ASX 200 futures flat, Dow notches 9th day of gains + AI rally faces its first test

MARKETS

Note: Morning Wrap tables still seeing some errors. Have taken them down. Apologies and hope to have them up next week. 

• S&P 500 lower (-0.68%) and finished just off worst levels

• Dow higher (+0.47%) marked its ninth straight gain – longest streak since 2017

• Big Tech mostly lower after mixed earnings from Tesla and TSMC guidance

• Markets beginning to focus on headwinds including overbought conditions, disappointing tech earnings, pickup in rate expectations on stronger-than-expected economic data, a bounce in the US dollar and sector rotation dynamics

STOCKS

• Tesla gross margin falls as price cuts impact profitability (Reuters)
• Tesla to invest ~US$1bn to become player in supercomputing (Bloomberg)
• Netflix revenue disappoints despite big subscriber beat following crackdown on password sharing (Reuters)
• Wall Street banks spent more than US$1bn on severance costs over the first half after over expanding during pandemic (FT)
• Apple testing generative AI in effort to challenge OpenAI and Alphabet (Bloomberg)
• Blackstone becomes first PE firm to have US$1tn under management (NY Times)
• Exxon seeks to double its LNG business portfolio by 2030 (OilPrice)

EARNINGS

Netflix and Tesla posted second quarter earnings after hours on Thursday. We recapped the results yesterday but it’s worth noting that the stocks finished a respective 8.4% and 9.7% lower overnight.

Johnson & Johnson (+6.1%) – Double beat due to strong sales from medtech segments (devices for surgeries, orthopaedics and vision) and raised full-year sales guidance to US$98.8-99.8bn, approximately US$1bn higher than its April guidance.

United Airlines (+3.2%) – Double beat, lifted both third quarter and full-year outlook.

• "The all-time quarterly highs in Q2 & the bright outlook for the future are evidence that the United Next strategy to up-gauge the airline, increase connectivity at its mid-continent hubs, and expand its industry leading global network is working.”

IBM (+2.1%) – Earnings beat but revenue miss, reaffirmed full-year revenue growth expectations of 3-5%, revenues for software division rose 7.0% but infrastructure underperformed, down 14.6% year-on-year.

TSMC (-5.1%) – Double beat but cut its 2023 targets.

• "Our Q2 business was impacted by the overall global economic conditions, which dampened the end market demand, and led to customers’ ongoing inventory adjustment." - CFO Wendell Huang
• "Moving into the third quarter 2023, we expect our business to be supported by the strong ramp of our 3-nanomenter technologies, partially offset by customers' continued inventory adjustment." - Huang

American Airlines (-6.2%) – Double beat, raised full-year outlook for adjusted profits, expects strong demand for domestic and international travel despite fears of a looming economic slowdown.

ECONOMY

• US Philadelphia Fed Manufacturing Index prints -13.5 below expectations of an improvement to -10 as shipments flipped to negative
• US Leading Economic Index down for 15th straight month, longest since leadup to GFC, points to a recession starting soon (Reuters)
• US initial jobless claims beat, lowest since mid-May (Reuters)
• Japan exports remain weak despite unexpectedly trade surplus (Reuters)
• Hot Australian labor market raises pressure on RBA to hike again (Bloomberg)
• PBOC steps up yuan support with stronger fixing, capital inflow tweak (Bloomberg)

DEEPER DIVE

Charts of the Week

This segment of the morning wrap brings you weekly technical commentary on the ASX 200 and some of the more interesting charts in the market. These are not meant as recommendations. They are for illustrative purposes only. Any discussion of past performance is for educational purposes only. Past performance is not a reliable indicator of future return. Always do your own research.

ASX 200 – Big levels respected

It has been a couple of weeks since the last update. In that time the ASX 200 has tested and bounced aggressively off the 7k round number, and tested (and so far rejected) the 7400 level. Whilst the rally from 7k was impressive, yesterday’s empathic rejection of 7400 could lead to further selling, particularly if we see a down day on the ASX today. More broadly, the index is range bound as we approach the August reporting season and I wouldn’t expect to see an major moves until the season is well underway.

Life360 (360) – Rally on volume

The rally on the broader index means that there are plenty of good looking charts at the moment and one of the better ones is Life360. The stock broke above the November 2022 swing highs recently and has since pushed up towards $8 – a level not seen since the start of 2022. Average volumes have picked up during the rally and the RSI is not overcooked. If $8 can be cleared with some conviction by the bulls, it could provide a ‘go with’ move.

James Hardie (JHX) – Building a rally

James Hardie is another stock with an impressive looking chart since the start of the year. Off a low sub-$26, the stock has pushed beyond $40 – in what could be argued are less than ideal conditions for the building products manufacturer. Volumes have remained solid throughout the rally and the RSI is not overcooked at present. An ascending triangle has formed, the neckline for which sits around $41. If this level can be cleared, a pathway into $50 could be opened up.

Latin Resources (LRS) – The rally continues

I covered this one about a month ago (23/6) and said at the time “Like any junior miner, this one will likely be driven by news flow but, from a technical perspective, it has solid momentum”. That momentum has continued and the stock had a monster day yesterday, popping nearly 14%. Kudos to anyone who got on board. Momentum here is strong and a volume spike yesterday suggest there remain plenty of buyers interested in bidding the stock higher.

TSMC and Sector Divergence

There was a big sector divergence that happened overnight. Recent runners (Discretionary, Tech and Real Estate) all led to the downside while Defensives (Utilities, Healthcare, Energy and Staples) outperformed. This resulted in the Dow rallying for a ninth consecutive session.

TSMC (Taiwan Semiconductor Manufacturing Co) is the world's largest semis manufacturer. A few specific items in its second quarter result and full-year guidance missed expectations overnight, which is adding some doubt in to the recent tech rally.

While there's a lot of hype behind AI, it's not enough to offset cyclically weaker demand.

"While we have recently observed an increase in Al- related demand, it is not enough to offset the overall cyclicality of our business," said CEO C C Wei.

So is it time to get defensive or buy into tech weakness?