Morning Wrap: S&P 500 rallies, Alphabet slumps on earnings miss, ASX to rise

A jumbo Morning Wrap as US earnings season heats up. US stocks continue to rally thanks to easing bond yields, a pullback for the dollar and solid results from names like UPS and General Motors, Alphabet shares slump in after hours on earnings miss, Rishi Sunak becomes the UK's third prime minister and a few highlights from the Federal Budget.

Let's dive in.

US MARKETS

The market is in a tricky spot as Alphabet and Microsoft are due to post their earnings. Alphabet shares are down more than -6% in after hours after missing earnings expectations. Still, falling bond yields and a pullback for the US dollar continue to support the recent bounce back.

• 10 out of 11 US sectors advanced

• Real Estate led to the upside

• Materials, Communication Services, Discretionary and Utilities all rose more than 2%

• Defensives including Staples, Industrials and Healthcare underperformed benchmarks

• Energy was the only red sector

• 77% of stocks advanced

• 59% of stocks trade below their 200-day moving average (65%  last Friday, 64% a week ago)

EARNINGS

"Earnings season is now in full swing, and so far, it looks like any other earnings season. With 129 companies reporting, 71% are beating estimates by an average of 4.7%. This is pretty much a repeat of the second quarter "nothing to see here" earnings season," said Jurrien Timmer, Director of Global Macro at Fidelity.

• Logitech (+11%) reiterated its full-year guidance which was cut in July. Quarterly sales fell -12% amid a slump in demand for PCs and hardware

• SAP (+5.9%) earnings beat analyst estimates thanks to higher cloud earnings. Revenue rose 5% to 7.8bn euros and its current cloud backlog grew 26% to 11.3bn euros

• General Motors (+3.6%) topped earnings estimates, reaffirmed its full year outlook and said supply chain constraints are beginning to ease

  • CEO: “We have been operating with lower volumes due to the semiconductor shortage for the past year, and we have delivered strong results despite those pressures.” 

• United Parcel Service (-0.33%) posted stronger-than-expected earnings but revenue missed expectations. Profit margins rose as higher prices were passed onto customers

• General Electric (-0.5%) cut its full-year outlook due to supply chain issues but posted stronger-than-expected revenue. The company plans to reduce global headcount at its onshore wind unit by 20% as part of its restructure and resize initiative

After hours:

• Alphabet (+1.9%, after hours: -6.1%) reported weaker-than-expected earnings amid a slump in YouTube advertising revenue

  •  Revenue growth slowed to 6% compared to 41% a year ago

  • YouTube ad revenue fell -2% to US$7.1bn compared to analyst expectations of 3% growth

  • Google Cloud revenue was mostly in-line with expectations at US$6.9bn

  • Overall advertising revenue was slightly higher compared to last year at US$54.5bn

  • CFO: “Financial results for the quarter reflect healthy fundamental growth in Search and momentum in Cloud, while affected by foreign exchange. We’re working to realign resources to fuel our highest growth priorities.”  

WORLD NEWS 

• China's wealthy activate escape plans as Xi extends rule (Financial Times)

• Rishi Sunak becomes the UK's third prime minister in two months (Bloomberg)

• China's budget deficit nears record US$1tn (Bloomberg)

• Bank of America client flows into single stocks near historic levels (Bloomberg)

ECONOMY

Source: TradingEconomics | Table: Market Index

Key takeaways:

• Germany IFO weakens again: "Germany’s most prominent leading indicator just sent the first signals that things are – at least – not getting worse," said ING

• German economy 'highly likely' to contract in Q3: "While the services industry benefited from a post-lockdown boost over the summer months, shrinking order books, high energy and commodity prices and low water levels strongly weighed on economic activity," notes ING

• US home prices are falling: The Case-Shiller house price index fell -1.32% month-on-month, its largest drop since March 2009 as surging mortgage rates (now more than 7%) dampen demand for housing

Australian Federal Budget highlights and key themes:

• The 2022/23 budget deficit is now expected to be $36.9bn, approximately 1.5% of GDP

