Morning Wrap: US stocks fade as Fed pivot optimism stalls, ASX set to fall

Momentum is starting to wane for Wall Street, US producer prices turned negative for the first time since early in the pandemic, Apple expects iPhone sales to be unaffected by the slowdown and the Fed is on the fence between 50 bps or 75 bps.

Let’s dive in.

MARKETS

Yesterday, 37% of S&P 500 members made new 8-week highs, according to Liz Ann Sonders, Chief Investment Strategist at Charles Schwab. “Not the largest we’ve seen over the past couple of years when the index was set for stronger gains moving forward, but the most since May 2021,” she said.

“Not surprisingly, yesterday’s easing of inflation sent stocks screaming higher in hopes of a Fed pivot. However, a review of the 70s suggests the initial easing point isn’t the buy signal but when the Fed starts cutting rates to battle the recession,” said Lance Roberts, Chief Strategist at RIA Advisors.

Major US benchmarks are starting to see some signs of exhaustion, with the S&P 500 and Nasdaq giving back yesterday’s gains. The S&P 500 remains above its 200-day moving average while the Nasdaq briefly rallied above it intraday but closed below.

• 5 out of 11 US sectors higher

• Healthcare and discretionary led the decline

• Energy surged an outsized 3.2% as oil prices bounced back

• Growth-heavy sectors and indices also underperformed

• 56% of US stocks advanced

• 48% of US stocks trade below their 200-day moving average (49% on Thursday, 56% a week ago)

STOCKS

• Rivian Automotive (+4.1%, after hrs: -2.4%) posted another disaster quarter, with a net loss of -US$1.7bn. The company expects full year EBITDA losses to be around -US$5.4bn, wider than its previous guidance of -US$4.75bn. The EV manufacturer reaffirmed its 2022 production target of 25,000 cars

• Walt Disney (+4.7%) posted better-than-expected Disney+ subscription numbers for the quarter, up 31% to 152m. From 8 December in the US, Disney+ with ads will be $7.99 a month, which is the current price without ads. The price of ad-free Disney+ will rise 38% to $10.99

  • “The Disney+ ad tier goes live on December 8, and we are taking a thoughtful approach by launching with a lower ad load and frequency to ensure a great experience for viewers”

  • Streaming guidance was lowered to the target range of 135-165m by FY24

  • “As it relates to demand we have not yet seen demand abate at all and we still have many days when people cannot get reservations,” said management in relation to theme parks

• Apple (-0.44%) asked suppliers to keep iPhone production in-line with 2021 levels as the company forecasts sales to remain intact despite the economic slowdown. Apple assemblers are expected to make 220m iPhones in total for 2022

• Pharmaceutical companies including Pfizer (-3.3%), GSK (-6.7%) and Sanofi (-3.9%) tumbled amid ongoing litigation concerns surrounding Zantac, which has been withdrawn from the US market due to product contamination that could cause cancer 

EARNINGS

91% of the S&P 500’s market capitalisation has reported quarterly results. Sales growth has been 15.1% and earnings growth 7.9%, both around 3.5% ahead of analyst expectations, according to Evercore ISI.

US corporate earnings we’re watching this week:

• Friday: Spectrum Brands

ECONOMY

• US producer price index fell -0.5% month-on-month in July from 1.0% in June

  • Below expectations of a 0.2% increase

  • On an annual basis, the index is up 9.8%, the lowest rate since October 2021

  • Most of the decline came from energy, which fell -9% at the wholesale level and accounted for approximately 80% of the total decline in goods prices

• US core producer price index rose 0.2% month-on-month in July from 0.4% in June

  • Below expectations of a 0.4% gain

• US Atlanta Fed estimates year-on-year Q3 GDP growth to be 2.5% 

• US Fed rate hike probabilities

  • 50 bps: 61.5% (from 58% a day ago)

  • 75 bps: 38.5% (from 42% a day ago)

COMMODITIES

• Iron ore futures rose 1.6% to US$111.1 a tonne

  • Prices of Chinese steel for export continued to strengthen this week on support of the recovery in the domestic steel market and improved market sentiment, according to Mysteel

• Oil prices rallied as demand fears seem overdone. US gas prices are now below $4 a gallon which should provide some relief to a weak summer driving season

  • IEA reaffirmed that global oil demand growth will be positive in 2022

  • In contrast, OPEC cut its 2022 forecast for global oil demand for the third time since April

• Gold faded from the key US$1,800 level as bond yields inched higher and optimism about a Fed pivot started to wane  

The market is in this awkward V-shaped place where many leading stocks are rather extended but the continued strength is getting hard to ignore. Wall Street is finally showing some weakness, so let's see how things hold up.

#1 Energy

Energy was the best performing US sector thanks to a rebound in oil prices.

"The economy is in too good shape for further crude demand destruction to occur and that should keep oil prices supported well above the US$90 level," said Oanda senior market analyst, Ed Moya.

Still, the 20-day moving average (red) has become a key point of resistance for any recent upthrusts for oil prices, signalling a weak short-term trend.

Source: TradingView

Even as oil prices broke down, local names like Woodside (ASX: WDS) and Beach Energy (ASX: BPT) have mostly traded sideways. It might be worth keeping an eye out for when these stocks approach the upper/lower bounds of their recent trading ranges.

#2 Nickel

The Bloomberg Nickel Subindex - which tracks the performance of nickel futures - rallied 6% overnight.

This could see some positive flows for local nickel explorers and producers.

#3 Tech

The Nasdaq briefly rallied 1.33% but closed -0.58% lower.

Several of the ETFs we track displayed a similar rally-into-fade action, including Solar, Cloud, Biotech and Fintech.

Note: the ETFs we track are mostly US-listed ones run by Global X and VanEck. We're working on a few updates to the Morning Wrap. In the meantime, if you want a list of tickers or have any questions, feel free to reach out :)

With Wall Street hand-balling us its weak close and negative SPI futures, tech and growth names could see some weakness.

Stocks going ex-dividend:

• Fri: SUN

• Mon: QVE, WOT

• Tue: ASW, GMA, PL8

• Wed: CBA

• Thur: QBE

ASX corporate actions occurring today:

• Dividends paid: CLW, KAT, SPY

• Listing: None

• Issued shares: 9SP, AQX, BIO, BIR, CG1, CNI, COG, EGL, EMP, ENX, FBR, LNR, LNU, MAY, MFF, MGG, NML, OPN, PDI, PNN, RGL, RUL, VML

Other things of interest (AEST): 

• UK GDP (Q2) at 4:00 pm

• Eurozone Industrial Production (June) at 7:00 pm

• US Consumer Confidence (August) at 12:00 am