Morning Wrap: Google shares tumble on botched AI demo, hawkish Fed speeches, ASX to fall

ASX 200 futures are trading 31 points lower, down -0.42% as of 8:20 am AEDT.

Google lost US$100 billion of market cap after its Chatbot Bard makes a factual error at its first public demo, Uber tops earnings expectations and guides to a profitable 2023, a bellwether for global trade expects a -2.5% contraction this year, US used vehicle prices unexpectedly jump in January and a deeper dive into the trouble with Australian housing.

Let's dive in.

S&P 500 Session Chart

A trend day towards the downside, the S&P 500 closed around session lows (Source: TradingView)

MARKETS

• Nasdaq led the declines with Alphabet down almost -8% after its AI chatbot Bard provided an inaccurate response in public demo

• Market is experiencing a clash of themes as disinflation and soft landing narratives takes on hawkish Fed speeches, underwhelming earnings

STOCKS

• TripAdvisor (+3.8%) upgraded by BoFA from Underperform to Buy due to accelerating growth across the business and strong US demand

• Tesla (+2.3%) will reveal third part of EV master plan at its first investor day on 1 March (Reuters)

• Alphabet (-7.7%) slumps after its Bard chatbot demonstration gave the wrong answer (CNBC)

  • Search engine wars: "From now on, the [gross margin] of search is going to drop forever ...There is such margin in search, which for us is incremental. For Google it’s not, they have to defend it all.” - Microsoft CEO Satya Nadella

EARNINGS

• New York Times Company (+12.0%): Earnings topped analyst expectations; CEO said the company gained more than 1 million digital-only subscribers in 2022

• Uber (+5.5%): Revenue beat, EBITDA smashed expectations; enters 2023 with a profitable business model; shares rally to a 10-month high

  • "We ended 2022 with our strongest quarter ever, with robust demand and record margins." - CEO Dara Khosrowshahi

  • "Our outlook for a Gross Bookings & Adjusted EBITDA step up in Q1 builds on that progress, and sets us up for yet another record year." - CFO Nelson Chai

• Chipotle Mexican Grill (-5.0%):  Revenue, EPS and comparable sales missed; flagged a pullback in customer spend in the December quarter

  • "We delivered strong growth in 2022, expanding average unit volumes and restaurant level margin, while opening the highest number of new restaurants in six years, despite facing a challenging and fluid macro environment.” - CEO Brian Niccol

• Under Armour (-8.3%): Revenue and earnings beat; flagged a 50% year-on-year increase in inventory; raised FY profit outlook 

ECONOMY

• Maersk sees global trade contracting by 2.5% in 2023 Bloomberg)

• Unexpected jump in used vehicle prices in January adds uncertainty inflation and Fed rates outlook (Bloomberg)

• API reports fall in oil inventories after jump in prior week (TheStar)

• Chinese oil demand makes comeback on reopening, with exports, holiday travel and domestic consumption higher (Bloomberg)

• Fed Chair Powell provides little pushback to easing conditions, economists see hawkish takeaways (Bloomberg)

• BOC Governor Macklem says no more rate hikes if inflation meets central bank's expectations (Reuters)

• ECB's Schnabel says limited impact of tighter policy on inflation (Bloomberg)

Deeper Dive

Moving away from "ASX Morning Brief" and into bite sized sections covering macro, charts/technicals, sectors to watch, broker notes etc.

Fed Rundown: More hawkish speakers

New York Fed President John Williams:

• “Maybe services prices stay elevated, and if that happens we'll need higher rates."

• Rates were "barely into restrictive territory"

• Wage growth remains "well above" levels that are consistent with the Fed's 2% goal and services sector price pressures remain persistent

• Backed the views of a peak rate of 5.0% to 5.25%, higher than what markets expect

Fed Governor Chris Waller:

• "We are seeing that effort [to reduce inflation] begin to pay off, but we have farther to go. And, it might be a long fight, with interest rates higher for longer than some are currently expecting."

• Excessive inflation is a more serious problem than higher rates

Taking Technicals: S&P 500

A different layout today (as opposed to candlesticks and moving averages).

The S&P 500 line chart shows three 'false breakouts' since late 2021. We're in the midst of another breakout that's trying to hold above the key level. Can it hold or is it just another rinse and repeat?

Source: TradingView

Sectors to watch

Nothing too exciting overnight. It was a risk-off session where the blue-chip Dow outperformed the Nasdaq (on a relative basis).

Looking at our overnight ETF list, most were down 1-2%, most notably: Fintech (-2.8%), Biotech (-2.2%), Cloud (-1.5%), Uranium (-1.4%) and Copper (-1.2%).

Gold and oil inched higher overnight, both up for a third straight session after experiencing a sharp selloff last week.

Quick bites

Quick bites and Broker watch was written by Hans Lee.

The trouble with housing: Interest rates were increased at a ninth straight meeting earlier this week. For a million-dollar loan, the increase since May 2022 in repayments is now $1,816. And with the RBA arguing more interest rate increase(s) are needed, it sounds like they are getting hawkish right at a time when many other central banks are pondering or discussing the opportunity for a step-down. But the reality is - they’re going to have to keep going especially when charts like this keep trending in the wrong direction.

Source: CoreLogic (March 2022)

The above chart just basically says it now takes 11 years (nationally) to save for a 20% deposit. 11. Whole. Years. And that’s before we talk about paying off the loan.

Source: CoreLogic (March 2022)

Broker watch

So given all the above, why in the world would Citi then upgrade REA Group (ASX: REA) and Domain (ASX: DHG) to buy ratings now? I’ll let analyst Siraj Ahmed explain.

While we see near-term conditions as tough and are below consensus for FY23e, we upgrade both REA and Domain to Buy as we see the risk-reward as more compelling from a 12-month perspective especially post recent cost reduction by both companies. Further, Citi’s quantitative analysis indicates that housing exposed stocks bottom approximately 6 months before house prices (assuming those bottom out at the end of 2023). 

Of course, the question then shifts to the housing recovery. Citi’s analysis suggests a 6% pop nationally in 2024. But can the two major players take advantage of the increase by passing on price increases for listings?

Yes, says Ahmed, especially if REA pushes through with a plan for subscription-centric listings. 

ASX corporate actions occurring today:

• Trading ex-div: Virgin Money (VUK) – $0.134

• Dividends paid: Centuria Capital (CNI) – $0.058

• Listing: None

Economic calendar (AEDT):

No major economic events during market hours. Overnight we will see:

• 6:00 pm: Germany inflation rate