Morning Wrap: US stocks dip as oil rallies to US$124, ASX set to fall

Wall Street gave back gains as surging oil prices and Treasury yields drove stocks lower, the World Bank and OECD downgraded global growth forecasts, Chinese tech companies rallied and all eyes on US inflation data due at the end of the week.

Let’s dive in.

Markets

Major US indices faded from a positive open as inflation woes returned. The US 10-year Treasury yield bounced back above 3.0% - a level that has troubled investors - while Brent crude oil prices hit US$124.

Higher oil prices raises concerns that inflation has yet to peak, which might mean Wall Street has underpriced the Fed's view on interest rates. Investors should expect stocks to remain chopping ahead of the US inflation report on Friday.

• 10 out of 11 US sectors declined

• Energy was the only green sector

• Real estate, materials, utilities, industrials and financials underperformed

• 63% of US stocks declined

• 66% of US stocks trade below their 200-day moving average (64% on Wednesday, 69% a week ago)

Stocks

• US-listed Chinese tech stocks are rallying on signs of easing regulatory pressure. China’s regulator approved publishing licences for 60 online games on Tuesday

  • Alibaba Group +14.7%

  • Pinduouo +9.7%

  • Tencent Music Entertainment +5.4%

  • Bilibili +6%

• Moderna (+2.2%) said an upgraded covid booster shot candidate produced a better immune response against omicron. Moderna plans for the updated vaccine to get clearance in the next few months 

• Twitter (+0.8%) will comply with Elon Musk’s demand for data about fake accounts. Twitter will provide Musk with access to a stream of data such as daily traffic

Economy

• The Organisation for Economic Cooperation and Development (OECD) cut its global growth outlook to 3.0% in 2022 from 4.5%

  • Growth is expected to further slow to 2.8% in 2023

• The World Bank expects global growth to ease to 2.9% in 2022

  • The risk of a widespread food shortage and potential return of stagflation will make a recession hard to avoid for many countries, said World Bank president David Malpass 

Commodities

• Iron ore prices remain unchanged around US$145 amid stable demand from steelmakers, sources told Fastmarkets

• Oil prices continued to power ahead, with Brent crude rallying to US$124

• Gold managed to eke out a small gain amid growing demand for safe-havens

The US posted rather broad-based declines, so it wouldn't be surprising to see that weakness spill over to the ASX.

Its interesting to note that traditional defensives like real estate, utilities and industrials posted sharper declines than growth-oriented sectors. This is likely due to the rebound in bond yields, which pressures rate sensitive sectors.

#1 Energy

Energy was the only positive US sector overnight. Oil prices don't seem to care about the growing fears of slowing economic growth and demand destruction.

"The EIA reported a build of ​2 million barrels for the week to June 3rd, analysts expected a draw of 2.3 million barrels. ​ Refiners are processing at levels not seen before the pandemic, which suggests the short-term crude demand outlook remains very robust," said Oanda senior market analyst, Ed Moya.

#2 Travel

The US Global Jets ETF fell -2.6%, with several US airlines down between 3-6%.

Interestingly, travel booking systems like Airbnb and Booking.com managed to eke out small gains of less than 1%.

Surging oil prices could squeeze airline margins, and passing higher prices to customers could take a toll on the pent-up demand narrative.

We have yet to see airlines or travel-related stocks post meaningful declines in the face of higher oil prices. We will have to see how this plays out.

ASX corporate actions occurring today:

• Ex-dividend: None

• Dividends paid: RPL

• Listing: None

• Issued shares: 5EA, AII, AOU, AUA, AVH, BKT, BNZ, CG1, CIA, CKF, EDU, EMR, FPC, HSC, KP2, LOM, LPD, MAY, MEG, MGU, MLS, MOH, NAB, NBI, NWS, PRU, RES, SGM, SLS, STO, TMT, ZMM

Other things of interest (AEST): 

• China Balance of Trade (May) at 1:00 pm

• ECB Interest Rate Decision at 9:45 pm

• US Initial Jobless Claims (Week ending June 4) at 10:30 pm