Morning Wrap: Recession risks drag the S&P 500 lower, ASX set for a flat open

ASX Futures (SPI 200) imply the ASX 200 will open 1 point lower.

The S&P 500 fell for a 3rd straight day as recession risks continue to climb, Spanish inflation smashed expectations (in a bad way), manufacturers and retailers are carrying too much inventory and China reaffirms its ‘zero tolerance’ stance on covid.

Let’s dive in. 

Markets

No one seems to be eager to buy the dip after the sharp selloff on Wednesday. Major US indices couldn’t bounce after a disappointing revision for US first-quarter GDP, rising recession risks and Powell warning that there’s no guarantee of a soft landing for the US.

Record inflation in Spain caught the market off guard, raising long-term inflation expectations and the possibility that a recession is the only catalyst that can tame surging prices. 

• 6 out of 11 US sectors advanced

• Energy fell an outsized -3.4% amid a pullback in oil prices

• Traditional defensives and tech outperformed

• 61% of US stocks declined

• 75% of US stocks trade below their 200-day moving average (74% on Wednesday, 78% a week ago)

Stocks

• JP Morgan cut its earnings estimates and price targets for 26 internet companies, citing weaker consumer spending in the face of surging inflation. The investment bank said the overall macro environment has deteriorated since Q1 earnings, flagging a 66% chance of a US recession in the next two years

• Tesla (-1.8%) closed its San Mateo and California offices and laid off 200 workers, according to a Wall Street Journal report

• Nio (-2.2%) was hit by a short seller report that said the EV manufacturer had exaggerated its financial results

• Carnival (-14%) shares plunged after Morgan Stanley halved its price target to $7. The investment bank warned the cruise line shares could go to zero given its debt levels

• Bed Bath & Beyond (-23.6%) missed revenue estimates and posted a wider-than-expected loss. The company said it would work aggressively to clear out excess inventory, which indicates tons of price cuts and sales

Economy

• US first-quarter GDP was revised to -1.6% from -1.5%

• US first-quarter personal consumption was revised to 1.8% from 3.1%

  • The revision for consumption puts the first-quarter at weakest since the June quarter 2020

• German inflation was 7.6% in June and below the 7.9% recorded in May

  • Economists expected inflation to come in at 7.9%

  • The lower CPI was mainly the result of government subsidies that lowered fuel prices

• Spanish inflation unexpectedly rose to 10.2% in June

  • Spanish CPI has not broken the 10% level since 1985

  • Well-above forecasts of 9.0%

• Global manufacturing inventory hit a record US$1.8tn worldwide

  • “The problem now is that this high level of inventory, coupled with slow consumption, could lead manufacturers to slam their brakes on production and exacerbate an economic deceleration that is already underway,” Nikkei Asia reported

Commodities

• Iron ore prices fell on Wednesday after Chinese president Xi Jinping reiterated the country’s strict “zero tolerance” policy against the spread of covid

• Oil prices dipped amid disappointing economic data, downgrades to travel stocks and demand concerns

• Gold struggled to capitalise on falling yields. The inflation surprise in Spain is likely a red flag for more aggressive interest rate hikes, which will continue to weigh on the non-yield bearing yellow metal

#1 Copper

Copper prices are struggling to bounce after an almost -20% correction in June. Prices were trading as high as US$4.55/lb at the beginning of the month and now lingering around US$3.7/lb for the last four sessions.

The Global X Copper Mines ETF fell -4.7%, close to another fresh 17 month low.

#2 Lithium

The Lithium & Battery Tech and Rare Earth/Strategic Metals ETF both fell more than -3%.

Wednesday was a rather worrisome session for local lithium miners, as major announcements from Pilbara Minerals (ASX: PLS) and Liontown (ASX: LTR) was met with aggressive selling pressure.

Pilbara Minerals provided a mostly upbeat June quarter update and the approval of a $298m production expansion plan. The company's stock rallied 4.2% in early trade before closing -3.8% lower.

Likewise, Liontown signed a binding offtake agreement with Ford for the supply of up to 150,000 tonnes of spodumene per annum. The company's stock hit an intraday high of 15.1% but closed just 5.2% higher.

#3 Uranium

Uranium was another once bullish sector that was sold off overnight, with the Global X Uranium ETF giving back -3.4%.

An inverted Uranium ETF chart appears quite bullish and trying to break out (to the downside).

Inverted Global X Uranium ETF Chart (Source: TradingView)

#4 Retail

Bed Bath & Beyond could serve as another warning for ASX retailers that aggressively boosted inventory levels to mitigate supply chain disruptions.

Source: Axios Visuals

It will be interesting to see which retailers had to slash prices to get rid of excess stock heading into August reporting season.

ASX corporate actions occurring today:

• Ex-dividend: ABP, LRT, MOT, MXT, OPH, PGG, RDV, RF1, RGB

• Dividends paid: KMD, KPG, PL8, TWR

• Listing: None

• Issued shares: ALL, ARU, ATV, BAS, BEX, BIO, CAI, CAY, CVV, DUB, DYL, IDA, IHL, KGL, MFG, MQR, NAB, ORN, PNN, PSC, TMR, VMC

Other things of interest (AEST): 

• China NBS Manufacturing PMI (June) at 11:30 am

• Canada GDP Growth Rate (May) at 10:30 pm

• US Producer Price Index (May) at 10:30 pm