Morning Wrap: Wall St falls as China's covid woes spook markets, ASX to rise

US stocks drop as China locks down Guangzhou and restrictions begin to mount in Beijing, the blue-chip Dow continues to outperform amid a rotation into value, Germany's produce price index was negative month-on-month, Tesla shares slump to a two-year low and Saudi Arabia denies potential production increases.

Let's dive in.

MARKETS

All three major US benchmarks finished lower. The blue-chip Dow continues to outperform on a relative basis, perhaps signalling a rotation to more defensive and value oriented stocks and sectors. Bond yields and the US dollar bounced back, which weighed on risk assets and commodities. The 'peak inflation' narrative is beginning to turn into disinflation after Germany's month-on-month producer price index was unexpectedly negative.

• Defensive sectors continue to outperform, notably Staples, Real Estate, Utilities and Industrials

• Growth-heavy Tech and Discretionary sectors fell more than -1.0%

• Energy led to the downside as China's new covid wave is showing no signs of slowing, leading to three deaths, the first reported deaths since May

• 53% of US stocks declined 

• 47% of US stocks trade below their 200-day moving average (46% on Monday, 45% a week ago)

STOCKS

Disney (+5.8%) shares rallied after ex-CEO Robert Igner returned as CEO.

• "The Board has concluded that as $DIS embarks on an increasingly complex period of industry transformation, Bob Iger is uniquely situated to lead the Company through this pivotal period.” - Disney Chair Susan Arnold

Tesla (-6.6%) is trading at its lowest level since November 2020. The stock is down -58% year-to-date.  

WORLD NEWS 

• Microsoft, Meta and others face drought risk to data centres (CNBC)

• China covid cases rise, hard-hit Beijing tightens entry rules (Reuters)

• Saudi denies oil output hike discussion (Reuters)

ECONOMY

Germany’s produce price index unexpectedly fell -4.2% month-on-month in October from 2.3% in September.

• Well-below analyst expectations of 0.9%

• Year-on-year, producer prices are up 34.5%, down from 45.8% in September

• The decline was led by the energy segment, which remains up 85.6% year-on-year but down -10.4% month-on-month

COMMODITIES

Iron ore futures fell -1.2% to US$92.75 a tonne.

• Prices came under pressure after Guangzhou, one of China’s largest cities with around 19m residents, imposed a five-day lockdown in its Baiyun district 

• Cases are also climbing in Beijing, where local authorities have described the situation as “the city is facing its most complex and severe prevention and control situation since the outbreak of the coronavirus.”

Oil prices fell for a four consecutive day but beginning to show signs of stabilisation. Prices bounced from session lows after Saudi Arabia declined potential production increases 

• Brent crude bounced from session lows of -6.2% and currently -0.7%

• “Oil is going to have trouble finding a floor with a deteriorating crude demand outlook for both world’s largest economies. ​ Until we get some positive news from either China or the US, the dollar will continue to rebound and crude’s path appears to be headed lower.” - Oanda senior market analyst, Ed Moya

Gold extended its skid to four sessions as the US dollar and bond yields bounced. 

• “Gold needs China’s Covid situation to improve before it can start to look attractive again for investors. ​ If the dollar rally turns excessive, gold could be vulnerable to a plunge towards the $1700 level.” - Moya 

Other commodities of interest:

• Natural gas +6.3% to US$7.1/MMboe

• Newcastle coal futures +3.9% to US$350/t

QUICK BITES

• Contrarian bullish: "The speculation around the “most anticipated recession” keeps growing. When this metric rolls over, the past has shown the market bottom to be in." - Game of Trades

Source: Bank of America

• No earnings recession: "Wall Street analysts continue to cut their Q4 and 2023 earnings estimates. However, they still see no earnings recession next year and even think 2023 will end with a new record for quarterly results. Today’s S&P 500 valuation of 18x current earnings power is consistent with that view. Even with this year’s disappointing stock market returns, optimism remains." - DataTrek Research

• Shipping costs: "The Baltic dry index is close to reverting back to pre-COVID levels, as we see shipping costs falling around the world. This is another positive sign that some drivers of cost-push inflation are dwindling." - Traderade

Learn more about our overnight ETFs.

Markets continue to chop in a rather selective fashion, with a preference for value over growth.

China's covid situation is the latest roadblock for a more positive near-term outlook for markets. Cases jumped to 26,824 on Sunday, close to the country's pandemic peak in April. This could have a rather negative flow on effect for global growth, commodity prices and supply chains. So far, only Guangzhou is locked down but restrictions are beginning to mount in Beijing.

Markets remain in a rather vulnerable position. The next few days will provide us with more evidence as to whether or not the post inflation print rally was genuine buying or fuelled by short covering.

So far, the ASX 200 has held up relatively well. SPI futures imply a +0.39% open, which seems rather opportunistic given China's covid situation. Perhaps we see a repeat of yesterday where value sectors tried to offset declines from Materials, Energy and Tech.

Sectors to watch

Nothing too exciting overnight.

Uranium: Global X Uranium ETF fell -2.4% after shelling of Ukraine's Zaporizhzhia nuclear plant sparks rising concerns of 'catastrophic consequences'.

Tech: Global X FinTech and Cloud ETFs fell -2.0% and -1.4% respectively and fast approaching recent lows. Will this rotation continue to weigh on local names?

Energy: Oil briefly tumbled to levels not seen since January but prices staged a massive reversal from session lows of 6-7% and now close to breakeven. Is this a bullish sign?

Stocks going ex-dividend over the next week:

• Tue: Amcor (AMC), Sunland Group (SDG), Tamawood (TWD)

• Wed: Embark Education (EVO), US Student Housing REIT (USQ)

• Thu: ALS (ALQ), Nufarm (NUF), Australian Vintage (AVG), TerraCom (TER)

• Fri: None

• Mon: None

ASX corporate actions occurring today:

• Dividends paid: Clover Corp (CLV)

•  Listing: Lightening Minerals (L1M), Toubani Resources (TRE) 

Other things of interest (AEDT):

• 6:00 pm: RBA Gov Lowe speech