Morning Wrap: Nasdaq bounces after worst start on record, ASX set to fall

ASX Futures (SPI 200) imply the ASX will open 25 points lower, down -0.3%. 

US stocks rallied in the final hour of trading, the 10-year Treasury hit 3% for the first time since November 2018, the US Fed is expected to raise rates by 50 bps for the first time in more than 20 years and weak economic data is catching up to China.  

Let’s dive in.

Stocks

• Wall Street seemed hesitant to buy the dip, rallying in the final hour of trade

• Investors are focused on the Fed, which is expected to deliver its first half-point rate hike in more than 20 years on Thursday. The main concern here is that the market might not have priced in enough Fed hawkishness

  • Fed Fund futures contract prices indicate that rates will most likely be 3.0% to 3.25% by year end

  • The introduction of 75 bp rate hikes or changes to current projections could cause further market turmoil

• The bond market made another leg up, with the 10-year Treasury peaking at 3% overnight. Yields rise when investors sell off government debt

• 6 out of 11 US sectors were positive

• Tech, energy and discretionary outperformed

• Defensive sectors like real estate, consumer staples, utilities and healthcare fell 

• 53% of US stocks advanced

• 71% of US stocks trade below their 200-day moving average (70% on Monday, 66% a week ago)

  • This indicates that even though the market bounced, market breadth continues to deteriorate

• As of Monday, 275 S&P 500 companies have reported quarterly earnings. 80% have beaten earnings estimates and 73% of topped revenue expectations

• Over the weekend, Warren Buffet’s Berkshire Hathaway reported stronger-than-expected earnings. Buffett revealed he had been building up a stake in:

  • Occidental Petroleum Corp

  • Activision Blizzard (due to be acquired by Microsoft)

• US corporate earnings to look out for this week:

  • Tues: Pfizer, BP, Hilton, Airbnb, Starbucks, Lyft

  • Wed: Moderna, Marriott, Uber Etsy

  • Thurs: Shopify, Doordash

  • Fri: Draftkings, Under Armour 

Economy

• The Institute for Supply Management’s Index of US manufacturing activity fell 1.7 points to 55.4% in April

  • The industrial side of the economy grew at its slowest rate in 18 points

• China’s manufacturing activity fell to a 6-month low in April. The PMI reading was 47.4, down from 49.5 in March

  • Any reading below 50 indicates that that activity is contracting

Commodities

• Iron ore prices were unchanged due to a Singapore public holiday on Monday

• Oil prices briefly dipped after reports that Hungary would veto the EU’s proposed ban on Russian energy

• Gold tumbled amid a more aggressive Fed and bond market selloff 

Wall Street staged a rather unconvincing bounce.

To cut to the chase, this is a bear market. The Nasdaq is having its worst start to a year on record and the S&P 500 had its 3rd worst start to a year in history.

The Nasdaq is in a lot of pain. According to Sundial Capital Research:

• More than 45% of stocks down -50%

• More than 22% of stocks down -75%

• More than 5% of stocks down -90%

The only comparisons are the October 2000 dot-com crash and 2008 GFC.

Amidst the selloff, the market is likely to stage convincing snap back rallies. US Trader Mark Minervini believes that the recent price action suggests "a long-term top and years of subsequent underperformance" for the Nasdaq.

Be careful out there.

Source: Mark Minervini

Back to the overnight session.

On the ETF front, it was a rather quiet one.

Much-loved sector ETFs like rare earths/strategic metals, hydrogen, uranium and copper all declined slightly, down between -0.7% and -1.4%.

Its not the best look if these previously strong trending sectors are struggling to bounce.

#1 Tech

Beaten up tech names led the overnight rally. Notable winners include:

• Draftkings +9.6%

• Block +6.4%

• Affirm +5.7%

• Nvidia +5.3%

• Meta +5.3%

Investors should take the bounce with a grain of salt. As SentimentTrader points out, these >1% bounces after a >1% selloff has only been triggered during bear markets.

Nevertheless, the bounce could send some positive flow through to local names, many of which declined 7-8% on Monday.

#2 Energy

Oil prices briefly fell -3.7% to US$100.3 overnight after reports that Hungary might veto the EU's proposed ban on Russian energy imports.

WTI Crude Oil prices (Source: TradingView)

"The growing risk of an embargo on Russian seems less likely until the EU can secure additional energy supplies for Hungary. Hungary can’t function without Russian energy and the EU will need to win their support in delivering harder-hitting sanctions against the Kremlin," said Oanda senior market analyst, Ed Moya.

China's weak manufacturing and services data also weighed on upside risk to oil prices. Shanghai's covid situation appears to be stabilising but Beijing is at risk of a lockdown.

"Oil prices seem to have strong support at the $100 a barrel level, but a massive rally seems unlikely given the return of US production and weakening gasoline demand," said Moya.

#3 Gold

Gold is down almost -6% in the last 10 sessions as investors try to price in more aggressive Fed tightening.

Gold price (Source: TradingView)

The yellow metal is struggling to stabilise as bond yields continue to trend higher.

"For gold to become attractive again, Wall Street needs to become confident that the majority of Fed tightening has been priced in and not overly bullish with stocks," said Moya.

This could spell further volatility for local gold stocks, most of which went from breaking out to now breaking down.

ASX corporate actions occurring today:

• Ex-dividend: ACQ

• Dividends paid: BKW

• Listing: EQS, SNX

• Issued shares: A8G, AKN, AUN, BIS, BRK, CAM, CHL, SGC, STK, VGL, VMY, WGB, WLE

Other things of interest (AEST):

• RBA Interest Rate Decision at 2:30 pm