Morning Wrap: Wall St on a three day losing streak, iron ore back below US$100, ASX to fall

Turnaround Tuesday failed to eventuate, Best Buys flags that customers are moving to lower priced products, the US IPO market is on a 109 day dry spell and more hawkish comments from Fed committee members. 

Let’s dive in.

MARKETS

The ASX 200 buckled the trend on Tuesday with a solid green day but Wall Street just kept on selling. It's been a pretty unique sequence of events for US markets, using the S&P 500 as an example:

• 4 Jan to 16 Jun: Down around -25%

• 17 Jun to 16 Aug: Rallies 18%, recoups roughly half the earlier fall

• 16 Aug to now: Falls -7.4%, gives back nearly half the earlier bounce

Bespoke notes an interesting comparison between now and 2008. (It's probably appropriate to say that "past performance is not necessarily indicative of future performance.")

Source: Bespoke Invest

Here's my two cents. The pullback we're seeing right now is just as important as the recent rally. This is because a pullback can tell us a lot about the true character of the recent move. So far, the pullback has been rather sharp and volatile. Anyway, onto the usual stuff.

• All 11 US sectors declined

• Financials, Health Care and Staples were relative outperformers

• Energy led to the downside as oil prices tumbled

• Defensive sectors including Industrials, Utilities and Real Estate also underperformed

• 70% of US stocks declined

• 60% of US stocks trade below their 200-day moving average (58% on Tuesday,  54% a week ago)

STOCKS

• Best Buys (+1.6%) said second quarter sales fell -13% and warned that the current quarter “will be slightly worse”. Best Buy downgraded its profit and sales forecasts in late July, so the result was in-line with expectations

  • Best Buys CEO: “Our data would tell us that customers are making some decisions to trade down, particularly those in lower income households. This is not across all categories.”

  • “But for example, in the television category, customers are moving more into our lower price point exclusive product brands.”

  • “We’re also seeing more interest in sales events … and other events geared at exceptional value.”

• First Solar (+0.5%) shares rallied to a fresh 52-week high after announcing plans to invest up to US$1bn in building a new solar panel manufacturing facility in the US

• Lucid (-6.3%) shares tanked after the EV maker announced plans to issue US$8bn in new shares over the next three years 

• Nikola (-9.4%) is another EV player that announced plans to raise up to US$400m

  ECONOMY

• German inflation accelerated to 7.9% year-on-year in August from 7.5% in July

  • The reading was in-line with a Reuters poll of analysts

  • Inflation continued to rise against government measures to ease the cost of living including public transport tickets and a fuel tax cut

  • The data supports more interest rate hikes from the European Central Bank, which last hiked rates by 50 bps from zero in July

Other things of interest:

• Year-to-date volume of institutional loan defaults in August was the highest since October 2020, according to a new Fitch Ratings report

• US Cleveland Fed forecasts 8.3% year-on-year inflation in August, down from 8.5% in July. Core CPI forecast to be 6.1%, higher than the 5.9% last month

• US IPO market is in its longest drought in more than two decades, according to The Wall Street Journal

  • It’s been 109 days since a company raised more than US$25m via an IPO, slightly ahead of the previous record in 2008

• Fed Richmond President Thomas Barkin comments:

  • “A recession does not have to be calamitous”

  • “Recession is a risk of us getting inflation back down to 2%” 

  • “ I don’t expect inflation to come down predictably”

• Fed New York President John Williams comments:

  • Current Fed policy isn’t in restrictive territory

  • Fed needs to get to somewhat restrictive monetary policy

  • Very focused on inflation for September rate hike call

  • The economy still has forward momentum but inflation remains too high

COMMODITIES

• Iron ore futures fell -6.1% to US$98.2 a tonne

  • "The symposium of iron and steel enterprises in Tangshan last Friday emphasised the importance of reducing steel production capacity by 8.264 million mt in 2022. In this scenario, the market sentiment weakened," the Shanghai Metals Market said on Tuesday

