Morning Wrap: US tech rout deepens after Snapchat dips -43%, ASX set to edge higher

US tech stocks fell sharply after a grim warning from Snapchat, US new home sales are plummeting as affordability takes a toll on demand, Pilbara Minerals receives a record bid at its fifth lithium auction and investment banks expect further pain ahead for markets.

Let’s dive in.

Stocks

• The Nasdaq underperformed the rest of the market after Snapchat shares fell -43%

  • Snapchat generates revenues mostly from ads and its grim earnings outlook weighed on peers including Meta (-7.6%), Twitter (-5.6%) and Alphabet (-5%)

  • The Nasdaq did however, close well above session lows of -3.84%

• The Dow Jones managed to push out a small gain thanks to gains from retailers, healthcare and industrials

• US equities may see more losses before the Fed signals an end to monetary tightening, according to Goldman Sachs 

  • “The Fed has offered no help to risk assets and appears far from stepping in”

• Morgan Stanley thinks that the S&P 500 at 3,400 (another -14% from overnight close) more accurately reflects the earnings risk ahead and expects that level to be achieved by the end of Q2 earnings season

• 5 out of 11 US sectors advanced

• Utilities, consumer staples, real estate, energy and healthcare sectors were positive

• Discretionary and tech underperformed

• 61% of US stocks declined

• 73% of US stocks trade below their 200-day moving average (73% on Tuesday, 70% a week ago)

• Zoom (+5.6%) beat analyst expectations and raised its full-year guidance

• Best Buy (+1.2%) beat March quarter revenue expectations but lowered its guidance

  • Management flagged that softer demand won’t let up any time soon but doesn't expect a full blown recession 

• Starbucks (-1.0%) will exit Russia after 15 years, closing 130 licenced cafes

• Abercrombie & Fitch (-28.6%) reported an unexpected loss in the March quarter as freight and product costs weighed on sales

  • Management said they will manage expenses “tightly” and search for opportunities to offset costs in the near-term 

• Snapchat (-43%) plunged after saying it will report earnings below the low end of their guidance for the June quarter

  • “The macroeconomic environment has definitely deteriorated further and faster than we expected when we issued our guidance for the second quarter,” said Snapchat CEO, Evan Spiegel

  • Snap said it will slow the pace of its hiring for the rest of the year 

  • Bank of America warns that “ad recession” concerns are becoming a reality 

Economy

• China crude steel output fell -5.2% on-the-year to 92.8m tonnes in April 

• US new home sales fell -16.6% on-the-month in April

  • Sales were down -26.9% compared to a year ago

  • Lowest reading since April 2020

  • Economists polled by The Wall Street Journal expected home sales to decline -1.7%

  • High prices and surging mortgage rates have taken a massive toll on demand

Commodities

• Iron ore prices eased to US$133 amid limited downstream demand for steel, which narrowed steelmaker margins, according to Fastmarkets

  • The initial bullish sentiment caused by India’s steel and iron ore export duties have now disappeared, a China-based buyer said

• Oil remains directionless as the lack of spare production capacity and tight supply is offset by deteriorating economic growth

• Gold extends its win streak to 5 days as Treasury yields continue to plunge 

#1 Gold

Gold is gathering momentum as the US 10-year Treasury yield pulls back from recent highs of 3.2% to 2.75%, which is also easing the the US dollar.

Source: TradingView

"Gold prices are surging as Treasury yields plunge following a wave of risk aversion that stemmed from disappointing earnings and deteriorating economic data from the US," said Oanda senior market analyst, Ed Moya.

"There might be no stopping gold right now as the wall of worry on Wall Street continues to grow. ​ Gold should remain supported as inflationary pressures weigh further, China’s COVID situation remains a big unknown, and corporate America continues to slash outlooks."

#2 Lithium

Lithium and chemicals giant Albemarle upgraded its earnings for the second time in less than 20 days to reflect higher lithium prices. Interestingly, the stock closed flat after briefly rallying 2.8%.

Pilbara Minerals (ASX: PLS) also dropped some good news around 7 pm on Tuesday, reporting a record bid at its fifth spodumene concentrate digital auction. The highest bid came in at US$5,955 per dry metric tonne (dmt) compared to US$5,650/dmt a month ago.

Surprisingly, both pieces of news were unable to buoy the Rare Earth/Strategic Metals ETF, which struggled for upside, closing -2.05%.

Will ASX lithium stocks rise to the occasion on Wednesday?

Source: TradingView

The ETF is comprised of mostly Chinese and ASX-listed lithium and rare earth players. Its top 5 holdings include Allkem (ASX: AKE), Lynas Rare Earths (ASX: LYC), Pilbara Minerals and two Chinese companies.

#3 Travel

The US Global Jets ETF dipped an outsized -4.6% overnight. The ETF is comprised mostly of US airlines, but also has exposure to international carriers including Qantas (ASX: QAN).

Factors weighing on airlines and the broader travel industry:

• US cruise line operator Carnival Corp fell -10.3% as analysts flagged that resurgent travel demand has failed to relieve inflationary and debt issues

  • Bookings for the second-half remain below pre-pandemic levels

  • Prices are nowhere near where cruise lines want them to be when rising food and fuel costs are added

• US airlines are trimming capacity amid a pilot shortage

#4 Tech

Local tech names could face some selling pressure following the painful overnight session. Notable US losers include:

• Snapchat -43%

• Affirm -15.3%

• Block -9%

• Tesla -7%

Its interesting to note that BNPL rival Klarna has expressed its intentions to lay off 10% of its workforce as the deteriorating economy hits the BNPL space.

ASX corporate actions occurring today:

• Ex-dividend: None 

• Dividends paid: None

• Listing: BVR

• Issued shares: ARU, BIR, CLE, CNB, DAL, DTM, DW8, FFT, MGF, MXT, NBI, NZM

Other things of interest: 

• Australia Construction Work Done (Q1) at 11:30 am

• European Central Bank President Lagarde Speech at 6:00 pm

• US Durable Goods Orders (April) at 10:30 pm