Morning Wrap: Bear market rally takes a pause as bond yields rise, ASX set to fall

Major US indices fell in volatile trade, Treasury yields are bouncing back - a potential problem for equities, President Biden tries to deflect the responsibility for fighting inflation to the Fed, the US is considering easing Chinese tariffs and Shanghai reopened on Tuesday night.

Let’s dive in.

Stocks

• The recent ‘bear market rally’ has taken a pause as downside risks including rising Treasury yields and surging oil prices weigh

• “It’s difficult to construct a case for more than a bear market rally, which could carry another 5%,” said Morgan Stanley

  • “Inflation remains too high for the Fed’s liking and so whatever pivot investors might be hoping for will be too immaterial to change the downtrend.” 

  • “One event that could increase those odds is a meaningful and lasting ceasefire between Ukraine and Russia … it would relieve a lot of pressure on global growth and commodity prices.”

• 9 out of 11 US sectors declined

• Consumer discretionary and staples were the only ones that advanced

• Energy and materials fell the most

• 60% of US stocks fell

• 68% of US stocks trade below their 200-day moving average (67% on Tuesday, 73% a week ago)

• Several US-listed Chinese stocks rallied after Shanghai lifted lockdowns and restrictions eased in Beijing

  • JD (eCommerce) +4.65%

  • Alibaba (tech/eCommerce) +2.8%

  • Baidu (Chinese Google) +0.9% (down from session highs of 4.9%)

• Unilever (+9.9%) after activist investor Nelson Peltz - founder of hedge fund Trian Fund Management - joined the board and acquired a 1.5% stake in the company  

• Salesforce (-2.9%, after hours: +7.6%) beat first quarter earnings expectations and lifted its full year guidance

  • “We’re just not seeing material impact on the broader economic world that all of you are in,” said CEO Marc Benioff 

Economy

• US President Joe Biden met with Fed Chair Jerome Powell, shifting the burden for battling inflation to the Fed

  • “My plan is to address inflation. That starts with a simple proposition: respect the Fed, respect the Fed’s independence, which I have done and will continue to do,” said Biden 

• The US is considering easing tariffs on China in an attempt to mitigate inflation

  • "Easing tariffs can potentially ease inflation ... at least by a few basis points, if not more," White House Council of Economic Advisers Chair Cecilia Rouse told Bloomberg

• US consumer confidence hit a 3-month low of 106.4

  • Economists were expecting a reading of 104

  • Consumers are spending less on big-ticket items like cars and appliances

  • There is a shift in spending to services like going to restaurants and travelling 

• Eurozone inflation hit 8.1% in May

  • Highest level since recordkeeping began in 1997

  • Energy inflation likely to stay high after the EU embargo on most Russian oil imports

• Shanghai reopens on Tuesday night

  • Residents will need a 72 hour negative PCR test

  • There’s over 15,000 testing locations within a 15 min walk from almost everywhere

  • PCR tests are free until June 30

• China’s manufacturing PMI was 49.6 in May

  • Economists were expecting a reading of 48.9

  • A solid improvement from 47.4 in April

  • Any figure below 50 indicates a contraction

Commodities

• Iron ore were relatively unchanged

• Oil prices pulled back from highs of US$120 after the EU agreed on a partial Russian oil ban, better-than-expected Chinese PMIs and the reopening of Shanghai

• Gold began to slip as US yields began bouncing after a recent pullback 

The overnight session seemed rather uneventful given the ASX had already made the first move in giving back recent gains. The US market was closed on Monday, so the S&P/ASX 200 decided to sell off first, down -1.03%.

Downside risks are beginning to creep in after a rather positive last couple of days buoyed by positive US corporate earnings, China's anticipated reopening and easing bond yields.

Most ETFs (table above) declined 1-2%, including:

• Tech (Cloud and Fintech)

• Rare Earth/Strategic Metals

• Uranium

• Lithium

• Steel

SPI futures are pointing to a -0.36% fall, so prepare for more weakness.

#1 Aluminium

Aluminium is failing to bounce even with China's reopening news.

There seems to be an emerging divergence between South 32 (ASX: S32) and aluminium prices, notwithstanding the company's fundamentals and other factors.

Aluminium price vs. South 32 (Source: TradingView)

#2 Tech

Those beaten up names that rallied in the last few sessions are back to selling off, including:

• Snapchat -9.4%

• Affirm -6.1%

• Block -3.3%

• Zoom -2.7%

It looks like local Zip (ASX: Z1P) shares were well aware of the trend, down -6.2% on Monday.

ASX corporate actions occurring today:

• Ex-dividend: NBI, UMG, VGI

• Dividends paid: DDR, SNC

• Listing: NNL

• Issued shares: ADN, BLG, CHN, CHZ, CNJ, CVV, DGR, EBO, ENV, FLX, IVZ, MFG, NBI, NGE, NZM, OPY, PLT, PNN, PXS, RB6, RGL

Other things of interest: 

• Aus GDP Growth Rate (Q1) at 11:30 am

• China Caixin Manufacturing PMI (May) at 11:45 am