Morning Wrap: S&P 500 rejects major trendline, RBA tipped for another 25 bps, ASX to fall

Wall Street sold off on higher bond yields and a bounce for the US dollar, the S&P 500 fails to break through a key trendline, Tesla shares tank on rumours of a 20% production cut at its Shanghai plant, Morgan Stanley is bullish on airlines and the RBA is set to hike rates by another 25 bps at 2:30 pm AEDT.

Let's dive in.

MARKETS

Major US benchmarks sold off sharply, with every sector closing in negative territory. The US dollar and bond yields bounced while the VIX jumped, albeit all three have fallen sharply over the past few weeks. Of note, the S&P 500 rallied into a key trendline, which may have triggered some technical selling. 

• Defensives outperformed on a relative basis, notably Utilities, Healthcare, Consumer Staples and Real Estate

• Energy led to the downside after oil prices slumped more than -3.0% and near a fresh ten-month low

• Growth-heavy sectors like Discretionary and Tech sold off as bond yields bounced  

• 76% of stocks advanced

• 45% of stocks trade below their 200-day moving average (40% on Monday, 46% a week ago) 

STOCKS

United Airlines (+2.0%) and Delta Airlines (+0.1%) shares both rallied at least 3% in early trade after Morgan Stanley said it believes 2023 could be a ‘Goldilocks’ year for the travel industry.

Apple (-1.3%) shares are holding up after its largest supplier Foxconn, which runs the largest iPhone factory in China that was subject to lockdown protests last month, said it expects to return to full production in late December or early January.

Tesla (-7.1%) shares tumbled after Bloomberg reported plans by the EV maker to cut output of its Model Y by more than 20% at its Shanghai plant this month.

• Tesla quickly denied the 20% production cut in December, according to Reuters

• Of note, China’s 12,000 yuan EV subsidy expires on 31 December 

WORLD NEWS

• China set to announce further easing of Covid measures (Reuters)

• Economists pull forward projects for China’s Covid Zero exit (Bloomberg)

• RBA set to raise rates but tightening cycle near end point (Bloomberg)

• Europe cuts gas demand by a quarter (FT)

• China steps on Washington's toes as Xi heads to Saudi Arabia (FT)

ECONOMY

Eurozone services PMI eased to 48.5 in November from 48.6 in October.

• “Output levels across the euro area shrank once again in November, extending the downturn into a fifth month.” - S&P Global Platts 

• “Although the rate of contraction eased for the first time over this sequence due to a slower fall in manufacturing production, this masked an accelerated decline in the Eurozone’s dominant services sector.”

• “Employment continued to rise, although the rate of job creation was the weakest in almost two years.”

US non-manufacturing PMI unexpectedly jumped to 56.5 in November from 54.4 in October, according to the Institute of Supply Management. 

• Well-above analyst expectations of a decline to 53.3

• “Economic activity in the services sector grew in November for the 30th month in a row.” - ISM ‘Report on Business’

COMMODITIES

Newcastle coal futures rose 2.3% to US$400.0 a tonne.

Iron ore futures fell -1.9% to US$106.5 a tonne.

• Global steel production totaled 147.3 million tonnes in October, down -3% month-on-month but up 1.0% compared to a year ago, according to Breakwave Advisors

• “Global crude steel production has now increased on a year-on-year basis for two straight months after previously contracting on a year-on-year basis for twelve straight months.  However, the growth remains almost entirely due to growth in China’s crude steel production.” - Breakwave Advisors 

Oil prices tumbled as the G7 price cap of US$60 a barrel goes live against Russian oil exports. Russia said it will refuse to export to countries abiding to the cap.

Gold sold off sharply as the US dollar and bond yields bounced.

• "The risk of more Fed tightening due to strong wage pressures is clearly not going away. ​ Gold has a nice run and investors will be quick to lock in profits if the bond market selloff accelerates." - Oanda senior market analyst, Ed Moya

QUICK BITES

• Peak inflation: JP Morgan says global inflation pressure "is now unwinding in a more convincing fashion ... the steady series of declines are a encouraging sign that disinflation continues to gather momentum."

• Don't fight the Fed: Bear markets tend to stop only after the Fed cuts rates.

The S&P 500 had its third crack at this tricky trendline and failed.

S&P 500 chart (Source: TradingView)

My favourite line from our Wrap's is probably "the pullback is just as important as the rally."

Markets have come a long way since October but the rejection of the trendline makes you wonder: Was this just another bear market rally?

The ASX 200 is set to open -0.64%. We've experienced a V-shaped like rally from October lows. So as we pullback, where do we find some support? Is it the 20-day? The 7,150 level? The 50-day? The 200-day?

XJO chart (Source: TradingView)

Sectors to watch

Lithium: VanEck Rare Earth/Strategic Metals ETF fell -4.86%. The rumored Tesla production cut and end of Chinese EV subsidies (31 December) could also spark some more negative flow for local names.

Uranium: Global X Uranium ETF down -4.78%. Uranium spot prices continue to roll over, down to US$48.3 according to Numerco.

Gold: Spot prices pulled back sharply overnight as the US dollar and bond yields bounced. ASX-listed gold names have rallied strongly in the past few weeks, so let's see if these breakouts can hold and if the pullback remains supported.

Gold spot price (Source: TradingView)

Iron ore: Commodity markets were caught up in the risk-off tone and higher US dollar. Of note, BHP is now within an arms reach of all-time highs, just 3.8% away from its August 2021 high of $48.57.

BHP weekly chart (Source: TradingView)

Stocks going ex-dividend over the next week:

• Tue: Dalrymple Bay Infrastructure (DBI)  

• Wed: Civmec (CVL) 

• Thu: Hitech Group (HIT), Fisher & Paykel (FPH), Select Harvests (SHV) 

• Fri: None

• Mon: None 

ASX corporate actions occurring today:

• Dividends paid: None

•  Listing: None

Economic calendar: 

• 2:30 pm: RBA interest rate decision

• 12:30 am: US balance of trade