Morning Wrap: Wall St stages massive reversal despite hot inflation print, ASX set to surge

The S&P 500 stages its biggest intraday reversal since March 2020, US core inflation continues to accelerate, Netflix launches its ad-tier a month early and four big US companies rally on better-than-expected earnings.

Let's dive in.

MARKETS

What on earth is happening. All the hotter-than-expected inflation prints this year have caused the US market to sell off. Except this one.

US markets reversed a -2.4% fall in early trade to close 2.6% higher, the largest intraday swing since 26 March, 2020. I'll do you one better, this was also three days after the pandemic bottom.

Bloomberg attributes the massive reversal to a combination of short covering and put selling. As we've observed in previous Morning Wraps, call/put ratios have hit all-time highs, meaning investors are well-hedged for any downside moves. Now that the event has passed, the hedges are sold, contributing to the rally. There was also better-than-expected earnings coming from several companies across tech, financials and discretionary sectors.

• All 11 US sectors were green

• Financials, Energy and Tech sectors rallied more than 3%

• Real Estate, Staples and Discretionary underperformed benchmarks

• 71% of US stocks advanced 

• 68% of US stocks trade below their 200-day moving average (71% on Thursday, 66% a week ago)

STOCKS

• Netflix (+5.3%) plans to launch its ad-tier a month earlier on 3 November across 12 countries at US$6.99 a month

  • Netflix COO: “We want to offer customers choice and figure out what the best offering is for them.”  

EARNINGS

• Domino’s Pizza (+10.4%) posted better-than-expected quarterly earnings at US$1.07bn

  • Pizza dominance: "I’m encouraged with our performance and the sequential improvements we made during the third quarter … We delivered around one out of every three pizzas in the US before the pandemic and we deliver around one out of every three pizzas today.”

• BlackRock (+6.6%) posted a 15% decline in third quarter revenue to US$4.3bn due to weaker market performance and dollar appreciation. Results were still ahead of analyst expectations

• Delta Airlines (+4.0%) posted net income of US$695m in the third quarter, down from US$1.5bn three years ago

  • Recovery in full swing: “... A strong September quarter with record quarterly revenues and a double-digit operating margin. The travel recovery continues as consumer spend shifts to experiences and demand improves in corporate and international.”

• Taiwan Semiconductor Manufacturing Company (+3.9%) posted an 80% jump in quarterly profits. The company also received a one-year license from the US to continue selling products to China

  • Lowering capex investment: “Three months ago, we said our 2022 capex will be closer to the lower end of our US$40 billion to US$44 billion range. Now we are further tightening up this year's capital spending and expect our 2022 capex to be around US$36B"

ECONOMY

• US inflation fell to 8.2% in September from 8.3% in August

  • Higher than analyst expectations of 8.1%

• US core inflation accelerated to 6.6% in September from 6.3% in August

  • Higher than analyst expectations of 6.5%

  • Highest yearly gain for core since August 1982 

Comments from the US Bureau of Statistics:

• "The all items index increased 8.2% for the 12 months ending September, a slightly smaller figure than the 8.3% increase for the period ending August … Increases in the shelter, food, and medical care indexes were the largest of many contributors.”

  • Note: Shelter makes up approximately a third of US CPI

• "The shelter index continued to increase, rising 0.7% in Sept, also the same as in August. The rent index rose 0.8% in Sept. The owners' equivalent rent index also increased 0.8% over the month, the largest monthly increase in that index since June 1990.”

Other views:

• ING: “Looking at the details, housing continues to be a major story with shelter (32.5% weighting) rising 0.7% MoM yet again. while medical care costs, which have been posting some solid price increases over the past six months, rose 0.8%.”

• ING: “It confirms that a 75bp interest rate increase on November 2nd is the minimum expectation with markets now pricing in the slight possibility of a 100bp hike.”