  • $4.9bn higher than the 2021/22 budget

  • $41.1bn lower than the $77.9bn forecast in the April pre-election outlook

• Cost of living relief via cheaper child care, paid parental leave, more affordable housing and reductions to medical costs

• Climate change initiatives that drive investment including $20bn of low-cost financing to upgrade electricity infrastructure

• Fixing the aged care system with $2.52bn over four years

• Establish a $15bn National Reconstruction Fund to support made in Australia goods

• $2.4bn in NBN Co to extend fibre access to 1.5m more premises and $1.2bn for better connectivity for regional and rural Australia

COMMODITIES

• Iron ore futures fell -0.1% to US$93.75 a tonne

  • “Iron ore prices may fluctuate along with steel product price trends with both demand and supply weakening when steelmakers keep low inventory, due to decreasing production profits and bearish market sentiment,” Mysteel said in a note on Tuesday

  • Chinese iron ore prices hit their lowest since last November and logged its longest stretched of weekly losses since 2016 last Friday     

• Oil and gold prices were mostly unchanged

Other commodities of interest (US$):

• Natural gas +8.6% to $6.19/MMboe

• Aluminium +1.8% to $2,210/t

• Zinc -1.65% to $268/t

• Palladium -2% to $1,931/oz

QUICK BITES

• AAA rating at risk: "Sharp correction in commodity prices could reverse recent gains in Australia's external accounts and, along with rising interest costs, could present downside to the AAA rating," noted S&P Global Ratings

• US rents start to ease: "The biggest component of CPI, home owners equivalent rent, is now on the decline. This should show up in the inflation print by the beginning of the year," said Lance Roberts, Chief Strategist at RIA Advisors

Source: Bloomberg, Daily Shot

• Experts are all bearish: "Remember the recent Bank of America Global Fund Manager survey showed a 3 standard deviation to underweight equities and nearly a 3 standard deviation to cash. Rarely is the crowd right when they all agree," said Ryan Detrick, Chief Market Strategist at Carson Group

Source: Bank of America

Hey hey. Kerry here. We're going to remove the US sectors table since the Wrap already talks about sector performance at the beginning. I'm also going to post and link an education piece about the 'Industry ETFs' table above and why its a useful tool for investors. Its something that's been poorly explained and a rather niche way of gauging what to expect for the upcoming ASX session. Also keen to hear any questions you might have about it. Feel free to reach out (email in bio).

Back to the writing about stonks.

Yields fall, dollar eases and stocks go up. And vice versa. Pretty simple script amid a volatile market.

The ASX 200 has been mostly rangebound in the three weeks. In the last two days, we've seen some rather short-lived rallies above that ~6,820 level. SPI futures suggest the ASX 200 will open +0.82%, so another crack at breaking out.

XJO chart (Source: TradingView)

Still, the market has to digest the Alphabet's earnings flop. Is this something that will weigh on the local market and see us chop after a strong open?

Sectors to watch

The overnight ETFs shows a big rise in risk appetite as gains were headlined by tech, crypto and renewable-related ETFs.

Overnight ETF gainers: Bitcoin (+5.03%), Fintech (+4.56%), Cloud (+4.41%), Hydrogen (+3.86%), Rare Earth/Strategic Metals (+3.65%), Uranium (+2.29%)

Overnight ETF losers: None

Stocks going ex-dividend over the next week:

• Wed: McMillian Shakespeare (MMS)

• Thu: Bank of Queensland (BOQ), Acrow (ACF), Genusplus (GNP) 

• Fri: 360 Capital Enhanced Income Fund (TCF), Gryphon Capital Income Trust (GCI)

• Mon: Autosports (ASG)

• Tue: Brickworks (BKW)

See all upcoming ex-dividend stocks

ASX corporate actions occurring today:

• Dividends paid: Reece (REH), Latitude (LFS)

• Listing: None  

Other things of interest (AEDT):

• 11:30 am: Australia inflation rate

• 11:30 am: Australia monthly CPI indicator

• 1:00 am: Canada interest rate decision