Morning Wrap: ASX to extend gains after S&P 500 posts best two day gain since March 2020

ASX Futures (SPI 200) imply the ASX 200 will open 107 points higher, up 1.59%.

US stocks rally for a second consecutive session thanks to the RBA pivot and a cooler-than-expected job openings report. Energy stocks rallied as OPEC is expected to deliver a hefty production cut, Elon Musk to proceed with US$44bn buyout of Twitter, China's coal production is surging and a few thoughts about the October bounce.

Let’s dive in.

MARKETS

Markets continue to bounce as the 'bear market killer' month of October lives up to its name (at least for now). The S&P 500 has posted its best two-day gain since March 2020 as markets begin to see the light at the end of this tightening cycle. There's this little central bank down under that's inspired traders to bet that the Fed will soon soften its stance as well.

• All 11 US sectors were green

• Energy topped the leaderboards, up 4.3% as traders brace for a hefty OPEC production cut

• Financials, Discretionary, Materials and Tech sectors rallied more than 3%

• Defensive sectors including Healthcare, Utilities, Real Estate and Staples underperformed benchmarks

• 83% of US stocks advanced

• 66% of US stocks trade below their 200-day moving average (70% on Tuesday, 74% a week ago)

STOCKS

• Twitter (+22.2%) shares rallied after reports that Elon Musk go through with the takeover at the originally agreed-upon price of $54.20 a share

• Rivian (+13.8%) posted a 67% jump in third-quarter production to 7,000 electric vehicles

• Credit Suisse (+12.2%) shares recouped some of the backlash it received from its surging credit default swaps

• Ford (+7.8%) reported a 16% increase in third-quarter vehicle sales. The automaker said new vehicle demand “remains strong” and retail orders are “rapidly expanding” 

• Domino’s Pizza (+4.5%) was upgraded to a Buy from Neutral by UBS. The investment bank expects demand to hold up even if consumer spending starts to weaken

• Tesla (+2.9%) shares underperformed the market amid expectations that Musk may have to sell more shares to fund his Twitter takeover

QUICK BITES

• Regressing back to coal: "This quarter China grew coal production by more than the entirety of Shell's global energy production. This quarter alone," said Shell CEO Amin Nasser, adding that "if you think about it, we are transitioning to coal."

• Why the RBA is dovish: The RBA has no choice but to rely on wishful thinking in its battle against inflation. Otherwise mortgage holders are screwed.

Source: RBA

• Its time for a short squeeze: Hedge fund shorts are at record levels. If the markets continue to rip higher, it'll lead to a massive short squeeze

Source: JP Morgan

• US dollar weakness sees strength for stocks: The US dollar is on a five day losing streak, trading back to where it was a month ago.

Source; Bespoke Invest

WORLD NEWS 

• Tesla shares give up gains on renewed prospect of Musk buying Twitter (Bloomberg)

• OPEC's power is at an all-time high and 'the old oil order is back' (Markets Insider)

• Tight global oil supply can't be reversed easily, Shell, Aramco CEOs say (Reuters)

• North Korea conducts longest-range missile test yet over Japan (Reuters)

ECONOMY

• US job openings unexpectedly fell to 10.05m in August from 11.2m in July

  • Analysts expected a smaller decline to 10.8m

  • Largest fall in almost two-and-a-half years

  • The decrease was led by healthcare and social assistance, services and retail trade segments

  • There are still 1.7 job openings for every unemployed person

Fed speeches:

• Fed Governor Jefferson:

  • "Restoring price stability may take some time and will likely entail a period of below-trend growth.”

  • "I want to assure you that my colleagues and I are resolute that we will bring inflation back down to 2%.”

• Fed Bank of San Francisco President Daly:

  • “There’s a lot of room to slow the labour market before we get into severe recessionary conditions that people are predicting.”

COMMODITIES

• Iron ore futures rose 1.2% to US$96.2 a tonne

  • “... raw material prices are expected to remain firm and the demand is picking up at the peak demand season under the buoyant market sentiment,” Mysteel said in a note

  • “Iron ore prices may strengthen along with steel products' price trend, with increasing downstream demand from the construction sector, against the stable hot metal output under thin steelmaking profits.”

• Oil prices extended gains after reports that OPEC+ is considering a cut as much as 2 million barrels per day. Brent crude is up almost 10% since the 26 September low of US$83

  • “The Saudis run this show and they know oil prices are at a make-or-break level. Expectations were high that a significant reduction of output would be the outcome, now it seems it might be twice as large,” said Oanda senior market analyst, Ed Moya

• Gold rallied past US$1,700 after the RBA surprised markets with a smaller-than-expected 25 bps rate hike 

  • “The RBA set the tone and now a lot of traders on Wall Street are expecting the Fed to soften their tightening pace,” said Moya

Other commodities of interest:

• Copper +2.6% to US$3.5/lb

• Palladium +4.5% to US$2,321 a tonne

• Aluminium +5.3% to US$2,337 a tonne

• Newcastle coal futures +0.12% to US$410 a tonne

SPI futures imply another strong open as the market buys into the RBA pivot narrative and expects other central banks to follow. Expect stocks to gap up at the open, with risk sectors and energy likely to led to the upside.

The unexpected turn of events from the RBA at a time where the market was already due for a bounce has turned into a face ripping rally. There are a few things I'm considering:

• Almost all bounce attempts have failed year-to-date as growth concerns, inflation and tightening continues to escalate

• US inflation data is due on Thursday, 13 October and boy is this one important. It feels like an all-in situation. If its hot like the last one, the Fed reiterates its hawkish stance and things get ugly for stocks

• "But remember, price usually bottoms before earnings. Historically, by the time earnings bottom, the P/E has already recovered 20%," said Jurrien Timmer, Director of Global Macro at Fidelity. Basically, what he's saying is that stocks bottom before the economy does, the same way they led to the downside earlier this year

• The massive rally subjects investors to a 'lock out rally'. As the name suggests, stocks rally so fast that it locks you out from getting in. Unless you like buying things that have gone vertical

ASX sectors to watch

Notable ETF list gainers:

• Jets +7.09%

• Hydrogen +6.5%

• Fintech +6.1%

• Rare Earths/Strategic Metals +5.7%

Gold: Massive re-rate thanks to the RBA pivot and weaker-than-expected US job openings.

Gold chart (Source: TradingView, Annotations by Market Index)

Energy: Brent crude reclaims the US$90 level as OPEC is set to reveal a massive production cut on Wednesday

Brent crude oil chart (Source: TradingView, Annotations by Market Index)

Stocks going ex-dividend:

• Wed: CAM, X64, RIC 

• Thu: ANG, ARB, BIS, N1H, WCG

• Fri: COS, MFF

• Mon: None

• Tue: REH  

ASX corporate actions occurring today:

• Dividends paid: ABC, CSL, SSM, FEX, KLS, IDX, CTD, ING, DUR

• Listing: None

Other things of interest (AEST):

• 5:00 pm: Germany Balance of Trade

• 11:15 pm: US ADP Employment Change

• 11:30 pm: US Balance of Trade