Morning Wrap: S&P 500 plunges, Chinese lockdowns smash oil prices, ASX set to fall

US markets tumbled as an anticipated midterms 'red wave' disappoints, China introduces lockdowns in some areas of Guangzhou as cases climb, oil and commodity prices weaken, Facebook-parent Meta announces more than 11,000 layoffs and brace yourself for volatility ahead of tonight's inflation print.

Let's dive in.

MARKETS

US markets snapped a three day winning streak in a rather volatile fashion, weighed by the drama surrounding the crypto market, a worsening covid battlefront in China and jitters kick in ahead of tonight’s CPI print. The US dollar bounced back but bond yields eased. European markets outperformed Wall Street, but still slightly red.

• Energy was smashed as lockdowns are coming into play in China, oil is on a two day losing streak, down more than -5%

• Growth-heavy sectors like Discretionary and Tech also led to the downside

• Defensives like Utilities, Health Care, Real Estate and Staples outperformed on a relative basis, in-line with the recent theme of the Dow outperforming the Nasdaq

• 73% of stocks declined

• 56% of stocks trade below their 200-day moving averages (54% on Thursday, 57% a week ago) 

STOCKS

Meta (+4.9%) shares rallied after announcing plans to lay off more than 11,000 employees or approximately 13% of its workforce.

• “Today I’m sharing some of the most difficult changes we’ve made in Meta’s history … We are also taking a number of additional steps to become a leaner and more efficient company by cutting discretionary spending and extending our hiring freeze.” - CEO Mark Zuckerberg

• “Many people predicted this (eCommerce) would be a permanent acceleration that would continue even after the pandemic ended. I did too, so I made the decision to significantly increase our investments. I got this wrong, and I take responsibility for that.” - CEO Mark Zuckerberg 

Disney (-13%) earnings missed analyst expectations at both the profit and revenue level. Paying subscribers for Disney+ was up 39% year-on-year to 164m but the company warned about cuts to marketing and content budgets moving forward 

• "...the company’s operating income guidance for next year is much weaker than present expectations and management tone appeared more cautious due to macro risks as well as potential impact from factors such as higher churn in streaming due to price increases.” - Wells Fargo 

Affirm (-23.1%) missed quarterly earnings expectations and issued a weaker-than-expected guidance for the current quarter. 

• "It’s likely that the slowing economy and worsening consumer credit will hamper GMV growth in the near term. The Fed’s accelerated rate changes are causing significant dislocations in debt capital markets ..” CEO Max Levchin 

WORLD NEWS 

• US mortgage rates rise to 7.14%, highest level since 2001 (Bloomberg)

• Overseas demand collapses as Chinese exports shrink (Bloomberg)

• China's factory-gate prices fall for the first time in two years (SCMP)

• Crypto market rout deepens as Binance drops FTX takeover (Bloomberg)

• Crypto shock hits ETFs with biggest futures fund briefly halted (Bloomberg)

ECONOMY

China’s inflation rate eased to 2.1% in October from 2.8% in September.

• Cooler than analyst expectations of a fall to 2.4%

China’s producer price index dipped to -1.3% in October from 0.9% in September.

• “Given China’s terrible import numbers on Monday, this isn’t a surprise. Domestic demand is just too weak to cause prices to rise,” - Michael Pettis, a finance professor at Peking University

• “While in the US, monetary expansion tends to boost the demand side, and so [it] can be inflationary, in China, monetary expansion mostly boosts the supply side, and so is more likely to be disflationary .. That is why low inflation in China isn’t evidence that the PBoC can be more aggressive but rather evidence that it has been too aggressive with policies that focus on the wrong side of the economy.”

Federal Reserve Bank of Richmond President Thomas Barkin speaks at a conference in Dallas, Texas.

• “Commodity prices seem to be cooling, supply chains seem to be easing up, excess spending is being spent down and the Fed is raising rates and doing what we need to do about it.”

• “My personal hypothesis is that we're on the back end .. not on the front end,” of the inflation surge 

CEO of the Federal Reserve Bank of New York John Williams speaks to the Economics Club in Manhattan, NY.

• “The news is mostly good — longer-run inflation expectations in the United States have remained remarkably stable at levels broadly consistent with the longer-run goal.”

COMMODITIES

Iron ore futures fell -2.1% to US$87 a tonne.

• “Market participants largely blamed the persistent decline in finished steel prices and relatively high costs of steelmaking raw materials for the steeper losses being inflicted on domestic steelmakers,” - Mysteel Global

• “Most Chinese steel producers have seen their product margins on sales shrink significantly since mid-October … steel mills nationwide quizzed in Mysteel’s regular survey hitting another new low for the year on 4 November.” 

Oil prices slumped again, down -5.5% in the last two sessions.

• US crude in storage rose 3.9m barrels in the last week to 440.8m barrels compared to analyst expectations of a 1.4m increase

• Covid outbreaks in Guangzhou city is worsening, with the city locking down a third district in an attempt to slow the widening outbreak  

Gold takes a slight breather after rallying as much as 5.1% this week. 

Other commodities of interest:

• Natural gas -4.4% to US$6.07/MMboe

• Newcastle coal futures -7.3% to US$300/t

SPI futures suggest a rather steep pullback of -0.76% after a rather extraordinary four day rally where the ASX 200 advanced 2.06%.

Wall Street is handballing us a weak session that was driven by a combination of:

• Profit taking and derisking ahead of the CPI print

• Drama surrounding the crypto industry. In short, the 2nd largest crypto exchange went under after its balance sheet was leaked, which showed a massive gap between assets and liabilities. FTX's token is down about -88% since the beginning of this week

• Higher covid cases in China, prompting for lockdowns in districts for the manufacturing hub of Guangzhou

The ASX 200 is expected to pullback from the key 7,000 level that's proven to be an area of resistance. Brace yourself for volatility ahead of the all-important US CPI print.

XJO chart (Source: TradingView)

Sectors to watch

Iron ore: China's intensifying covid situation is seeing weakness in commodity markets. This could take some heat out of the recent rebound for iron ore miners. Its worth noting that BHP ADRs fell -2.3% in overnight trade.

Energy: Oil prices are looking for a new floor as it digests what new lockdowns in China might mean for demand. OPEC is next due to meet on 4 December. The IEA's Birol warns that the cartel might issue more production cuts that put further upwards pressure on inflation. Woodside held up relatively well yesterday, closing +0.5%.

Uranium: The Global X Uranium ETF was smashed overnight, down -5.05%. Like most local uranium names, the ETF continues to chop back and forth. Uranium spot prices have eased from late October highs of US$53/lb to US$50/lb.

Global X Uranium ETF (Source: TradingView)

Resources: Other resource-related ETFs like Rare Earths, Copper and Lithium all closed at least -2% lower.

Stocks going ex-dividend over the next week:

• Thu: Acorn Capital (ACQ)

• Fri: Challenger (CGF)

• Mon: Lion Selection Group (LSX)

• Tue: QV Equities (QVE), Plato Income Maximiser (PL8)

• Wed: Challenger (CGF) 

ASX corporate actions occurring today:

• Dividends paid: McMilan Shakespeare (MMS), Dexus Industria (DXI), Dexus Convenience Retail (DXC)  

•  Listing: None

Other things of interest (AEDT):

• 11:00 am: Australia consumer inflation expectations

• 12:30 am: US inflation rate