Morning Wrap: S&P 500 set for worst year since 2008, ASX to fall

US markets fell for a fourth straight session, the former Fed's Dudley says investors are better off believing the Fed, Germany's leading business indicator bounces strongly and Amazon is set to give back all of its pandemic gains.

Let's dive in.

MARKETS

A Santa Rally – except its in the wrong direction. Major US benchmarks slumped again, with the S&P 500 down -5.3% in the last four sessions. The former New York Fed President William Dudley pushed back market expectations about the Fed's resolve to bring inflation down, sending bond yields higher. Alongside rising recession fears and China's covid explosion – the market didn't stand a chance.

• Defensive sectors outperformed on a relative basis, notably Staples and Utilities

• Energy held up relatively well as Germany’s leading business indicator staged a strong rebound and revived hopes that the economy might only face a mild recession

• Growth-heavy sectors like discretionary and technology led to the downside

• 69% of stocks declined

• 56% of stocks trade below their 200-day moving average (53% on Monday, 47% a week ago) 

STOCKS

Tesla (-0.3%) shares rallied as much as 3.3% after CEO Elon Musk polled users on Twitter whether he should step down as Twitter head and users voted he should. Musk claimed he would abide by the results. 

Meta (-3.9%) shares fell after the EU Commission informed the company that it breached antitrust rules by abusing its dominant position. 

WORLD NEWS

• Shanghai to shut most schools again from Monday (Bloomberg)

• Hedge funds slashed bets on rising US rates after FOMC (Reuters)

• Post-FOMC Fedspeak rejects market's inflation optimism (FT)

• Rapid spread of Covid in China leading to widespread medicine shortages (FT)

ECONOMY

Germany’s IFO business climate index bounced to 88.6 in December from 86.4 in November. 

• “The index is now back at a level last seen during the summer. Both the current assessment and the expectations components improved in December.” - ING Economics 

• "At the end of what has once again been a challenging year for the German economy, hope has returned: hope that the economy might even avoid a winter recession or at least hope that it will only be a mild one." - ING Economics

COMMODITIES

Iron ore futures -0.1% to US$107.60 a tonne.

• Daily crude steel production among mills assessed by the China Iron & Steel Association fell -2.1% over 1-10 December compared to the prior 10-day periods, according to Mysteel

• “The dip was chiefly because more steel producers conducted maintenance works due to profit losses or the expectation of shrinking demand in the low season for steel consumption." - Mysteel

Oil is trying to bounce after falling -5.4% in the previous two sessions.

• “Energy traders might be stuck in wait-and-see mode as there might not be a clear catalyst for the next major move with crude prices … Earlier oil rose after the German IFO report showed the Eurozone’s largest economy might not have that bad of a recession.” - Oanda senior market analyst Ed Moya

Gold prices are under pressure after hawkish Fedspeak sent bond yields higher.

• “Gold prices edged lower as global bond yields surged after former Fed’s Dudley told investors not to fight the Fed.” - Moya 

QUICK BITES

• Megacaps go full circle: Amazon has erased its pandemic gains, closing at its lowest level since March 16, 2020. The stock is down -48% year-to-date

• Worst year since GFC: The S&P 500 is headed for its worst year since 2008, so far down -18.9% year-to-date versus the -39.3% decline in 2008

• Money managers poised to sell: Quarter end rebalancing is likely to create selling pressure for equity markets. The world's biggest money managers are set to unload up to US$100bn of stocks in the final few weeks of the year, according to Bloomberg

Source: Bloomberg

A reversal day last Tuesday plus four consecutive days of selling places investors in a rather unsettling but familiar position where:

• Is the market oversold: Yes, as more and more red days stack up

• Is the market due to bounce: At some point, especially as it gets more and more oversold

• Where is momentum headed: Down, as short-term moving averages like the 20 and 50-day begin to slope downwards

S&P 500 (Source: TradingView)

The overnight weakness sets the stage for more weakness for the local sharemarket. The ASX 200 is poised to open -0.38%. As we've noted in the last few Wraps, the market's have seen pretty volatile opens (e.g. dips and rips back to breakeven). That volatility seems to die down after lunch, perhaps an unsurprising drop off heading into Christmas.

We're in this awkward position watching US markets try to find a floor. The million dollar question is whether or not that's a few percentage points away or another leg down.

Sectors to watch

Iron ore: The VanEck Steel ETF took a -5.5% dive. US-listed BHP and Rio Tinto fell -0.6% and -0.7% respectively overnight.

Nickel: Nickel futures fell -5.4%.

Tech: The Nasdaq and S&P 500 tech sector led to the downside amid a risk-off tone and rising bond yields. This could see some negative flow for the local tech sector.

Lithium: The VanEck Rare Earths/Strategic Metals ETF fell -2.5%. It's now down -14.05% from its high last Tuesday.

VanEck Rare Earths/Strategic Metals ETF (Source: TradingView)

Key events 

ASX corporate actions occurring today:

• Dividends paid: Westpac Bank (WBC), SSR Mining (SSR) 

•  Listing: None

Economic calendar:

• 11:30 am: RBA meeting minute

• 2:00 pm: Japan interest rate decision