Morning Wrap: Wall St dips as interest rate worries return, Fed kicks off 'QT', ASX to fall

Wall Street sold off as growth, inflation and interest rates worries returned, the Fed has begun shrinking its US$8.9tn balance sheet, the Bank of Canada is aggressively hiking interest rates and Apple moves iPad production out of China for the first time ever.

Let’s dive in.

Markets

• Major US indices failed to hold onto early gains as higher oil and gas prices spark concerns that inflation has yet to top and blurs the outlook for Fed interest rate hikes

• St Louis Fed President James Bullard spooked the markets by saying:

  • The Fed is in danger of losing control of inflation

  • It’s too early to say if we’ve seen a peak in inflation, will need more than a few tenths to make a judgement

  • Sometimes relatively stable longer-term inflation expectations is taken as a sign that the Fed doesn’t have to do much. I don’t take them that way

• The Fed has kicked off Quantitative Tightening (QT), allowing US$47.5bn worth of bonds to roll-over (expire without reinvestment) a month

  • This will increase to US$95bn three months later

  • Targeting a US$7.6tn balance sheet by 2023

• 10 out of 11 US sectors declined

• Energy was the only green sector

• Financials, healthcare, staples, real estate and material stocks underperformed

• 58% of US stocks declined

• 69% of US stocks trade below their 200-day moving average (68% on Wednesday, 72% a week ago)

Stocks

• Salesforce (+9.9%) beat first quarter earnings expectations and upgraded its full-year outlook

• HP (+3.9%) delivered a strong quarter of computer sales and raised its full-year earnings guidance 

• Meta Platforms’ (-2.6%) longtime chief operating officer Sheryl Sandberg steps down after 14 years at the company. Her departure comes amid a slowdown in ad revenue and increased competition from rivals such as TikTok

• Delta Air Lines (-5.2%) shares dipped even after the airline raised its June quarter guidance

  • The airline expects sales in the June quarter to return to prepandemic levels

Economy

• Australia’s GDP growth rate was 3.3% in the March quarter

  • Consensus was expecting a 2.9% gain

  • Households contributed roughly 0.8 percentage points to GDP

• The Bank of Canada raised interest rates by 50 bps to 1.5%

  • This was in-line with expectations

  • "Governing Council is prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target,” said the bank

  • 50 bps hikes are expected in July and September, with interest rates forecast to hit around 3.5% in early 2023

Commodities

• Iron ore prices were stable, little was changed in downstream demand and buyers were mostly in wait-and-see positions, sources told Fastmarkets

• Oil rallied and then gave back gains

  • OPEC+ is planning to suspend Russia from its quota system due the EU embargo and sanctions

• Gold is holding up pretty well even as the US dollar and Treasury yields rebound

#1 Lithium

What a rough day it was for lithium and the green metals cohort.

It's crazy how 3-4 headlines was enough to kill sentiment for one of the best performing sectors in the past 2 years. The headlines being:

• Goldman Sachs and Credit Suisse call the top for lithium

• Argentina establishing a reference price for lithium carbonate exports

  • Price set at US$53kg (current spot prices are roughly US$70kg)

• Chinese battery major BYD plans to buy six African lithium mines, enough to supply a decade worth of production

The VanEck Rare Earth/Strategic Metals ETF dipped -6.8% overnight. Several US lithium giants like Albemarle and Lithium Americas fell around 8-10%. Chinese lithium names fell a lot less.

Yesterday, I took a closer look at how investors should interpret the -22% selloff for Pilbara Minerals (ASX: PLS).

#2 Travel

US travel stocks including cruise lines, air lines, hotels and travel booking systems sold off after JPMorgan CEO Jamie Dimon said the economy is headed for a "hurricane".

Delta Air Lines dipped -5.2% even after an earnings upgrade. Whereas most US-travel related names fell around 3-5%.

Interestingly, Australia's GDP rose 3.3% in the March quarter, boosted by solid household spending, which contributed roughly 0.8 percentage points. Household spending has seen a shift from goods to services, including transport, hotels, cafes and recreation.

So two rather diverging narratives for travel stocks to try and digest.

#3 Tech

It's surprising to see the Nasdaq fall less than the S&P 500, buoyed by a small gain from mega caps Alphabet, Microsoft and Amazon.

However, the same can't be said about other mid-large caps:

• Affirm -14.7%

• Block -6.4%

• PayPal -3.2%

• Meta -2.6%

• Tesla -2.4%

Weakness across US FinTech and Cloud related names could flag some negative flows for local players.

ASX corporate actions occurring today:

• Ex-dividend: TNE

• Dividends paid: None

• Listing: None

• Issued shares: ADX, AGY, AML, APZ, CE1, CNU, CUS, DDR, DXC, DXI, EML, EMN, EMR, HOR, HPG, HVY, KAT, LAU, MAY, MCT, MFG, MGH, MPR, NBI, NVX, OCL, RUL, S32, SNC, SOL, TOP

Other things of interest: 

• Aus Balance of Trade (April) at 11:30 am

• Aus Retail Sales (April) at 11:30 am

• US Initial Jobless Claims at 10:30 pm