Morning Wrap: ASX 200 to rally + NASDAQ inflows surge as tech FOMO trade returns

The S&P 500 breaks out to a 10-month high, Bank of America says tech funds attracted a record amount of inflows last week, the debt ceiling deal is set to suck US$1 trillion from US money supply and that's generally bearish for stocks, Resource-related sectors surge overnight and the RBA is expected to pause rate hikes on Tuesday.

Let's dive in.

S&P 500 SESSION CHART

S&P 500 trends higher and closes near session highs (Source: TradingView)

MARKETS

• S&P 500 higher, ending near best levels and near 10-month highs

• S&P 500 marked its third-straight weekly gain, Nasdaq up for sixth-straight week

• Bullish focus points – Congress passed deal to suspend debt ceiling to January 2025, disinflation momentum (ex-Aus), Fedspeak supporting a June pause

• Bearish focus points – Debt ceiling deal to trigger a big liquidity drain, weak market breadth, risk of Fed to maintain tightening bias 

• BofA said in its Flow Show report that tech funds attracted a record US$8.5bn in the week-ended 31 May, reaffirming the “baby bubble” among AI stocks (Bloomberg)

• Trillion-dollar Treasury vacuum to drive liquidity headwinds (Bloomberg)

• Bearish positioning in S&P 500 highest since 2007 while bullish bets on Nasdaq 100 near highest level since late last year (Yahoo)

• Growth, small cap and value funds all saw redemptions, while consumer funds were hit with the largest outflow since October 2022 (Bloomberg)

• Philly Fed President Harker says Fed close to point where it can pause (Bloomberg)

STOCKS

• Lululemon (+11.3%) posted a double beat and raised its full year guidance (CNBC)

• Dell (+4.0%) quarterly revenue fell 20% on weak PC demand (Reuters)

• Broadcom (+2.8%) posts better-than-expected results, BofA reiterates a Buy (CNBC)

• AT&T (-3.8%) fell amid news that Amazon is weighing a wireless service (Bloomberg)

ECONOMY

• Senate passes debt ceiling legislation, off to Biden for his signature (FT)

• US nonfarm payrolls grew 339,000 in May, well ahead of the 185-195,000 expected

• US employers boost hiring in May but labour market losing steam (Reuters)

• US ISM Manufacturing Index slumps further in May (Reuters)

• UN global food price index falls to two-year low in May (Reuters)

• South Korea inflation slows to 19-month low in May (Reuters)

• China mulls new basket of measures to support property sector (Bloomberg)

Deeper Dive

US markets: The rebound, the Fed and the liquidity

A few interesting bits and bobs about US markets.

• Back to zero: The S&P 500 now flat since the Fed started to hike rates in March 2022. We went from basically zero to more than 5.0% in a little over a year and stock seem absolutely ok with that. During this time, we saw a drawdown of almost 20% but all of that is now recovered

• Fed set to pause: There's currently a 74.7% likelihood that the Fed opts for a pause at its June meeting, according to CME's Fedwatch tool. Goldman is also in the pause camp, saying that "we continue to expect a pause at the June FOMC meeting, reflecting the mixed household survey, the softness in hours worked and the decline in average hourly earnings growth."

• Tsunami of inflows: After record outflows in March 2023, Nasdaq inflows and calls just hit record levels. "We remain skeptical on the big picture sustainability of this rally ... we just saw the largest inflow into QQQ of the year ... typically contrarian as [it] signal investors have FOMO into the tail end of a move," said BTIG.

Source: Bloomberg

• Liquidity squeeze: Once the US debt ceiling deal is signed into law by Biden, the Treasury Department will effectively top accounts back up. This means hitting the market with a tsunami of short-term Treasury bills. JPMorgan estimates that this will lower US money supply by approximately US$1.1 trillion. Historically, this is not good for stocks.

Source: Bloomberg

Sectors to Watch

Materials: The S&P 500 Materials sector rallied 3.4% overnight. Iron ore prices are back above US$100 a tonne to a two-week high. Some other specialty sectors of interest include Steel (+5.4%), Copper Miners (COPX) +4.3% and Rare Earths/Battery Metals (REMX) +4.2%. This could see some broad-based strength follow through for local miners.

Energy: WTI crude is trading near a one-month high of US$74 a barrel.

Travel: The US Global Jets ETF rose 2.6% to close near a three-month high. The ETF invests in mostly US-listed carriers but also retains some exposure to international names including Qantas. Do we see some positive flow trickle over to local travel names?

ASX corporate actions occurring today:

• Trading ex-div: Lots of ETFs trading ex-dividend. You can see the full list here.

• Dividends paid: None

• Listing: None

Economic calendar (AEST):

• 11:30 am: Australia Company Q1 Gross Profits

• 4:00 pm: Germany Balance of Trade

• 12:00 am: US ISM Services PMI