ASX 200 to fall + Higher oil prices, US dollar and yields drag S&P 500 lower

ASX 200 futures are trading 18 points lower, down -0.25% as of 8:30 am AEST.

S&P 500 SESSION CHART

MARKETS

• S&P 500 finishes lower and at worst levels
• Weak breadth – Only 144 S&P 500 stocks up vs. 389 down – Large cap tech and energy were the only sectors the held up
• Relatively uneventful session with no major directional drivers of note
• Main drag on markets include: Bond yield and US dollar bounce, a spike in oil prices driving risk-off attitude, higher-than-expected inflation prints in Asia and seasonality headwinds
• WTI crude settles higher as Saudi Arabia extends its unilateral production cut by another three months
• Goldman Sachs says the recent rounds of OPEC+ production cuts have returned the market to a deficit
• Morgan Stanley's Wilson says too much optimism in stocks (Bloomberg)
• Fed Governor Waller says incoming data is looking “pretty good” in favour of a soft-landing scenario but policymakers will need to see “a couple of months along this trajectory” before it can say it is done with hikes (CNBC)
• Global funds slash China stock positions to lowest since Oct 2022 (Bloomberg)
• M&A activity showing signs of life after slow start to the year (Axios)

EARNINGS

• Q2 S&P 500 earnings fell ~4% year-on-year, well-above the ~9% expected going into earnings season
• BofA notes that its three-month ratio of above vs. below consensus earnings guidance jumped to 1.3x – The highest since 2021
• Citi says upwards revision for S&P 500 as a percentage of total revisions finished at 62.7% in August

STOCKS

• Warner Bros cuts full-year earnings expectations as strikes drag on (CNBC)
• Arm valued at more than US$52bn, the biggest IPO of the year (Reuters)
• Airbnb joins S&P 500, shares up 7% (Reuters)

CENTRAL BANKS

• RBA leaves cash rate unchanged as inflation cools, reiterates some further tightening may be required (Bloomberg)

CHINA

• Country Garden pays interest on dollar bond within grace period (Bloomberg)
• Debt crisis threatens almost all of China's surviving developers, the 16 remaining face $1.5bn in bond repayments this month (Bloomberg)

ECONOMY

• US factory orders fell 2.1% month-on-month in July (Reuters)
• China services sector grows at slowest pace this year (Bloomberg)
• ECB says consumer inflation expectations edged up in July (Bloomberg)
• Eurozone August downturn was deeper than expected (Reuters)
• UK services sector PMI shows sharpest slowdown in 7 months (Reuters)
• Goldman Sachs reduces odds of US recession to 15% from 20% amid encouraging inflation news, favourable real income outlook and a decline in jobs-worker gap (Bloomberg)
• South Korea inflation reaccelerates (Bloomberg)

Sectors to Watch

A relatively heavy overnight session where a handful of energy and tech stocks tried to offset weakness from everywhere else. Will this theme play out for us on Wednesday?

A bounce on bond yields and US dollar weighed on sectors such as Gold (VanEck Gold Miners ETF -2.06%), Materials (S&P Metals & Mining ETF -1.32%) and Defensives.

Energy is the gift that keeps on giving and that includes:

• Uranium (Global X Uranium ETF +2.26%): To punish France, Niger has hiked the price of uranium to 200 euros a kilogram (which effectively takes out ~5% of global supply). Last week, Cameco reduced its guidance by approximately 3 million pounds (or another ~5% of supply).
• Coal: Newcastle coal futures rose 4.3% to US$166 a tonne
• Oil: Oil prices continue to gather momentum on China stimulus hopes, the strong US economy (and Goldman cutting recession odds)

Inflation: Base Effects and a RE-ACCELERATION in Asia

The battle against inflation is far from over. The fall from mid-2022 peaks to 3-4% was relatively easy thanks to beneficial base effects (aka comparing current prices against elevated prices from a year ago).

But as these effects roll off, the path to the desired 2-3% becomes rather difficult.

As Bespoke points out – If month-on-month increases in US inflation hold steady at 0.2% for the foreseeable future – We'll reach the desired 2.0% level by mid 2024. If the month-on-month figure sits at 0.3%, then inflation will continue to sit around 4.0%.

Several Asian countries have reported an unexpected acceleration in inflation due to higher rice and fuel prices, notably:

• Philippines inflation up 5.3% year-on-year in August vs. the 4.7% forecast of economists in a Reuters poll
• South Korea inflation accelerated to 3.4% in August from 2.3% in July and the month-on-month rate was the fastest since early 2017
  
  

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