Morning Wrap: Bear market saga continues as Wall St dives on strong jobs data, ASX to fall

Major US indices plummeted on better-than-expected jobs data, markets expect a higher peak Fed funds rate and another 75 bp rate hike in November, AMD misses earnings by US$1.1bn as PC demand wanes and oil prices continue to rally.

Let’s dive in.

MARKETS

US stocks tumbled on better-than-expected jobs data, which means the Fed will stick to its overly hawkish intentions. Treasury yields and the US dollar rallied after the solid jobs report.

• All 11 US sectors declined

• Energy and Staples were relative outperformers

• Growth heavy sectors like Tech and Discretionary led to the downside

• 78% of US stocks declined

• 70% of US stocks trade below their 200-day moving average (66% last Friday, 73% a week ago)

STOCKS

• Credit Suisse (+13.1%) shares rallied after offering to buy back US$3bn in debt securities and sell its famous Savoy Hotel in Zurich 

• DraftKings (+3.3%) shares rallied after reports that the company was closing in on a new partnership with Walt Disney’s ESPN

• Tesla (-6.3%) CEO Elon Musk revived his plans to buy Twitter last week. A judge said he needs to complete the takeover by 28 October to avoid a trial 

• Lyft (-8.7%) shares were downgraded to Sector Perform from Outperform by RBC

• AMD (-13.9%) posted disappointing preliminary third-quarter results that were well-below its initial guidance. The chipmaker expects quarterly revenue of about US$5.6bn compared to its previous US$6.7bn forecast

  • AMD CEO: “The PC market weakened significantly in the quarter. While our product portfolio remains very strong, macroeconomic conditions drove lower-than-expected PC demand & a significant inventory correction across the PC supply chain.”

  • “The gross margin shortfall to expectations was primarily due to lower revenue driven by lower Client processor unit shipments & average selling price.”

QUICK BITES

• From one extreme to the other: Central banks have gone from record QE to record QT.

Source: Bank of America

• Which leads us to the next chart: Markets are highly dependent on Fed liquidity. There is an anomaly from 2014-19 where the S&P 500 rallied almost 50% despite the Fed shrinking its balance sheet by almost US$1tn. But can the market find a floor in the absence of any QE?

Source: Bloomberg

• Likelihood of 75 bps jumps: The probability of the Fed hiking rates by 75 bps jumped from 56.5% to 81.1% after the better-than-expected unemployment data, according to CME Group

• Jobs winning steak: "We're now in the longest streak of better-than-expected Nonfarm payroll reports (6) since at least 1998," according to Bespoke Invest

• Legendary hedge fund manager Stanley Druckenmiller: "There's a high probability in my mind that the market at best will be flat for ten years, sort of like the 1966-1982 time period, but the nice thing is there were companies that did very well in that environment back then. That's when Apple computer was founded, and Home Depot was founded, coal and energy companies and chemicals made a lot of money in the 70s."

WORLD NEWS 

• China's bond markets bleeds $83bn as foreign investors cut holdings (Asia Nikkei)

ECONOMY

• US nonfarm payrolls rose 263,000 in September from 315,000 in August

  • Economists polled by Reuters expected 250,000 jobs to be added

  • Tied for the lowest monthly increase since April 2021

  • Education, health, leisure/hospitality, business service and goods producing sectors contributed the most to job growth

  • Retail and financials sectors lost jobs

• US unemployment rate fell to 3.5% in September from 3.7% in August

  • Beat analyst estimates of 3.7%

• US average hourly earnings rose 5% year-on-year in September from 5.2% in August

  • Slightly below analyst estimates of 5.2% 

COMMODITIES

• Iron ore futures rose 0.1% to US$95.7 a tonne

  • Prices inched 0.13% higher last week

• Oil prices rallied for a fifth straight session

  • “Crude prices held onto the majority of this week’s OPEC+ driven gains after the NFP report showed the labor market remains strong but is showing signs of cooling,” said Oanda senior market analyst, Ed Moya

  • “The risks of $100 oil are easily back on the table and if it is a cold winter, we could see $110 before the end of the year.”

• Gold tumbled below US$1,700 after the better-than-expected US jobs report

  • “The economy is not breaking down as fast as some traders were anticipating. ​ If next week’s inflation does not deliver any cool surprises, a Fed pivot seems far away,” said Moya

Other commodities of interest:

• Copper -1.7% to US$3.39

• Newcastle coal futures -6.2% to US$379.9

• Uranium futures -0.8% to US$47.9

• Aluminium - 1.7% to US$2,279.1

The market is a forward-looking, discounting mechanism. The weakness to date has reflected slowing growth and trying to price-in where exactly the Fed will stop hiking.

The market saw a glimmer of hope in August, following the cooler-than-expected US inflation print. The S&P 500 rallied 2.15% on the day of the report. But a month later, fell -4.3% after a hotter-than-expected inflation report.

Our backs are against the wall again as the strong jobs report means the Fed has to continue hiking rates to pull demand back towards equilibrium.

In the past week, our Wraps have talked about the importance of an orderly pullback after the massive post dovish-RBA rate hike. The US jobs report has triggered quite the opposite, with US markets pulling sharply lower, with broad-based weakness, heavy intraday selling and high volatility.

Expect those above characteristics in the upcoming session. Can the ASX 200 find some strength as it sells into the 20-day moving average? Or does a retest of June lows come into question again?

Source: TradingView, Annotations by Market Index

Sectors to watch

Our "Industry ETFs" list above are mostly US-listed. We'll soon be providing an update (either links to the ETF site or a link to a separate explainer page) to better explain to readers what they are. If you can't wait, feel free to email me for a list.

Notable overnight ETF gainers: None

Notable overnight ETF losers: Semiconductors (-6%), Cloud (-4.9%), FinTech (-4.3%), Rare Earths/Strategic Metals (-3.5%), Jets (-2.9%), Copper Miners (-2.8%)

Energy: Oil prices didn't seem to care about Wall Street selling off. US energy stocks weathered the storm better, but still red. Local energy names could see some weakness but higher oil prices should drive outperformance relative to the rest of the market

Tech: Risk sectors like Tech and Discretionary were the most hard hit. This could see some negative flows for local peers

Cannabis: On Friday, I said I've been reluctant to talk about cannabis-related moves as "the ETF has done nothing but rally and fizzle." Well here we are, the Cannabis ETF gave back all of its Biden overhaul/pardon gains.

Stocks going ex-dividend:

• Mon: None

• Tue: TRA, REH  

• Wed: WGB, HZN, RRL, GOW

• Thu: TI1, D20, CGO 

• Fri: LSX, HVN

ASX corporate actions occurring today:

• Dividends paid: SEQ, ORA, EQT, ADA, SND

• Listing: None