Morning Wrap: ASX 200 to rise + Why the market's short-term oversold but long-term bullish

The S&P 500 continues to rally into oversold territory, Goldman Sachs raised its 2024 S&P 500 target by 8%, CNN's Fear & Greed Index hits 'Extreme Greed' for the first time since August, Apple pauses US sales of two watches over patent dispute, Fed and ECB policymakers push back against market rate cut expectations, Citi's take on ASX earnings and Macquarie's Australian ESG strategy.

Let's dive in.

S&P 500 SESSION CHART

S&P 500 gaps up and holds onto gains (Source: TradingView)

MARKETS

This is the last Morning Wrap of the year. We’ll be back on Monday, 8 January 2024. On behalf of the team – It’s been a pleasure writing the wrap and I hope it’s provided you with some good insights. Feel free to send through any comments, feedback and suggestions to [email protected]. I hope everyone has a safe and enjoyable Christmas holiday and a Happy New Year.

• S&P 500 higher, finished near best levels while the Nasdaq rallied for an eighth straight session

• A bit of an opposite day, last week's underperformers like energy and big tech outperformed while runners like small caps underperformed

• Goldman Sachs says megacap tech stocks were collectively net sold for the first time in three weeks last week

• Treasury bond ETF rallies 21% from 16-year low in October, marks biggest inflow in five months (Bloomberg)

• Bank of America strategists forecast four 25 bp cuts in 2024, starting March, up from previous forecast of three cuts (Reuters)

• Fed easing in 2024 could unwind of inverted Treasury curve (Bloomberg)

• Goldman Sachs strategists lift S&P 500 target a month after setting it on lower on Fed easing expectations (Bloomberg)

• Net US dollar positioning bearish for first time since September (Bloomberg)

• US corporate bond issuance seen increasing after bond yields tumbled last week (Reuters)

OVERBOUGHT OR JUST THE BEGINNING

• CNN's Fear & Greed Index returns to 'Extreme Greed' for the first time since August 2 – The S&P 500 fell ~5 over the next 13 sessions

• Just under half the S&P 500 is now trading with a 14-day RSI of more than 70

• Jefferies notes that going back to 1990, there have only been four other instances where more than 45% of S&P 500 constituents had overbought RSIs

• Jefferies says 12-month performance for S&P in each of the above instances was positive, with an average return of 13%

• BofA’s CTA model notes trend follower equity longs are stretched with further buying limited across most equity markets globally

• Deutsche Bank says systematic strategies have taken equity exposure above average, the low volatility environment could allow them to continue to add steadily 

STOCKS

• Apple to stop selling latest versions of its smartwatch in the US due to a patent dispute (Bloomberg)

• Nippon Steel to buy US Steel in $14.9bn deal (FT)

• Adobe ditches $20bn acquisition of Figma, saying no clear path to UK and EU regulatory approval (FT)

CENTRAL BANKS

• Fed's Goolsbee says too early to declare victory over inflation and rate decisions will continue to be based on incoming data (Bloomberg)

• ECB governors see no dovish pivot before March, cut before June (Reuters)

• ECB's Wunsch says wage 'slowdown' key to timing of policy shift (FT)

• ECB's Nagel says probably at rate peak but too soon to consider cuts (Bloomberg)

• BOJ expected to keep policy unchanged in upcoming decision (Bloomberg)

GEOPOLITICS

• Israeli PM Netanyahu faces protest after killing of three hostages (Bloomberg)

• UK, Germany and France step up calls for Israel Gaza ceasefire (FT)

• Putin says he won't attack Nato as Ukraine and Russia trade strikes (Bloomberg)

ECONOMY

• UK recession risk returns with data signaling possible downgrade (Bloomberg)

• China's weak property sector, retail sales keep stimulus calls alive (Reuters)

• German Ifo business climate survey slows, dampening hopes of rebound (Bloomberg)

Citi’s Market Earnings Update

Citi analysts expect earnings for the market to fall 2.1% in FY24 (which is well-above consensus expectations of a 4.2% drop) but bounce back and rise by 3.2% in FY25. 

Here are some of the key takeaways from the note:

• Resources – Sector earnings are forecast to decline by -9.2% in FY24e (-13.1% for VA Consensus) and should be flat at -0.2% in FY25e (-3.0% for VA Consensus).

• Banks – Citi forecasts sector earnings to fall by -3.2% for 2024e (-6.9% for VA Consensus) followed by a more stable -0.6% in 2025e (0.2% for VA Consensus).

• Market ex resources and banks – The rest of the market remains the most robust in terms of earnings, delivering 6.6% growth for FY24e (4.4% for VA Consensus), and then a further 9.3% growth in FY24e (10.7% for VA Consensus).

• In summary: The rest of the market is expected to deliver strong earnings growth in FY24-25. The resource sector faces challenges for base metal and iron ore prices. While bank valuations will increasingly pressured by declining earnings, higher deposit and funding costs as well as elevated costs. This might not bode well for the resource-and-bank heavy ASX 200 but it does sound like a stock pickers paradise.

Macquarie’s Australian & Asian ESG Strategy

COP28 closed last week, with 198 nations committing over US$85 billion for a swift, balanced and historic package to accelerate climate action. 

Some of the key outcomes from COP28 include:

• Parties agreed to transition away from fossil fuels – This marks the first global commitment to a transition away from coal, oil and gas

• 130 countries committed to tripling global installed renewables to 3.4 terawatts in 2022 to at least 11 terawatts by 2023

• 22 countries pledged to triple nuclear power generation capacity by 2025 from a base year of 2020 including the US, Canada, Japan, France, Poland and South Korea

• Stronger global methane pledges from countries and commitments from high methane emitting sectors

Macquarie’s ideas and stocks to watch:

• “Growing nuclear power demand would benefit BHP, BOE and PDN.”

• “Stronger pledge momentum from countries and commitments from high methane emitting sectors with funding to improve monitoring and tracking, likely to place further pressure on stocks in energy, agriculture, and waste,” the analysts noted names like:

  • Energy: BPT, CRN, COE, KAR, S32, STO, WDS

  • Agriculture: A2M and AAC

  • Waste: CWY

• Over 50 oil and gas companies joined the global methane pledge, representing 40% of global oil production. Woodside was the only Australian company that signed up.

The Bigger Picture

Markets are short-term overbought but this may be a sign of long-term strength. Here are two interesting big picture charts from Carson Group.

#1 – More than 40% of S&P 500 constituents have an RSI of more than 70. While this is an indication that things are overheated, it only tends to happen at the beginning of very strong moves.

Source: Ryan Detrick, Carson Investment Group

#2 – The S&P 500 is up 7 weeks in a row and tends to only happen in bull markets. There have been 29 instances of such streaks since 1950 and a year later, the market tends to be higher 86% of the time with a median gain of 8.0%.

Source: Ryan Detrick, Carson Investment Group

ASX corporate actions occurring today:

• Trading ex-div: Kelly Partners (KPG) – $0.004 

• Dividends paid: Aristocrat Leisure (ALL) – $0.34, Incitec Pivot (IPL) – $0.05, Macquarie Group (MQG) – $2.55, Infratil (IFT) – $0.05, Westpac (WBC) – $0.72 

• Listing: Enlitic (ENL) at 10:30 am 

Economic calendar (AEDT):

• 11:30 am: RBA Meeting Minutes

• 2:00 pm: Bank of Japan Interest Rate Decision

• 12:30 am: Canada Inflation Rate

• 12:30 am: US Building Permits (Nov)