Morning Wrap: Global tightening sends stocks lower, glimmer of hope for iron ore, ASX to fall

The local sharemarket will have two red US sessions to digest after the Fed raised rates by 75 bps and reiterated its 'hike till the job is done' rhetoric. We take a look at several sectors that rolled over and why iron ore could be a pocket of strength on Friday.

Let's get into it.

MARKETS

• US market performance in the last two sessions:

  • S&P 500 -2.54%

  • Dow -2.05%

  • Nasdaq -3.14%

• 9 out of 11 US sector declined

• Healthcare and Communication Services sectors were green

• Defensives including Staples and Utilities were also relative outperformers

• Consumer-related sectors including Discretionary and Financials led to the downside

• 75% of US stocks fell

• 70% of US stocks trade below their 200-day moving average (65% on Thursday, 62% a week ago)

STOCKS

• Lockheed Martin (+0.5%) and other defence stocks moved higher after Russian president Vladimir Putin announced a partial military mobilisation for the war in Ukraine

• Tesla (-4.1%) recalls nearly 1.1m US vehicles due to a window automatic reversal system that may not react correctly after detecting an obstruction

• Beyond Meat (-4.1%) Chief Operating Officer Doug Ramsay was arrested on Saturday on charges of “terroristic threatening and third-degree battery” after an incident at a college football game

• Block (-5.9%) shares are down -9% in the last two sessions after Mizuho downgraded the shares to Neutral from Buy on Thursday. The analysts said the company’s focus on Bitcoin is causing it to lose focus on its core businesses 

QUICK BITES

• Fed doing the opposite: "During the previous 8 bear markets, the Fed responded with easy money (rate cuts, QE, etc.). This year they’re doing the opposite, hiking rates & expected to continue hiking for the rest of the year. Last time we saw a hawkish Fed during a bear market? Early 1980s under Volcker," said Charlie Bilello

Source: Compound Capital, Charlie Bilello

• Post rate hike selloffs aren't common: The last time the S&P 500 dropped the day of a rate hike and the following day was in December 2018. This was when the market nearly crashed and Powell soon pivoted in early 2019, according to Carson Investment Research

• Fed's moving expeditiously: Visualisation of Fed rate hikes below

Source: Bloomberg

• Still no capitulation: "Not throwing in the towel: It’s surprising how little capitulation there has been in the market. Yes, the sentiment surveys are all negative, but actual flows have not been. This seems consistent with the lack of volatility in the market," said Jurrien Timmer, Director of Global Macro at Fidelity. As we know, capitulation helped set bottoms in previous bear markets

Source: Fidelity

WORLD NEWS 

• Russia sets out how much it’s going to cut gas flow through 2025 (Bloomberg)

• A great copper squeeze is on the horizon (Bloomberg)

• Walmart plans to hire 40,000 workers for the holiday season compared to 150,000 a year ago (CNBC) 

• Meta quietly reduces staff in cost-cutting push (Wall St Journal)

• Putin orders first military mobilisation since World War II (Reuters)

ECONOMY

• US Fed raised interest rates by 75 bps to 3.25%, in-line with expectations

• UK raised interest rates by 50 bps to 2.25%, in-line with expectations

• Indonesia raised interest rates by 50 bps to 4.25%, consensus expected a 25 bps hike

• South Africa raised interest rates by 75 bps to 6.25%, in-line with expectations

• Saudi Arabia raised interest rates by 75 bps to 3.25%, in-line with expectations

• Eurozone consumer confidence hit a record low of -28.8 in September from -25 in August

Quotes from Powell’s conference:

• Until the job is done: “My main message has not changed since Jackson Hole. The FOMC is strongly resolved to bring inflation down to 2%, and we will keep at it until the job is done."

• On further rate hikes: "We need to continue, and we did today do another large increase as we approach the level we think we need to get to. We’re still discovering what that level is."

• Pain is unavoidable: "If we want to light the way to another period of a very strong labor market, we have got to get inflation behind us. I wish there were a painless way to do that. There isn’t."

• Not risking a premature pause: "If we want to light the way to another period of a very strong labor market, we have got to get inflation behind us. I wish there were a painless way to do that. There isn’t."

Key takeaways from the Fed:

• New projections from Fed officials show a median estimate of 4.4% at the end of 2022 and 4.6% at the end of 2023

• Fed’s dot plot shows 10-9 majority in favour of hiking above 4.25%, suggesting a fourth straight 75 bp hike

• Policy makers expect rates to be cut in 2024 to around 3.9% and to 2.9% in 2025

• GDP growth forecasts marked down to 1.2% in 2023 and 1.7% in 2024, below the longer-run trend; unemployment seen rising to 4.4% in 2023

• Powell indicated that inflation doesn’t actually need to get to 2% in order to justify cutting rates. The data just needs to show convincing evidence that it is headed towards 2%

COMMODITIES

• Iron ore futures fell rose 0.9% to US$99 a tonne

  • “Daily crude steel production at large and medium-sized mills in China most recently averaged 2.1m tonnes during 1-10 September,” said Breakwave Advisors

  • “This has marked a rise of 3% from late August, is up by 11% from the low seen in late July and is up year-on-year by 3%."

