Morning Wrap: US stock market rallies on Fed's supersized rate hike, ASX set to rise

Wall Street rallied after the Fed delivered its largest interest rate hike since 1994, Biden wrote a letter to oil companies to boost supply and slammed them for high profit margins and PayPal has a new BNPL product.

Let’s dive in.

Markets

Major US indices rallied after the Fed pulled the trigger on a 75 bps rate hike, signalling they are serious about fighting inflation and want to get ahead of the curve.  The Fed expects year-end interest rates to be around 3.4%.

• 10 out of 11 US sectors advanced

• Energy was the only sector that declined

• Discretionary, real estate and tech stocks outperformed 

• 69% of US stocks closed higher

• 76% of US stocks trade below their 200-day moving average (77% on Wednesday, 66% a week ago)

Stocks

• Boeing (+9.5%) has had 5-straight sessions where its share price has moved +/-4% or more. Reuters reported that China Southern Airlines is conducting test flights with Boeing’s 737 Max jets 

• Microstrategy (+9.2%) holds more than 129,000 bitcoin and at risk of a massive margin call to maintain required loan-to-value ratios. Shares of the tech company rallied after CEO Michael Saylor defended their strategy of investing in bitcoin on CNBC

• Moderna (+5.7%) shares rallied after the US FDA voted to recommend their covid vaccine to children aged 6 to 17

• Hertz (+5.1%) announced a US$2bn stock repurchase program

• PayPal (+4.6%) introduces a “Pay Monthly” product to give consumers more choice at checkout

Economy

• US hiked interest rates by 75 bps to a range of 1.50% to 1.75%

  • The markets fully anticipated the 75 bps hike

  • The last time the Fed hiked rates by 75 bps in a single move was in November 1994

  • Powell’s speech said high inflation warranted action, another 75 bp hike is possible if inflation does not begin to flatten

• US retail sales unexpected fell -0.3% month-on-month in May

  • Economists were expecting a 0.2% gain

  • High inflation is beginning to hurt demand

  • Might come as no surprise following profit downgrades from major US retailers including Target and Walmart 

• China May data (year-on-year):

  • Industrial Production +0.7% vs. -0.7% forecasts

  • Retail sales -6.7% vs. -7.1% forecasts

  • Fixed Asset Investment +6.2% vs. +6% forecasts

  • Overall, economic troubles continue to persist, even if the pain is less severe

Commodities

• Iron ore prices are trying to stabilise around US$135 amid weaker sentiment caused by poor downstream steel sales and expectations of more steel production cuts, sources told Fastmarkets

• Oil prices declined in the face of tightening financial conditions and Biden’s pressure on US refineries to produce more gasoline and diesel

• Gold prices bounced as traders are beginning to have a clearer view about the Fed’s interest rate outlook 

JP Morgan said that "inflation-led bear markets do not bottom until you see peak inflation," alluding to a "very aggressive Q4 rally" should consumer prices begin to peak around August or September.

The markets reacted positively to the Fed's more aggressive stance on interest rates. Though, Powell warned that inflation risks continue to be weighted to the upside.

Before today, the S&P 500 was down -10.2% in the last five sessions. The overnight move is only a tiny bounce in the face of a massive downtrend. A lot more is needed.

Several ETFs rose between 1-3% but again, a small downtrend bounce. Notable ETF gainers include:

• Biotechnology +2.3%

• Uranium 2.2%

• Steel +1.9%

• Copper Miners +1.6%

• Jets +1.55%

• Rare Earth/Strategic Metals +1.55%

With Wall Street closing higher and positive ASX futures, maybe we could see some relief buying to snap a 4-day losing streak.

#1 Tech

Tech rallied strongly as the Fed's action against inflation outweighed the typical "growth stocks hate higher interest rates" narrative.

Again, the more beaten up the stock, the bigger the rally, notably:

• Snapchat +10.8%

• Netflix +7.5%

• Zoom +5.7%

• Tesla +5.5%

• Affirm +5.1%

The Cloud and Fintech ETFs rallied 3.5% and 2.7% respectively.

Note: These are Global X ETFs, most of their exposure in US tech companies. Though, its a good gauge for sector sentiment.

#2 Energy

Brent crude oil prices pulled back to US$118 after Biden wrote a letter to oil companies including Exxon Mobil and Chevron.

“At a time of war – historically high refinery profit margins being passed directly onto American families are not acceptable," wrote Biden.

″Companies must take immediate actions to increase the supply of gasoline, diesel, and other refined product.”

Biden's letter is largely symbolic and political in nature. A letter isn't going to change years of oil capex underinvestment and missing Russia supply.

Separately, the EIA crude oil inventory reported showed a larger-than-expected 2m barrels per day (bpd) build and higher production. US crude oil production rose by 100,000 bpd to 12m bpd, a 15 month high.

ASX corporate actions occurring today:

• Ex-dividend: None

• Dividends paid: DBI, MFB, NBI, RMD

• Listing: None

• Issued shares: 1AG, ADD, AFA, AKN, AUH, BGD, BIO, BPP, BXB, CNU, DBF, GBR, GT1, IR1, KMT, LKO, MAP, MCT, NAB, NBI, NOR, OSL, PUR, QRI, SIS, SRN, UBN, WAT, WHF

Other things of interest (AEST): 

• Australia Unemployment Rate (May) at 11:30 am

• UK Interest Rate Decision at 9:00 pm

• US Housing Starts (May) at 10:30 pm