  • For July, China’s total export volume of flat steel stood at 4.3m tonnes, down -12.1% month-on-month, according to Mysteel

• Oil prices tumbled almost -5% amid broad-based fears about the deteriorating economic outlook

  • “Today, everything seems to be turning bearish for oil,” said Oanda senior market analyst, Ed Moya

  • These factors include the Fed’s aggressive stance on interest rate hikes, EU inflation data that supports aggressive tightening, Best Buy earnings showing consumers are pulling back spending and Taiwan’s military reportedly fired warning shots at a Chinese drone

  • “The oil market is still tight, so this downward move should not last much longer. If WTI crude easily breaks below the $90 level, bearish momentum could make this interesting and make a run for the August lows,” added Moya

• Gold continues to decline against further global central bank tightening

It took me like 10 minutes to fix the "pullback can tell us a lot about the true character of the recent move" line. So we'll have to move ''expeditiously' through this segment.

Energy under pressure: I've described oil markets as a pendulum quite often in the last few months. It'll swing towards the tight supply narrative for a few days or weeks and then swing back to the demand destructive and recession narrative the next.

Oil was in this downward channel from early June through to late August. Both the 20-day and 50-day acted as key resistance areas for any upside during this period. The trend was buckled around 23 August, when it rallied above the channel, reclaimed the key 200-day moving average and then the 50-day a few days later. The sharp -5% decline overnight now brings oil to a key inflection point.

Brent crude oil chart (Source: TradingView, Annotations by Market Index)

Copper tumbles: The Global X Coppers Miners ETF fell -4.1% overnight. Copper is on a two-day losing streak, down around -4% to US$3.55/lb. Factors such as the quashed Fed pivot, the rising risk of a severe recession in Europe and geopolitical tensions between China and Taiwan are weighing on not just copper but commodity prices in general.

Iron ore to follow: US-listed BHP (ASX: BHP) and Rio Tinto (ASX: RIO) fell -4.3% and -4.2% respectively overnight, reflecting the above factors and decline in iron ore prices.

Lithium under pressure: The VanEck Rare Earth/Strategic Metals ETF fell -2.8%, closing right on its 50-day moving average. This could see some negative flow for local battery metal names.

Stocks going ex-dividend:

• Wed: ADA, AEF, AX1, BGA, BKL, CIN, EDV, HUM, IRE, NSC, OML, OZL, PFP, PGG, PIA, SRV, TAH, TWE, WES, WOW

• Thu: AGL, BHP, CCP, FEX, GNG, HMC, IDX, IVC, JIN, JLG, MNY, PPE, PTM, SLH, SXL, WHC

• Fri: ALD, APE, BSE, BVS, COL, CYC, IFM, KLS, LIC, MIN, PFG, PTL, TER

• Mon: ADH, AFG, ALU, BEN, CTD, FMG, GOR, ILU, KSL, MAD, MCP, NHF, ORA, RHC, SNZ, SSG, YAL

• Tue: BSL, CSL, CUV, EFN, LGL, NST, ORG, SHL, SUL, VEE

ASX corporate actions occurring today:

• Dividends paid: ABP, CHC, CQR, GDI, GMA, GOZ, GPT, LFG, MGR, SCG, SCP, SGP, WPR

• Listing: None

• Issued shares: ACR, AD1, AFG, AFI, AZL, BKI, CCA, CPH, DCC, EQT, EXR, FTZ, FZO, GDG, GML, GSR, HRN, JHX, LTR, MAF, MAY, MFG, MM8, MOB, MR1, MRR, NAB, NAN, NBI, NZM, PFT, PME, PPE, RMC, RRL, RUL, TCL, TLX, TTT, WAT, XRO

Other things of interest (AEST): 

• China August NBS Manufacturing PMI at 11:30 am

• China August NBS Non-Manufacturing PMI at 11:30 am

• France August Inflation Rate at 4:45 pm

• Eurozone August Inflation Rate at 7:00 pm