Morning Wrap: US stocks cap their worst day of 2023, bond yields rally, ASX 200 set to fall

Major US benchmarks cap their worst day of 2023, bond yields rise on prospects of higher interest rates, Home Depot and Walmart paint a gloomy outlook for the consumer, RBA considers a 50 bp hike and a closer look at iron ore and lithium markets.

Let's dive in.

S&P 500 SESSION CHART

S&P 500 gaps down 0.7% at the open but trends lower throughout the day to close at session lows (Source: TradingView)

MARKETS

• Major US benchmarks sold off as bond yields rallied, the VIX jumped and depressing commentary from consumer heavyweights Walmart and Home Depot

• Peak rates currently priced at approximately 5.3%, up almost 50 bps from recent lows

• FOMC meeting tomorrow, preview highlights: More relentless hawkish messaging, elevated inflation readings that counteract the disinflation narrative

• Morgan Stanley strategist says S&P 500 could drop 26% in months (Bloomberg)

• Bank of America and JPMorgan see European rally will fizzle out soon (Bloomberg)

STOCKS

• Microsoft to address EU concerns to save $69bn Activision Blizzard takeover (Bloomberg)

• Walmart sees lower 2023 performance in time of economic uncertainty (Reuters)

EARNINGS

General Mills (+4.9%): Raised its full-year guidance, citing resilient consumer demand. The new guidance includes organic net sales growth of approximately 10%.

• “I am frustrated by pricing. I am sure our customers are too. But that is the environment that we are living in ... We do not see our elasticities changing from the first half of the year. ” - CEO Cagny Conf

Walmart (+0.6%): Beat both earnings and revenue expectations, US comp sales rose 8.2% year-on-year but full-year guidance was below estimates due to a cautious outlook for 2023 as consumers were more likely to continue shopping for lower-priced items.

• A stressed consumer: "The consumer is still very pressured. And if you look at economic indicators, balance sheets are running thinner and savings rates are declining relative to previous periods. And so that’s why we take a pretty cautious outlook on the rest of the year.” - CFO John David Rainey

• Inflation still a big problem: "Food inflation has been the most stubborn of all the categories. We were in mid-double digits in Q3. In Q4, it hasn't come down all that much, a little bit I guess...so this looks to be a little bit higher than what we were expecting to went into the year.”

Home Depot (-6.5%): Misses revenue, beats on EPS. The stock is having its second worst reaction day to earnings in the last 20 years. Inventories rose 12% to US$28.8m  

• No growth: "So we work from kind of a fundamental assumption that consumer spending will be flat. We know that our market has seen a gradual shift that reflects the broader shift in the economy, in consumer spending from goods to services.” - CFO Richard McPhail

• No incentive for home improvement: Home Depot customers are homeowners and “over 90% of US homeowners either own their homes outright or have fixed-rate mortgages under 5%. And so that incentive to sell and move to a higher-rate mortgage just isn’t there.” 

ECONOMY

• Canada's inflation slows in January, making rate pause more likely (Reuters)

• Services sector boosts Eurozone business growth to a 9-month high (Reuters)

• UK's flash PMI beats expectations while inflation eases (Reuters)

• Japan manufacturing contracts at fastest pace in almost three years (Reuters)

• Increased traffic congestion in China indicates accelerated economic activity (Bloomberg)

• Goldman sees Fed hiking by further 75bp on stronger growth (Bloomberg)

• BOJ's Kuroda says wage growth to accelerate on tight job market (Reuters)

• RBA debated hiking cash rate by 50 bp at February meeting (Bloomberg)

Deeper Dive

Talking Technicals: Yields and VIX

Hotter-than-expected inflation data and ever-so-hawkish Fedspeak has triggered a breakout for bond yields. The 2-year is near recent highs and the 10-year is back at levels last seen in November 2022. Not a good look for equity markets.

US 10-year Treasury yield (Source: TradingView)

The VIX was trading around the bottom trendline but now it's starting to push.

Volatility S&P 500 Index (Source: TradingView)

Sectors to Watch

Compounding factors surrounding central banks, yields, corporate earnings and consumer outlook triggered a heavy session for most US sectors. Growth and tech-related names led to the downside. From our ETF list: Uranium (-3.9%), Semiconductors (-3.3%), Jets (-3.0%), eCommerce (-2.9%), Lithium (-2.8%), Cloud (-2.7%) and Fintech (-2.0%).

Iron Ore: Fortescue, UBS and China's pilot scheme

Yesterday's Morning Wrap noted the Fortescue chart as one that was consolidating amid a breakout for iron ore prices. Fortescue finished the session 3.2% higher at a fresh all-time high. Though, the market's risk-off tone overnight might call for some backtesting.

Fortescue daily chart (Source: TradingView)

Singapore iron ore futures surged to highs of almost US$140 a tonne on Tuesday but faded quickly to around US$130 a tonne. As UBS puts it (along with a US$95 forecast for year-end):

"The rally has been driven mostly by speculation into China's reopening, despite still-weak demand fundamentals. We expect the demand impulse on reopening to be modest, mainly due to the weakness in China property."

Interestingly, Chinese listed property developers experienced a broad-based rally on Tuesday after the government launched a pilot scheme for real estate private equity investment funds. In summary:

• Pilot scheme of at least 30 million yuan in its first round

• Will invest in residential and commercial housing as well as infrastructure projects

• Encourages participate by foreign investors through an inbound investment programme

Lithium: Prices fall on weak demand

"Chinese battery-grade lithium carbonate was heard to have traded as low as 416,000 yuan a tonne in the week to February 17th as downstream activity slowed amid high inventory levels," said S&P Global Platts. For perspective, lithium carbonate prices was trading at peaks of almost 600,000 yuan last November.

"Downstream demand is weak at the moment as NEV production is slowing down, everybody has sufficient inventory, hence the lack of buying interest."

ASX corporate actions occurring today:

• Trading ex-div: Domain Holdings (DHG) – $0.02, Commonwealth Bank of Australia (CBA) – $2.10, GQG Partners (GQG) – $0.019, SG Fleet Group (SGF) – $0.089, Netwealth Group (NWL) – $0.11, AGL Energy (AGL) – $0.08

• Dividends paid: None

• Listing: None

Economic calendar (AEDT):

• 11:30 am: Australia Construction Work Done

• 12:30 pm: Bank of Japan Tamura Speech

• 8:00 pm: Germany Ifo Business Climate Index

• 6:00 am: FOMC Minutes