Morning wrap: Wall Street fades ahead of Fed interest rate decision, ASX set to slide

ASX Futures (SPI 200) imply the ASX will open 61 points lower, down -0.86%.

The overnight price-action was far from encouraging as all three major US indices quickly gave up earlier gains. 

The Federal Reserve is expected to kick off the first of many interest rate hikes on Thursday, China re-imposes strict lockdowns as covid cases surge, the US has its eyes set on Venezuelan oil and Russia continues its military advance throughout Ukraine.

Let’s dive in.

Stocks

• Wall Street is beginning to sound like a broken record after countless sessions where earlier gains fade into close. The market’s inability to hold onto gains and bounce from oversold levels sets a very bearish mood

• All three major US indices are revisiting late-February lows. The market needs to bounce to avoid flagging a lower low

• Investors remain skittish ahead of the US Federal Reserve’s interest rate decision on Thursday

  • CME's FedWatch Tool shows a 98.3% probability of a 25 bps hike

• Defensive sectors such as financials, healthcare and consumer staples outperformed the broader market, closing in positive territory

• Growth sectors including tech as well as commodities took the brunt of the selling

• 66% of US stocks declined, as defensive sectors managed to weather the storm

• 67% of US stocks trade below their 200-day moving average (66% yesterday, 68% a week ago)

• Pfizer shares rose 3.7% after its CEO said that people will need a fourth covid shot later this year and that an approval for its vaccine for children under 5 could be granted by May

• US-listed shares of Alibaba tanked -10.5% following a sharp plunge in Chinese equities

Economy

• Northern China has re-entered lockdown after reporting ~3,400 covid cases on Sunday, the highest case count in almost two years

  • China’s ‘zero tolerance policy’ will see harsh lockdowns for affected states and provinces

  • The industrial city of Changchun with more than 9 million people was locked down last Friday

• Goldman Sachs latest views on the economy include:

  • Odds of a US recession next year sit at 35% 

  • Forecasts seven 25 bps rate hikes this year followed by 4 more next year to bring the cash rate back up to 2.75% to 3.00%

• The US Federal Reserve will make their interest rate decision on Thursday, 5:00 am AEDT

Commodities 

• Iron ore prices plunged below US$150 a tonne as China reimposed severe lockdowns across several major industrial provinces

• Oil prices slid as Russian exports still seem to be flowing and on concerns that China’s ‘zero tolerance policy’ will weigh on near-term oil demand

• Gold continued to pull back ahead of the Fed’s tightening 

US stocks are failing to stabilise as morning rallies fade into close.

#1 Tech

Investors continue to flee from the tech sector ahead of the Fed’s closely watched interest rate decision.

The prospect of higher interest rates greatly shifts the opportunity cost for investors betting on fast growing, and at times, loss making companies. When interest rates are near zero, investors are willing to pay a premium for growth and potential future profits. 

Higher interest rates will make low-risk assets such as bonds more attractive. As well as sectors that typically generate strong cash flows, including financials and consumer staples. 

Notable overnight losers include: 

• Affirm -15% (fresh all-time low)

• Block -7%

• Tesla -3.6%

This will mark a weak open for local Block (ASX: SQ2) shares. The broad-based tech selloff could weigh on local names like:

• Xero (ASX: XRO)

• WiseTech Global (ASX: WTC)

#2 Nickel

The London Metals Exchange has confirmed the nickel market will reopen on Thursday (7:00 pm AEDT).

A 15% daily limit has been imposed across all metals.

The Bloomberg Nickel Subindex, which tracks the price of nickel futures, as plunged more than -40% since last Monday.

It wouldn't be surprising to see an outrageous move from the LME when trade resumes.

#3 Uranium

The Global X Uranium ETF fell -6.6% overnight.

ASX Uranium stocks sold off sharply on Wednesday, in-line with the broad shift away from risk assets.

The Uranium ETF has rallied strongly in the past two weeks in response to higher uranium prices and pro-nuclear policies from various governments.

The broader-market weakness and a potentially weaker economic outlook could dampen the sector's comeback narrative.

See a full list of ASX uranium stocks here.

#4 Lithium

The risk-off mood is impacting battery materials, even as lithium prices continue to trend higher.

The VanEck Rare Earths/Strategic Metals ETF is revisiting late-January lows and closed below its 200-day moving average overnight.

Source: TradingView

The risk-oriented selloff overnight could weigh on local lithium, rare earths and battery-related names.

See a full list of ASX lithium stocks here.

#5 Energy

The US Energy sector was the worst performing sector overnight, down -2.9%.

"Oil prices did not stand a chance as Russian crude exports still seem protected and on fears the short-term crude demand outlook will take a hit as China sticks to the zero-COVID policy," Ed Moya.

"The oil market still remains very tight and while optimism grows that a huge risk to the global economy could be removed, that won’t change short-term crude supply risk, so a pullback towards the mid-US$90s is not yet warranted."

This could point to a weak session for local oil and gas players, notably:

• Woodside Petroleum (ASX: WPL)

• Santos (ASX: STO)

• Beach Energy (ASX: BPT)

ASX corporate actions occurring today:

• Ex-dividend: GC1, GDG, IGL, MAH, NWS, SFR, TOP, TPG, YAL

• Dividends paid: AMC, DHG, ECP, JLG, MYS, PIA, QRI, SEQ

• Listing: None today

• Issued shares: 360, AGE, AGH, AGY, AQD, AUC, AVR, BIO, BRK, CAE, CF1, CNU, COB, CXO, DOW, DYL, FBU, FZO, IEC, IKE, IMM, KNM, KOV, KSS, LKE, LOM, MNY, MRD, MRI, NAB, OBM, PEK, PH2, PNR, RLC, SCT, SYR, TGM, TLX, TZL, UWL, ZEL

Other things of interest: 

• RBA meeting minutes will be released at 11:30 am AEDT

• Chinese Industrial Production (Jan-Feb) will be released at 1:00 pm AEDT