Morning Wrap: Wall St selloff deepens, German inflation hits a record 10%, ASX set to fall

ASX Futures (SPI 200) imply the ASX 200 will open 22 points lower, down -0.34%.

US stocks were smashed after another round of hotter-than-expected inflation readings from Europe and hawkish Fed speeches. Fed Mester said a recession doesn't stop them from raising rates, Nike shares nosedive after releasing its quarterly earnings and Germany rolls out a 200bn euro energy relief plan.

Let's get into it.

MARKETS

• Session lows for major US benchmarks include:

  • S&P 500 -2.92%

  • Dow Jones -2.31%

  • Nasdaq -3.88%

• All 11 US sectors declined

• When the US market opened, 100% of Nasdaq 100 stocks were red and approximately 99% of S&P 500 constituents were down

• Energy outperformed benchmarks, down just -0.13%

• Healthcare and Financials were also relative outperformers

• Defensive and rate sensitive sectors including Utilities and Real Estate fell -4.1% and -2.9% respectively

• Growth heavy sectors like Tech and Discretionary also underperformed

• 75% of US stocks declined

• 73% of US stocks trade below their 200-day moving average (71% on Thursday, 70% a week ago)

STOCKS

• Occidental Petroleum (+1.1%) shares bucked the downtrend after Warren Buffet added another 6m shares of the oil giant

• Nike (-3.4%, after hours: -10%) reported a -20% decline in quarterly profits as margins were squeezed

  • Inventory was up 44% year-on-year to US$9.7bn due to elevated in-transit inventories from ongoing supply chain volatility

  • Gross margins fell 220 bps to 44.3% primary due to North America, which took measures to liquidate excess inventory

  • Nike expects a better start to FY23, with managing saying "Nike's first quarter results set the foundation for another year of strong growth."

• Apple (-4.9%) was downgraded by Bank of America to Neutral due to weaker consumer demand and a deteriorating macroeconomic environment 

• Bed Bath & Beyond (-4.2%) posted a wider-than-expected -US$366m loss in the second quarter as comparable sales flopped

QUICK BITES

• Oil > Tech: Exxon overtook Meta's market capitalisation for the first time in five years. The oil giant's shares are up 30% year-to-date while the Facebook-parents' is down -58%

• Policymakers have no clue: "We and frankly, monetary policy makers -- have no experience with interest rate changes of this magnitude," said Morgan Stanley's Zentner

• Bank of America on yields: We project end '22 2Y & 10Y rates at 4.4% and 3.65%. We see 75 bps of 2s and 10s curve inversion at the end of 2022, consistent with high recession likelihood

• Bulls have gone extinct: "Lowest % bulls in this cycle. Close to matching 2016. When bulls this low historically, thinking about what can go right vs piling on the what can go wrong narrative in S&P 500 is usually best outcome. Then let momentum be your trigger," said Renaissance Macro Research

Source: Renaissance Macro Research

WORLD NEWS 

• Germany agrees on 200bn euro package to shield against surging energy prices (Reuters)

• Bank of England to sell off emergency bond purchases as soon as risk subsides (Bloomberg)

• Hurricane Ian to worsen bleak outlook for US orange juice industry (Reuters)

ECONOMY

• Eurozone economic sentiment fell to 93.7 in September from 97.3 in August

  • Analysts expected a reading of 95.4

  • “For industry, production expectations dropped sharply in September. Backlogs of work have fallen as new incoming orders disappointed in recent months,” said ING analysts

  • “For the services sector, confidence fell even more as the post-pandemic catch-up demand is fading and the purchasing power squeeze is starting to bite.”

• Germany inflation hit 10% year-on-year in September from 7.9% in August

  • This is the highest reading on record and above market expectations of 9.4%

  • Consumer prices rose 1.9% month-on-month, the largest increase since March

  • “Looking ahead, the only way for German inflation is up. With high wholesale gas prices now reaching people’s homes and pockets as well as more inflationary pressure in the industrial pipeline,” said ING

  • “Based on today's numbers, peak inflation could come in at around 13%.”

