Morning Wrap: S&P 500 rebound spooked by Apple production cut, ASX to fall

US markets continue to bounce but closed well off session highs after reports that Apple is cutting its iPhone 14 production, Goldman Sachs and Lockheed Martin post better-than-expected earnings, New Zealand inflation smashes expectations and boosts the case for more rate hikes and US industrial production surprises to the upside.

Let's dive in.

US MARKETS

US markets got spooked by reports that Apple was cutting its iPhone 14 production. The S&P 500 closed well off session highs of 2.3%. It was more extreme for the Nasdaq, which was trading as high as 2.7%. A few more US market thoughts in the Morning Brief below.

• All 11 US sectors higher

• Defensives including Industrials, Utilities and Financials outperformed

• Healthcare, Communications, Tech and Energy underperformed benchmarks

• 68% of US stocks advanced 

• 64% of US stocks trade below their 200-day moving average (66% on Tuesday, 71% a week ago)

STOCKS

• Target (+5.4%) was upgraded to a Buy from Hold by Jefferies. The analysts said the stock can rally as much as 20% and benefit from easing supply chain issues

• Amazon (+2.3%) was named a top pick at Citi for both a hard and soft economic landing

• Apple (+0.9%) shares sold off intraday after reports of iPhone 14 production cuts less than two weeks after its debut 

• Microsoft (+0.4%) has sacked around 1,000 employees this week in a fresh round of layoffs

EARNINGS

Just a quick one on what we’re looking to achieve with this earnings segment. We’re not looking to cover every single US earnings result but just the high-profile ones plus any key quotes on macro and industry trends.

• Lockheed Martin (+8.7%) posted better-than-expected earnings and plans to double its share repurchase plan to US$8bn in 2022

• Goldman Sachs (+2.3%) said quarterly revenue was down -12% and profit fell -43% but that was still slightly ahead of analyst expectations

  • Goldman: “Real spending growth has slowed significantly and we expect it will remain weak through end-2023 ... Household balance sheets remain strong, but after data revisions we now estimate that households have spent over 20% of their excess savings.”

  • CFO: “On consumer side, we're seeing some signs of credit deterioration and increase in charge-offs or credit performance remains in line with our expectations … we're closely monitoring the portfolio and actively adjusting our underwriting in light of softening macro outlook.”

• Hasbro (-2.9%) posted third-quarter earnings that missed analyst expectations

  • CEO: "As expected, the third quarter is our most difficult comparison and was further impacted by increasing price sensitivity for the average consumer.”

WORLD NEWS 

• New Zealand Q3 inflation smashes expectations (Reuters)

• Apple cuts iPhone 14 production (The Information)

• Wall St's fixed income results top expectations (Bloomberg)

• Germany pushes to extend lifespan of three nuclear plants (Reuters)

• Green hydrogen seen competing with LNG within a decade (Bloomberg)

ECONOMY

• German ZEW economic sentiment index was -59.2 in October from -61.9 in September

  • Analysts polled by Reuters expected a reading of -65.7

  • “The probability that real gross domestic product will decline in the course of the next six months has also increased considerably,” said ZEW President Achim Wambach

  • While the index slightly improved, it’s still sitting around levels not seen since the Global Financial Crisis  

• US industrial production rose 5.3% year-on-year in September from 3.9% in August

  • Ahead of analyst expectations of 3.4%

  • The better-than-expected result was supported by broad-based increases across manufacturing, mining, durable and non-durable goods

COMMODITIES

• Iron ore futures fell -0.4% to US$94.6 a tonne

  • “Iron ore prices may fluctuate along with steel products' price trend, with the bearish market sentiment on the downstream demand and thin steelmaking profits, under the sintering operation curb and a low in-plant inventory level,” said Mysteel

  • Rebar production among the 137 Chinese steel mills Mysteel samples regularly declined for a third consecutive week over 6-12 October to a fresh 1.5 month low

• Oil prices tumbled on expectations that the Biden administration will continue to drain strategic oil reserves in the lead up to midterm elections

  • “China’s decision to delay the release of key economic readings could suggest the data is so ugly that they don’t want it released during the party’s congress … Crude prices are struggling here and that will continue if the mood on Wall Street sours,” said Oanda senior market analyst, Ed Moya

• Gold fluctuated around the US$1,650 level

  •  “Earnings season has driven some investors back into equities, which means demand for safe-havens was low. ​ The current market environment is still bearish for gold as Wall Street becomes convinced that the Fed will need to continue rates into the spring,” said Moya.

Other commodities of interest (US$):

• Aluminium -2.9% to $2,173/t

• Natural gas -4.2% to $6.05/MMBoe  

QUICK BITES

• JPMorgan sees a downshift in inflation: We see signs that moderating inflation “is already underway and that this cooling will become more prominent over time. Overall, we think headline CPI inflation cools ... to 6.8% in December and then to 3.2% by September ...”

• Sydney housing market smashed: Awesome graphic by CoreLogic and mapping software provider Esri. There are some suburbs that have fallen by more than -10% in the past quarter. Link to visual tool here.

• Fed funds futures: Currently pricing in a terminal rate as high as 5.0% with 53.5% certainty for February 2023. This implies another 75 bps in November and December, and a 25 bp hike in February. And then the Fed might pause to assess the impact of their hiking.

• Funds hoarding cash: Bank of America's fund manager survey shows the highest cash levels since 2001.

Source: Bank of America Global Fund Manager Survey

The Nasdaq rallied 2.7% in early trade but closed 0.9% higher. That's not the kind of momentum you want to see heading into Wednesday. It's probably also why SPI futures are pointing towards a -0.4% at the open.

US earnings season is heating up and it's mostly been positive, with the highlight so far being better-than-expected earnings from banks. This was somewhat offset by news that Apple was cutting its iPhone 14 production.

Market conditions continue to be extremely volatile. We've seen plenty of rallies in the past few weeks fizzle rather quickly. The ASX has held up much better than the US market, so let's see if it can consolidate on those gains and avoid undercutting recent lows around 6,635.

XJO chart (Source: TradingView)

Sectors to watch

Overnight ETF gainers: Aerospace & Defense (+4.0%), Hydrogen (+3.57%), Jets (+2.5%), Cloud (+2.17%), Fintech (+1.46%)

Overnight ETF losers: Aluminium (-2.57%), Bitcoin (-1.74%), Copper (-1.08%)

The overnight session wasn't too exciting and there weren't too many leads to go off. The most notable sector I can think of for today is:

Travel: The US Jets ETF rose 2.5% overnight. The ETF holds mostly US airline stocks with lessor exposure in international airlines including Qantas (ASX: QAN).

Interesting quote from United Airlines earnings (released after market close): "... there are 3 durable trends for air travel demand that are more than fully offsetting any economic headwinds: air travel is still in the COVID recovery phase, hybrid work ... and external supply challenges will limit industry supply for years to come."

Qantas is in a pretty interesting place after a massive rally last week thanks to its earnings update. Its made a rather V-shaped move but its also trying to push above previous highs.

Qantas chart (Source: TradingView)

Stocks going ex-dividend:

• Wed: None

• Thu: None

• Fri: SNC

• Mon: NHC

• Tue: CLV 

ASX corporate actions occurring today:

• Dividends paid: SGM

• Listing: None

Other things of interest (AEDT):

• 5:00 pm: UK inflation

• 11:30 pm: Canada inflation

• 11:30 pm: US housing starts