Morning Wrap: Wall St gains fade as Apple and retailers extend losses, ASX to edge lower

Major US indices gave up earlier gains, the S&P 500 Consumer Staples Index hit its lowest level since December as retail firms struggle to deal with inflation, Goldman Sachs predicts a 35% chance of a US recession in the next two years and gold finally finds its groove.

Let’s dive in.

Stocks

• Major US indices were all red after hitting session highs of:

  • Dow Jones +0.25%

  • S&P 500 +0.57%

  • Nasdaq +1.27%

• Retailers like Target, Ralph Lauren and Nike continue to bleed as margins come under pressure from rising prices and also hurting consumer purchasing power

• 3 out of 11 US sectors were green

• Materials, healthcare and consumer discretionary sectors were higher

• Consumer staples, tech, industrials and financial sectors underperformed

• 50% of US stocks advanced

  • Interesting to see 50% of stocks green even though all three major US indices were red

  • Apple dragged the Nasdaq lower, but there were more green tech stocks than red

• 74% of US stocks trade below their 200-day moving average (74% on Thursday, 76% a week ago)

• Target (-5.1%) continued to sell off after a shocking -25% plunge on Wednesday

  • Quarterly earnings came in well-below expectations as higher freight costs and supply chain disruptions ate away at margins  

• Bath & Body Works (-6.8%) reported better-than-expected earnings but cut its full-year guidance due to inflation and increased investments

  • Higher costs of raw materials, transportation and wages is expected to take a US$225-250m hit to earnings, US$75m more than expected

• Cisco Systems (-13.7%) led Dow declines after missing quarterly earnings expectations and guided to a much weaker-than-expected fourth quarter 

  • Revenue is forecast to decline -1% to -5.5% compared to analyst estimates of a 5.7% gain

  • Its Russia exit and component shortages related to China’s covid lockdowns has taken a toll on growth 

Economy

• Australia’s unemployment rate was 3.9% in April

  • Fell slightly to hit a near 50-year low 

• US first-time claims for unemployment benefits rose 21,000 last week to 218,000

  • Economists polled by The Wall Street Journal expected claims to total 200,000

  • The labour market is starting to show some cracks. Mega cap tech companies like Amazon and Facebook have recently indicated plans to scale back hiring and reduce staff

  • Jobless claims typically rise before the start of a recession, so eyes on whether or not this trend continues

• US Philadelphia Fed Manufacturing Index fell sharply to 2.6 pts in May

  • Economists were expecting a reading of 15 pts

  • This is the lowest level of activity since the beginning of the pandemic

  • Slower demand as a result of higher prices, supply chain disruptions and shortages were to blame 

Commodities

• Iron ore prices reclaimed the US$130 a tonne level

  • Sentiment was firmer among traders who saw Shanghai begin lifting lockdowns, but downstream demand remains muted, according to Fastmarkets 

• Oil prices bounced from session lows of US$105 to US$111 as the EU nears a deadline to pay for Russian oil with a rubles account

• Gold is having its best days since March and finally acting like a safe haven again

  • A pullback in Treasury yields, the US dollar and concerns about economic growth is driving positive inflows for the yellow metal 

What an odd session. If you look at the ETF table above, it feels like US markets rallied maybe 2-3% overnight.

Note: These are mostly Global X ETFs. Their weightings and investments are typically in the largest listed companies of the respective industries

#1 Nickel

Shanghai nickel futures soared more than 6% to 215,400 yuan a tonne (~US$32,100).

#2 Lithium

The Rare Earth/Strategic Metals ETF is showing a lot of strength after an almost -35% correction in the last two months.

VanEck Rare Earth/Strategic Metals ETF (Source: TradingView, Annotations by Market Index)

Large cap lithium names like Allkem (ASX: AKE) and Pilbara Minerals (ASX: PLS) closed well-above session lows on Thursday, which was a brutal day for the broader market.

A solid +3.7% for the ETF could position local lithium stocks for a positive session.

#3 Tech

The Global X FinTech and Cloud ETFs rallied at least 3.5%, even though the Nasdaq was down -0.44%. Notable overnight winners include:

• Zoom +7.4%

• Coinbase +7%

• Block +6.2%

• PayPal +5.3%

• Affirm +5.2%

Which will impact local tech stocks more: the Nasdaq or the solid performance of several individual stocks?

#4 Energy

Its been a very choppy past 48 hours for oil, bouncing between US$115-105.

Oil markets are bracing for some degree of demand destruction as households continue to be squeezed from almost every angle.

There are also reports that China is looking to take advantage of discounted Russian oil to top up state reserves - a move that would otherwise undermine Western sanctions.

Even though oil is facing several downside risk factors, the lack of supply and a strong short-term travel outlook is keeping prices high.

#5 Gold

Gold is finally acting the way it should as recession fears have triggered a pullback in Treasury yields and the US dollar.

"The dollar is getting sold against everything and that is great news for gold. Right now, investors are looking for safety and Treasuries and gold should both outperform in the short-term," said Oanda senior market analyst, Ed Moya.

Gold spot price (Source: TradingView)

ASX gold miners went from looking bullish and trying to break out in mid-to-late April to rapidly deteriorating 10-25% in the past few weeks.

Weaker yields and an easing dollar could see some positive flow follow through for beaten up gold miners.

ASX corporate actions occurring today:

• Ex-dividend: KPG

• Dividends paid: CMW, HCW, HDN, JMS, KAT

• Listing: None

• Issued shares: ABE, ADX, BXB, FDV, HCH, LKE

Other things of interest (AEST):

• Australian Federal Election on Saturday

  • Don’t forget to vote