• Brean Economics: “... More than half the components of the CPI are rising at faster than 5% annualised rate in the latest month … opens the door to a further 75 bp hike on 14 December … It now seems likely to us that the peak in the fed funds rate in 2023 will be above 5%.”

Fed speeches:

• Governor Bowman:

  • ‘Not yet clear’ how high rates will need to go

  • If inflation starts to decline, a slower pace of rate increases would be appropriate

  • Should communication unwavering resolve to restore price stability, decide policy meeting-by-meeting, stay attentive to risks 

  • ‘Sizeable’ rate hikes should remain on the table if there are no signs of inflation moving down 

COMMODITIES

• Iron ore futures fell -1.2% on Thursday to US$94.9 a tonne

  • The daily consumption of of imported iron ore sintering fines at 64 Chinese steelmakers recorded in Mysteel’s regular survey eased to 500,300 tonnes a day during 8-12 October, down -9.5% week-on-week or a fresh two month low 

• Oil prices rallied after a mixed EIA report and the hotter-than-expected inflation print

  • “The headline draw was mainly driven by a massive SPR draw and many energy traders are concerned with the low diesel inventories heading into the winter,” said Oanda senior market analyst, Ed Moya

  • “The crude demand outlook is going to see massive downgrades over the coming months, but right now it seems the market will remain tight. If China’s Covid situation doesn’t completely lead to massive lockdowns, oil should find a home above the $100 level.”

• Gold inched lower as bond yields rallied 

Other commodities of interest:

• Copper +1.1% to US$3.46/lb

• Aluminium +0.2% to US$2,341/t

• Palladium -0.7% to US$2,102/oz

• Platinum +3.05% to US$903/oz

• Newcastle coal futures -0.9% to $400/t

• Uranium futures unch at US$49.1/lb

QUICK BITES

• Macro themes to the test: One of the big macro themes coming out of US banks over the past several months is that consumers have remained resilient and willing to spend. Tonight, major US banks JP Morgan, Wells Fargo, Morgan Stanley and Citi will post their earnings. Will this tone change?

• Painful mortgages: US mortgage rates surged to 7.2% overnight, a fresh 22-year high

Wild. Absolutely wild.

I was watching US futures when the inflation print was released and went to bed thinking "I'll probably wake up to the US market down 2-3%, if not more."

And of course, the opposite happens.

It feels like a bit of a miracle for markets to rally on a hot inflation print. It can be explained (technical oversold market where the S&P 500 has been down 17 of the last 22 days, shorts covered, well-anticipated event, gap down into oversold dip buyers) but it just doesn't feel right.

The Fed is expected to remain aggressive and if anything, the peak fed funds rate is only going to go higher.

Will this rally fizzle like all the others we've seen this year? Or can the gains be sustained and we see a healthy pullback when the time comes? Let's see how this plays out.

Sectors to watch

Notable overnight ETF gainers: Semiconductors (+2.88%), Hydrogen (+2.87%), Steel (+2.45%), Jets (+2.25%), Copper (+2.08%), Uranium (+1.98%)

Notable overnight ETF losers: Nickel (-1.68%), Gold (-0.69%), eCommerce (-0.40%)

I'm working on a laptop today (with no mouse) so apologies for the lack of detail and charts.

SPI futures imply a +1.65% rally at the open. Note that the best performing US sectors were Financials, Energy and Tech. Expect a strong gap up at the open, but the question is, how will we close?

Volatility remains extreme, tread carefully, oh and happy Friday.

Stocks going ex-dividend:

• Fri: LSX, HVN

• Mon: WAA, CDM, CDO, FGX, WMA 

• Tue: KSC

• Wed: None

• Thu: None

ASX corporate actions occurring today:

• Dividends paid: IPC, GAP, LCE, CVV, XRF, HUB, FSF, LNK, PPC, 29M, PPM, SUL 

• Listing: None

Other things of interest (AEDT):

• 12:30 pm: China inflation rate

• 2:00 pm: China balance of trade

• 11:30 pm: US retail sales

• 1:00 am: US consumer sentiment