Morning wrap: US stocks snap win streak, Fed warns "inflation is too high", ASX set to rally

ASX Futures (SPI 200) imply the ASX will open 80 points higher, up 1.10%.

US stocks snapped a four-day win streak after the Fed flagged more aggressive rate hikes, a Boeing 737 passenger plane operated by China Eastern Airlines crashed in China, investors continue to watch Russia-Ukraine developments, a new covid variant emerges in Europe and oil is back above US$110 a barrel.

Let’s dive in.

Stocks

• US stocks finally gave in after a massive four-day rally. Encouragingly, major indices closed well above session lows

• Covid cases have dramatically increased in Europe as health officials closely monitor BA.2 - a “stealth” variant that might be harder to distinguish from the delta variant 

• Energy, materials and utilities sectors outperformed the market

• Healthcare, financials and tech stocks fell, but only slightly

• 59% of US stocks fell

• 60% of US stocks trade below their 200-day moving average (60% yesterday, 67% a week ago) 

• Boeing shares fell -4.2% after a 737 airliner crashed in China

Economy

• Jerome Powell said that the central bank could deliver rate hikes larger than the traditional 25 basis points at future meetings

• • “There is an obvious need to move expeditiously to return the stance of monetary policy to a more neutral level, and then to move to more restrictive levels if that is what is required to restore price stability.”

  • “... if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so.”

• The Fed is hoping for a “soft landing”, pointing to instances in 1965, 1984 and 1994 where the Fed aggressively raised interest rates in response to perceived overheating without tipping the economy into a recession

Commodities 

• Iron ore prices remain stable around US$150 a tonne 

• Oil rallied on expectations for an EU ban on Russian energy imports

• Gold held above US$1,900 as geopolitical and growth concerns buoy safe haven assets

#1 Steel

The VanEck Steel ETF is on the verge of breaking out to 12-year highs. The ETF has exposure to major global steelmakers and iron ore miners including Vale and Rio Tinto (ASX: RIO).

VanEck Steel ETF teases at a 12-year high (Source: TradingView)

The Russia-Ukraine conflict has impacted global demand-supply dynamics for steel and coking coal. Russia was the world’s largest exporter of steel and Ukraine was the fourth largest in 2020. 

“... steel prices, if I look at China and Asia and also in India, they have gone up 10 to 12 percent whereas the same steel prices, if I look at Europe, they have gone up over 50 percent,” said Seshagiri Rao, MD and CFO of JSW Steel. 

“... it is only a temporary phenomena what we are seeing right now. Things will stabilise going forward. That is why we are already seeing a correction in several commodities globally in the last few days,” warned Rao. 

Nevertheless, this could point to positive flow for local iron ore and steelmakers including:

• Fortescue (ASX: FMG)

• BHP (ASX: BHP)

• BlueScope Steel (ASX: BSL)

• Sims (ASX: SGM)

#2 Uranium

The Global X Uranium ETF closed at a 4-month high. Uranium spot prices advanced 4% to US$58.50/lb according to fuel brokers EvoMarkets.

There have been plenty of encouraging headlines for nuclear energy adoption in the past two weeks, including:

• Belgium delays nuclear exit by 10 years

• South Korea elects pro-nuclear president

• Japan policymakers call for faster reactor restarts

• Czech opens tender for nuclear plant

• UK government exploring how to accelerate nuclear projects

See a full list of ASX uranium stocks here.

#3 Airlines 

US airline stocks faltered after the China Eastern Boeing 737 crash. Flight MU5735 was taking a domestic route between Kunming and Guangzhou with 132 people on board. The airline has confirmed fatalities.

The 737 model is considered to be very safe. The incident could see some airlines potentially ground 737 models.

Notable overnight losers include:

• Delta Airlines -4.2%

• American Airlines -3.9%

• Boeing -3.6%

This could see some negative flow follow through for airlines stocks.

Qantas (ASX: QAN) has 75 Boeing 737s in service.

#4 Tech 

Oversold technology stocks have headlined gains in the past week.

Looking over at notable local winners in the past four trading sessions:

• Block (ASX: SQ2) +38%

• WiseTech (ASX: WTC) +9.6%

• Xero (ASX: XRO) +9%

It might be difficult to tell how local ASX tech stocks will perform on Tuesday, as SPI futures are surging but Wall Street snapped its four-day winning streak.

#5 Energy

The US Energy sector topped the leaderboards overnight after oil prices spiked 8% to US$116 a barrel.

"Geopolitical risks remain elevated and that has made this a one-way trade for oil prices. Trading oil will remain a volatile trade, but it seems energy traders are growing more confident that supply shortages are just around the corner," said Oanda senior market analyst, Ed Moya.

"China’s decision to avoid broad lockdowns is also helping oil prices as the short-term crude demand hit should be temporary."

ASX corporate actions occurring today:

• Ex-dividend: ALX, BBL, BKL, CIW, CVCG, EHL, KPG, VEU

• Dividends paid: ALU, CFD, IFM, REA

• Listing: NFL

• Issued shares: ADO, AGY, AUI, AUN, AVR, BGT, BIO, BIR, BOE, CAD, CXU, DOU, DRO, DUB, DUI, E79, EFE, EHL, FBU, FZO, HLF, ICI, IMA, IPH, JHX, KNM, LME, LNY, LRS, MGT, MRD, NOR, NTU, PAI, PEK, PEX, PMC, RDT, RGL, RHY, RMC, RUL, RXM, SGM, STG, TRT, WAT

Other things of interest (AEDT):

• RBA Governor Lowe Speech at 12:00 pm