• Canada’s GDP rose 0.1% month-on-month in July from 0.1% in June

  • Analysts forecasted a decline of -0.1%

Highlights from key central bank policymaker speeches:

• Fed St Louis President Bullard:

  • US is at a higher risk of recession but that is not the base case

  • Markets have digested the message on rate hikes

• Fed Cleveland President Mester:

  • The Fed is not even in restrictive territory on the funds rate

  • A recession won’t stop the Fed from raising rates 

• Fed San Francisco President Daly:

  • Full impact of Fed policies will unfold over time

  • Says must be on watch for signs that enough has been done

  • Doing too much could end in over-tightening but doing too little could mean harsher measures later 

  • Projected Fed rate hikes are ‘necessary and appropriate’

 COMMODITIES

• Iron ore futures fell -1.9% to US$96.5 a tonne

  • “Transaction volumes of construction steel in China's physical market improved significantly this week, thanks to the active replenishment of end-users ahead of the country's coming National Day holiday,” Mysteel reported

• Oil prices were mostly unchanged as tumbling equity markets weighed on commodity risk appetite

  • “A deteriorating crude demand outlook won’t allow oil to rally until energy traders are confident that OPEC+ will slash output at the October 5th meeting,” said Oanda senior market analyst Ed Moya

• Gold reversed early losses as the US dollar was unable to hold onto gains

  • “Fed messaging has been consistently shrugging off recession risks which implies they will remain aggressive with rate increase in November and December. ​ The risks are still to the downside, but right now it seems gold has major support ahead of the $1600 level,” said Moya

Before all the doom and gloom talk. I just wanted to point out that the above tables now order everything from % high to low. Thanks Devs :)

Back to the doom and gloom.

In Thursday's Evening Wrap, we talked about how volatility remains very high and how the market can "easily defend the low one day and then rip below it the next". And that's exactly what we're seeing.

It's not a good sign that the bounce is getting sold into so aggressively. And that's been triggered by a flurry of bad news:

• Fed Mester saying they'll hike into a recession

• Inflation continuing to climb in Europe

• BoE bond buying was just to buy pension funds time

SPI futures imply a -0.34% open, which doesn't look too nasty on the chart (black line is the expected open). But given current volatile circumstances, who knows where we will finish.

XJO chart (Source: TradingView, Annotations by Market Index)

Sectors to watch

The tenacity in oil prices could see local energy stocks hold up relatively well. Also looking at defensive sectors like Health Care and Staples to show some relative outperformance. Whereas risk and yield sensitive sectors like Tech and Real Estate could flag some underperformance.

Renewables: Not so much to do with ASX-listed stocks and sectors, but the we're seeing an aggressive deterioration in leading green ETFs like the Invesco Solar ETF. It broke below the August base and now it's below the 200-day.

Travel: The US Global Jets ETF fell -3.3% overnight. Not a good look for local airlines and travel-related stocks.

Lithium: The VanEck Rare Earth/Strategic Metals ETF fell -3.2% to a 2-month low.

Uranium: The Global X Uranium ETF broke a two-day winning streak, down -2.96%.

Aluminium: The London Metals Exchange is considering a ban on Russian Metal supplies. This triggered a 4.6% jump in aluminium prices to $2,223 a tonne. Even after the rally, prices are down -10.6% in the last month and -21% year-to-date.

Stocks going ex-dividend:

• Fri: EP1, GVF, NCK, PGG, SST

• Mon: VAS, LCE, IPC, WAR

• Tue: SGM, WAX

• Wed: CAM, X64, RIC 

• Thu: ANG, ARB, BIS, N1H, WCG

ASX corporate actions occurring today:

• Dividends paid: ABA, ALI, AMO, BPT, BST, DTL, EBO, EHL, EVN, GC1, GRR, GTN, HNG, IGO, ILU, JYC, KPG, LSF, MCY, MND, ORG, PFG, PL8, PME, PPE, PPT, REG, SHM, SLH, TOP, TWE, VG8, WQG

• Listing: AHL

• Issued shares: 1VG, A1M, ADT, AHL, AQX, AS2, AUT, CNU, ENR, GOZ, KGD, LPE, M3M, MFF, MFG, MGV, MHJ, NCM, NIM, NWF, NZM, OEC, RBL, RDT, RFR, SEQ, SPX, STO, SZL, TMR, TSC, VBS, WCG

Other things of interest (AEST):

• 11:30 am: China NBS Manufacturing PMI

• 11:30 am: China NBS Services PMI

• 4:45 pm: France Inflation

• 7:00 pm: Eurozone Inflation