bulls will need a catalyst (strong local earnings season, more signs of inflation coming off) in order to get over the hump.

Whilst it’s easy to forget, the bars and squiggly lines on charts represent the will of the people, and right now people are reluctant to keep bidding up prices. They’d rather ‘wait and see’ after what has been a nosebleed rally from the October lows. That’s right, just four and a bit months ago we were trading 1100 points lower. We’ve seen a circa 18% rally from the bottom. Not wonder people are a little gun shy up at these levels.

As for what’s going on technically, the uptrend is still intact, although volumes have rolled over and the RSI has officially printed a sell signal. It’s certainly not goodnight Irene, but the bearish evidence is starting to mount. Earnings season is the key. Strap in.

Source: Commsec

Three interesting charts

Auckland International Airport (AIA)

Source: Commsec

When scanning through the list of stocks the meet my criteria, AIA stood out for a couple of reasons. One is because of the beautiful uptrend support line, which I have highlighted. The second is because I conducted an interview with a fund manager, Iain Fulton of Nikko Asset Management, earlier in the week and he identified travel as a segment with increasing demand, and limited supply.

Those factors generally bode well for participants. Throw into the mix China reopening, increased tourism, and in AIA’s case a stranglehold on an entire market, and you’ve got the makings of potential share price outperformance. It seems the market is already onto this, but that doesn’t mean that the momentum can’t continue. For fun, make sure to check out the charts of QAN and WEB as well… there might be legs in this travel trade!

South32 (ASX: S32)

Source: Commsec

Forgive my doodling on the chart, but there are some interesting observations to work through. First, the sideways congestion zone that held prices captive for the best part of six months, between $3.50 and $4.50. It would have been great for range traders (seriously, who trades ranges?), but no good for trend traders.

At the start of this year the price action broke higher, but has since traded in an ever-tighter range, forming a pennant pattern. Pennants are continuation patterns. In other words, in theory price should break in the direction from which they came… prices were moving higher on the way in, so should break higher on the way out. The only piece of evidence that weakens that theory is the falling volumes.

Either way, it appears as though S32 is shaping up for a sharp break out of the pennant pattern. Such a break could provide opportunities for active traders.

Healius (ASX: HLS)

Source: Commsec

Something a little different this week. I am a trend trader and I like to buy trend alignment and momentum. There are, however, some people that like to buy stocks the are extreme oversold. These are typically high risk, high reward trades. You might have a success ratio of one-in-ten, but if the reward to risk is 20:1, than you’d take the trader every time.

The key is being able to suffer through the nine losses to get the one big winner. Most retail traders and, in fact, most human beings, simply won’t tolerate that much ‘losing’.

All that said, HLS is shaping up as extreme oversold. The share price has been hammered over the past year, volumes have spiked sharply during the most recent selloff, and the RSI is approaching 20. Could it be that all the selling is exhausted, creating a vacuum into which some bargain hunters can step? Again, it’s high-risk, high-reward type stuff, but an interesting setup nonetheless.

Quick bites

EPS peaks: "We are at a cyclical inflection point: The market tends to be ahead of the earnings cycle, often by several quarters. That’s why, in an early-cycle bull market, we tend to see valuations expand while earnings are still contracting. This happened in 2009 and again in 2020." - Jurrien Timmer, Head of Global Macro at Fidelity.

Source: Fidelity

Rates top earnings yield: The upper bound of the Fed's target rate (4.75%) is close to topping the Russell 1000 Index's current earnings yield (4.97%) for the first time since 2000.

ASX corporate actions occurring today:

• Trading ex-div: BKI Investment (BKI) – $0.042, Janus Henderson Group (JHG) – $0.545

• Dividends paid: Newmark Property REIT (NPR) – $0.025 

• Listing: None

Economic calendar (AEDT):

• 11:30 am: RBA Statement on Monetary Policy

• 12:30 pm: China Inflation Rate

• 6:00 pm: UK GDP Growth

• 2:00 am: US Consumer Sentiment