• Oil prices have fizzled at any signs of strength in the last two sessions

  • “Supply risks and tight market conditions should give oil some support above the $80 level, but a quicker tumble to a global recession will keep prices heavy,” said Oanda senior market analyst, Ed Moya

  • “Oil pared gains after Eurozone consumer sentiment plunged to a record low as the energy crisis and aggressive central bank tightening is killing economic growth prospects.”

• Gold is beginning to steady around the US$1,675 level even as the US dollar and Treasury yields rip higher

  • “Gold is clearly going to become a safe-haven as the global outlook deteriorates and as Wall Street grows confident that we are nearing the peak with Treasury yields,” said Moya

• Newcastle coal futures rose 0.7% to US$444.5 a tonne

• Uranium futures rose 1.5% to US$49.50/lb

Things are getting really ugly on Wall St. The S&P 500 is just 3.8% away from a fresh year-to-date low. The market rallied in July and August a cooler-than-expected CPI print and expectations of a Fed pivot. All those factors seem to be now dead in the water.

The ASX 200 experienced a pretty brutal selloff heading into the Queen's Memorial public holiday. It now has two rather dire US sessions to digest. Volatility is to be expected.

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

ASX Sectors to watch

After having a flick through the ETFs we watch, two things happened over the last two days:

1. The ETFs that held up relatively well rolled over

2. The ETFs that were already beaten up fell even more

Hydrogen close to retesting lows: Around 5% away from hitting fresh all-time lows

Global X Hydrogen ETF (Source: TradingView, Annotations by Market Index)

FinTech also retesting lows: Sitting near those May and June lows. Not a good look for local tech names like Xero (ASX: XRO) and Wisetech Global (ASX: WTC)

Global X FinTech ETF (Source: TradingView, Annotations by Market Index)

Solar breaks trading range: The Invesco Solar ETF was one of the last ETFs that still had some shape to it and able to withstand the recent selling. It's finally caved in. Can it bounce from the 200-day (blue)?

Invesco Solar ETF (Source: TradingView, Annotations by Market Index)

Jets rolls over: The US Global Jets ETF made a rather violent and volume-heavy move to the downside. Could flag some negative flow for local travel shares like Webjet (ASX: WEB) and Flight Centre (ASX: FLT)

US Global Jets ETF (Source: TradingView, Annotations by Market Index)

Lithium under pressure: The VanEck Rare Earth/Strategic Metals ETF is down -2.6% in the last two sessions. Headlines like Chinese lithium carbonate prices hitting fresh all-time highs and Pilbara Minerals' (ASX: PLS) record spodumene auction might've helped the sector hold up better than most. Still, it's retreated to a key inflection point where it needs to bounce to stay out of trouble.

VanEck Rare Earth/Strategic Metals ETF (Source: TradingView, Annotations by Market Index)

Looking at iron ore for strength: In the last two sessions US-listed BHP (ASX: BHP) and Rio Tinto (ASX: RIO) were -0.8% and +0.44% respectively. We're starting to see some positive iron ore-related developments come out of China, including:

• "Iron ore production globally is seen climbing markedly during the current July-December half to partly offset the decline during this year's first half, new research from Mysteel suggests. As a result, full year output in 2022 should be largely unchanged from 2021 at around 2.4 billion tonnes."

• A recovery in Chinese daily crude steel output as mentioned in the 'Commodities' section above

• Breakwave Advisors also commented that "Overall, we remain of our view that it is becoming easier to be more bullish for the Chinese steel/iron ore complex and for the Chinese economy in general."

Stocks going ex-dividend:

• Fri: BFL, LFS, VLS

• Mon: IMD

• Tue: PIC, SXE

• Wed: CIW, CWP, MYR

• Thu: ARF, CII, CIP, COF, CYG, DXC, DXI, EOL, GDF, HCW, HDN, MGL, RFF, SKS, TCF, XRF

ASX corporate actions occurring today:

• Dividends paid: ADH, APE, BGA, CVW, HLO, IRE, JIN, MCP, MEC, MEZ, MFD, MHJ, MIN, OML, PTL, PWH, QBE, RKN, RMC, SFC, SIQ, SKT, TAH, VEA

• Listing: None

• Issued shares: 

Other things of interest (AEST):

• UK September Consumer Confidence at 9:00 am

• Eurozone September Manufacturing & Services PMI at 5:30 pm

• US September Manufacturing & Services PMI at 11:45 pm

• Fed Powell Speech at 4:00 am