Morning wrap: Dow hits record high, tech stocks slump, ASX to open lower

ASX Futures (SPI 200) imply the ASX will open -11 points lower, down 0.2%. 

A pivot away from high growth stocks reverberated throughout the US market as the blue-chip Dow Jones closed at all-time highs while the tech-heavy Nasdaq gave back Tuesday's gains.

The Dow Jones hit a fresh all-time high overnight, led by bank shares. 

The Nasdaq reversed Tuesday's gains, weighed by tech heavyweights Tesla (-4.2%), Amazon (-1.7%) and Microsoft (-1.7%). 

Financial and value-oriented stocks led the markets as investors gear up for higher interest rates and less stimulus.

The market is currently pricing in a 64% probability of 4 rate hikes by December 2022, according to the Fed fund futures expectations. 

Higher interest rates punish growth stocks with high valuations and long-dated cash flows.

On the economic front, the US reported slower-than-expected manufacturer growth as the index dropped to 58.7% in December, compared to 61.1% in November. The figure represents the slowest pace of growth in 11 months.

Energy stocks rallied after OPEC and its allies agreed to raise its output target by 400,000 barrels per day from next month. The move is broadly in-line with expectations given US pressure to lift supply to curb surging energy prices.

For context, OPEC is in the process of unwinding its April 2020, covid-induced supply cuts of approximately 10 million barrels per day. 

Investors might be asking “doesn’t more supply mean oil prices will go lower, which is bad for energy stocks?”. 

At face value, yes. More supply should weigh on prices.

However, as OANDA senior market analyst Craig Erlam puts it, “It’s clear based on today’s meeting that downside risks to demand from the new variant never materialized and the group is far more comfortable with the outlook based on the data they’ve seen. This will be encouraging for investors and could keep oil prices elevated around US$80.”

Financial stocks rallied as the benchmark 10-year US Treasury yield climbed for a second consecutive session. The 10-year yield is trading at a 1-month high of 1.66% and not too far off pre-covid levels of 1.74%.

Higher interest rates provide more breathing room for bank net interest margin expansion. Major US banks including Wells Fargo, JP Morgan and Bank of America all rallied more than 3.7%. 

Tech stocks tanked as investors were reminded about the prospect of higher interest rates in 2022.

Higher interest rates shift the opportunity cost for investors betting on fast growing, loss making companies which might only turn a profit well into the distant future. The proposition of paying a premium for potential future profits falls as interest rates rise.

ASX Sectors in play

ETF GAINERS

The Rare Earth/Strategic Metals ETF topped the overnight leaderboards following a strong session for ASX-listed names like Lynas Rare Earths (ASX: LYC), Pilbara Minerals (ASX: PLS), Allkem (ASX: AKE) and AVZ Minerals (ASX: AVZ). The four stocks make up approximately 25% of the ETF’s net assets. 

• Elsewhere, the ETFs major Chinese holdings including Zhejiang Huayou Cobalt and China Northern Rare Earth fell -4.5% and -5.1% on Wednesday 

• The overnight tech-oriented selloff could weigh on rare earths/strategic metal stocks given how they are high growth and richly-valued in nature

The Copper Miners ETF moved higher as spot prices are closing in on a 2-month high. 

The Australian Government’s commodity forecaster, the Office of the Chief Economist expects that “high prices will be supported in 2022 through the continued economic recovery and expanding use of copper in low-emissions technology”. Copper prices averaged multi-year highs of US$9,200/t in 2021, prices are expected to hold around these levels before easing slightly to US$8,500/t by 2023 as “new mine supply comes online”. 

• This could drive positive flow for ASX copper plays like Oz Minerals (ASX: OZL), Sandfire Resources (ASX: SFR) and to a lesser extent, Rio Tinto (ASX: RIO) 

• Smaller names like Copper Mountain (ASX: C6C) could also benefit 

ETF LOSERS

The Cloud Computing ETF plunged to an 8-month low as investors sold down technology related stocks. The sharp move was on the back of heavy volume, with 1.7m shares changing hands compared to a 20-day average of 884,000. 

• Sharp declines from the Cloud ETF and broader Nasdaq could spark weakness across ASX players like NextDC (ASX: NXT), WiseTech Global (ASX: WTC) and Xero (ASX: XRO) 

Sticking to the theme of plunging tech stocks, the eCommerce ETF fell close to a 16-month low as its major holdings eBay, Etsy and JD.com fell between -2.5% and -6.1%. 

• This likely dampens the prospect of a comeback for beaten up ASX eCommerce players like Redbubble (ASX: RBL) and Kogan.com (ASX: KGN) 

The FinTech ETF hit a fresh 14-month low triggered by selling across holdings including Block (formerly Square), Mailchimp owner Intuit and payments company Adyen.  

• Afterpay (ASX: APT) will likely log heavy declines on Wednesday after Block slumped -4.7% to a 14-month low 

• US-listed BNPL giant Affirm also fell -10.4% overnight. This likely points to a weak session for local names like Zip (ASX: Z1P), Sezzle (ASX: SZL) and Openpay (ASX: OPY) 

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