Morning Wrap: S&P 500 retreats as yields pop, Netflix stock soars, ASX to fall

Major US benchmarks eased as bond yields climbed to fresh multi-year highs, Netflix unexpectedly adds 2.4 million new subscribers, UK inflation accelerates to double digits again, the Fed's Kashkari sees rates going above 4.50%, US oil reserves are plummeting and an ASX-listed lithium name wins a $141.7 million grant by the US Department of Energy.

Let's get into it.

US MARKETS

Shifting the line about US markets to the Morning Brief below (just for today).

• 10 out of 11 sectors declined

• Energy rose an outsized 2.94% as oil prices pushed higher

• Communication Services, Tech and Staples also outperformed on a relative basis

• Defensives including Real Estate, Financials, Health Care and Utilities led to the downside  

• 69% of stocks declined

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

STOCKS

• Snapchat (+2.5%) shares rose after Citi said it expects the social media company’s earnings to be better than expected due to an improving advertising environment  

• Lowe’s (-4.8%) was downgraded by Evercore ISI on the grounds of slowing demand for home improvement goods and services

• Baidu (-8%) and JD.com (-7.7%) are among several Chinese tech stocks that got smashed

EARNINGS

• Netflix (+13.1%) added 2.4m subscribers in the third quarter and posted better-than-expected earnings

  • Netflix released 1,026 original episodes in Q3 2022 compared to Amazon Prime (223), Disney’s Hulu (194) and Disney+ (140)

• United Airlines (+5%) earnings beat Wall Street expectations. The airline now expects adjusted operating margins to be above 2019 for the first time

  • “... there are three 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."

• Procter & Gamble (+0.9%) earnings beat analyst estimates as higher pricing helped offset lower sales volume and currency headwinds. Price hikes are beginning to hurt demand, with sales volume down -3%

  • Management said it expects full year earnings to be at the low end of guidance, mostly due to foreign exchange impacts 

WORLD NEWS 

• Nestle passes its largest price hike in decades (Bloomberg)

• Covid in China's coal hubs crimp supply (Bloomberg)

• Netflix confirms plans to launch cloud gaming service (Protocol)

• BMW CEO says US curbs on China could detract from EV demand (Bloomberg)

• Apple chipmaker TSMC considers Japan expansion as China tensions continue (CNBC)

ECONOMY

• UK inflation accelerated to 10.1% in September from 9.9% in August

  • Consensus expected an increase of 10%

  • Increases in food, transport and energy prices were the biggest contributing factors

  • “We think we’re only fractionally away from the peak now, which is likely to come in October – though in practice we’re likely to see inflation hover in the 10-10.5% range through to January,” said ING

• Canada inflation fell to 6.9% in September from 7.0% in August

  • Consensus expected a fall to 6.8%

  • Energy prices fell -4.4% month-on-month but segments like services, food and durable goods remain elevated

• EIA weekly petroleum status report indicate a -1.7m barrel decline in crude inventories

  • Analysts expected that crude inventories would increase by 1.38m barrels

Fed speech highlights:

• Minneapolis Fed President Kashkari:

  • “I’ve seen very little evidence in my region that the labour market is softening.”

  • “I’ve not yet seen much evidence that that (referring to  core inflation) has peaked.” 

• St Louis Fed President Bullard:

  • Favors frontloading rate hikes for now, with a wait-and-see stance in 2023

  • In 2023, if inflation starts to decline meaningfully, then the Fed can stay where it is at a higher rate level 

COMMODITIES

• Iron ore futures fell -0.5% to US$94.5 a tonne

  • “China's prices of construction steel have been losing ground after the country's National Day holiday (over 1-7 October), largely as demand lacked major upward momentum while cost support from the raw material side waned,” said Mysteel

  • “Moreover, market sentiment has been subdued due to the resurgence of COVID-19 cases across the country, market sources shared.”

  • Global steel demand is set to contract 2.3% this year as Europe’s energy crisis and China’s economic slowdown weigh on consumption, according to the World Steel Association

• Oil prices are starting to turn after an -8.2% selloff in recent weeks

  • “The White House goes all-in on sending oil prices lower over the short-term.  The Biden administration will release an additional 15 million from the Strategic Petroleum Reserves,” said Oanda senior market analyst, Ed Moya

  • Biden said the US will refill its SPR when US oil prices are at or below $72 a barrel

• Gold prices tumbled after US Treasury yields hit fresh 14 year highs and the US dollar snapped a two day losing streak   

Other commodities of interest (US$):

• Platinum -2.4% to $883.5/oz

• Natural gas -4.2% to $5.8/MMBoe  

QUICK BITES

• Fed Beige Book for October: "Retail spending was relatively flat, reflecting lower discretionary spending, and auto dealers noted sustained sluggishness in sales stemming from limited inventories, high vehicle prices, and rising interest rates."

• Dwindling US energy reserves: Biden is draining reserves like his life depends on it.

• Liquidity becoming an issue: "Liquidity is becoming much more of an issue for the market, which leaves the Fed much less room to hike rates without breaking something," said Lance Robert, Chief Strategist at RIA Advisors

Source: Bank of America

• IPOs in the dumpster: "Of >400 listings where companies raised at least $100 million between 2019 and 2021, 76% are now below their IPO price and median return since IPO date is -44%," notes Liz Ann Sonders, Chief Investment Strategist at Charles Schwab

• A rapidly recovering supply chain: Supply chain stress is now back around pre-pandemic levels, with commodities and used car prices leading the way down

Source: Arbor Research

Major US benchmarks retreated as bond yields picked up again. This was noted in Wednesday's Evening Wrap.

Higher yields has humbled the markets in recent months. This is happening amid a rather positive US earnings season, where we've seen better-than-expected results from banks, discretionary companies successfully pass on higher prices and a massive turnaround from Netflix.

US 2 Year Treasury Yield vs. S&P 500 (Source: TradingView)

It'll be worth keeping an eye on yields and whether or not they top around these levels, or if they keep on chugging higher towards 5.0%.

I think I've said this three days in a row already but the ASX 200 is in much better shape than the US. We've defended June lows and more recently, popped above the 50-day moving average.

SPI futures are pointing towards a modest fall at the open, so let's see if this pullback can be one that has a little more character to it - as oppose to what we've seen the past few weeks.

Sectors to watch

Overnight ETF gainers: Nickel (+1.6%), Rare Earth/Strategic Metals (+0.85%)

Overnight ETF losers: Hydrogen (-4.38%), Solar (-3.45%), Biotech (-3.41%), Fintech (-2.78%), Uranium (-1.66%)

Overall, nothing too interesting on the cards for Thursday.

Energy: Oil prices bounced back overnight and Energy was the best performing sector on the S&P 500. This could see some strength return for local energy names like Woodside (ASX: WDS) and Beach Energy (ASX: BPT)

Lithium: US government handing out cash to a few lithium-related plays overnight. $50m was awarded to Lilac Solutions (Lake Resources' technology partner) and also US$141.7m for Piedmont Lithium (ASX: PLL), whose US-listed shares rallied 12.2%. This isn't too material for local lithium names, just something interesting to note.

Stocks going ex-dividend in the next week:

• Thu: None

• Fri: SNC

• Mon: NHC

• Tue: CLV 

• Wed: MMS

ASX corporate actions occurring today:

• Dividends paid: HZN, X64, EOL, NEC, LOV 

• Listing: None

Other things of interest (AEDT):

• 11:30 am: Australia unemployment rate

• 12:15 pm: China loan prime rate

• 5:00 pm: Germany producer price index