Morning Wrap: S&P 500 falls on China covid protests, Fed officials stay hawkish, ASX futures flat

ASX Futures (SPI 200) imply the ASX 200 will open 3 points higher, up 0.04%.

Major US benchmarks fall on fears of supply chain issues from China's intensifying covid situation, the Fed's Mester and Williams reiterate their hawkish intentions, China continues to pass on more support for its property sector and Europe is struggling to reach an agreement on an oil price cap for Russian exports.

Let's dive in.

MARKETS

US stocks are pulling back as China’s covid situation continues to escalate. Protests against the strict Covid-zero policies are sweeping across China and testing President Xi Jinping's commitment to lockdowns. The selling was further stoked by hawkish remarks from the Fed’s Williams and Mester, who reiterated the higher for longer narrative. The selling was rather broad-based as all three major US benchmarks closed around -1.5%. 

• A mix of defensive and growth sectors under/outperformed

• Materials and Energy sectors both fell more than -2% as China’s near-term economic growth outlook begins to deteriorate under mounting lockdowns

• Technology also fell more than -2% reflecting the market’s risk-off tone 

• 72% of stocks declined

• 46% of stocks trade below their 200-day moving average (43% on Monday, 47% a week ago) 

STOCKS

Apple (-2.8%) shares fell again as intensifying worker unrest at the world’s biggest iPhone factory in China could take a deepening toll on already constrained iPhone 14 production.  

• "We estimate that Apple now has significant iPhone shortages that could take off roughly at least 5% of units in the quarter and potentially up to 10% … an absolute gut punch ... Apple is extremely limited in their options for holiday season." - Wedbush

ECONOMY

New York Fed President John Williams:

• "I do think we're going to need to keep restrictive policy in place for some time; I would expect that to continue through at least next year.”

• "Inflation is far too high, and persistently high inflation undermines the ability of our economy to perform at its full potential.”

• "I do see a point probably in 2024 that we'll start bringing down nominal interest rates because inflation is coming down."

• Williams said his own terminal rate projection has moved up since the September forecast round but “not a massive change, but somewhat higher,” owing to a strong labor market and a “mixed bag” on inflation

Cleveland Fed President Loretta Mester:

• “Given where we are in terms of inflation readings, the outlook and the risks, I still put more weight on a higher risk or a higher cost of not doing enough.”

• “The costs of stopping too early are high. We want to be very diligent about this.”

• “We had one good October CPI report. I would need to see several more of those and more moderation and perhaps even a reduction in core services prices. And we also have to see better balance in the labour market.”

COMMODITIES

Iron ore futures rose 0.3% to US$93.30 a tonne.

• The China Security Regulatory Commission (SCRC) said it will adjust and optimise five measures in terms of equity financing for property development

• China’s CITIC Bank signed strategic cooperation agreements with ten real estate companies to meet their ‘reasonable financing needs’ 

Oil reversed a -3.5% decline to finish the session around breakeven. 

• European countries failed for a third time in reaching an agreement on a G7 oil price cap for Russian exports. The cap is supposed to go live on 5 December - Bloomberg 

• “... oil prices are also crumbling under the pressure of record Covid cases and huge economic uncertainty. The country’s commitment to zero-Covid has seriously damaged growth in the world’s second-largest economy and by extension, crude demand.” - Oanda senior market analyst, Craig Erlam

Gold prices eased -0.8% to US$1,740 an ounce following hawkish comments from the Fed. Prices are down -2.6% from their mid-November peak of US$1,765.

Newcastle coal futures rallied 5.3% to US$380 a tonne. 

QUICK BITES

• Sector performance under stagflation: Materials and tech struggle the most in periods of poor growth and high inflation.

Source: Bank of America Global Research

• Sector sensitivity to China: Energy, Health Care and Staples are the most negatively correlated to China's manufacturing and services PMI. While Discretionary and Tech are positively correlated.

It's interesting how China's escalating covid situation has been sitting around a week and markets have only just started to react.

China reports two separate manufacturing PMIs on Wednesday and Thursday, which could give us a peep into how industrial activity has held up against mounting restrictions.

My commentary will be a little bit of a repeat from Monday and past wraps, that being:

• The rest of the week will give us a better indication as to how this China covid blowout sits with the market

• The pullback is just as important as the rally. Will it be a less volatile pullback that's supported? Or was this just another bear market rally?

• Let's see if the theme of value sectors holding up relatively well continues

Sectors to watch

Copper: Copper has taken a round trip, down almost -9% from its mid-November highs. The Global X Copper Miners ETF also fell -2.57% overnight, which could flag some negative flows for local miners.

Copper chart (Source: TradingView)

Tech: The risk-off tone does not bode well for richly valued tech names, with the Global X FinTech and Cloud ETFs falling -2.1% and -1.36% respectively overnight. Still, many of our tech names have held up relatively well including Tyro Payments, Altium, Dicker Data and Seek.

Lithium: Many lithium names are falling to inflection points such as old highs, support areas and key moving averages. So far, there hasn't been much evidence of dip buying.

Energy: Oil managed to reverse a -3.5% fall to close around breakeven. Does this see some support for local names?

Oil price chart (Source: TradingView)

Stocks going ex-dividend over the next week:

• Tue: Graincorp (GNC), My Food Bag Group (MFB), Ocean Healthcare (OCA), Liberty Financial Group (LFG), Ifratil (IFT), Red Hill Iron (RHI), Beacon Minerals (BCN), 

• Wed: Pengana International Equities (PIA), Aristocrat Leisure (ALL), PTB Group (PTB)

• Thu: Technology One (TNE), Pendal Group (PDL) 

• Fri: None

• Mon: Incitec Pivot (IPL) 

ASX corporate actions occurring today:

• Dividends paid: Sky Network Television (SKT), Champion Iron (CIA) 

•  Listing: None

Other things of interest (AEDT):

• 12:00 am: Germany inflation rate

• 12:30 am: Canada Q3 GDP