ASX 200 to fall + Morgan Stanley's take on the Big Four Banks

ASX 200 futures are trading 35 points lower, down -0.48% as of 8:20 am AEDT.

S&P 500 posts its worst session since 2 May, led by Tech and Materials. US debt ceiling talks remain in a deadlock, European luxury stocks like LVMH and Hermes take a $30bn hit after a stellar run, copper spot prices hit a fresh 6-month low and Morgan Stanley's views on the current banking environment plus their preferred picks.

Let's dive in.

S&P 500 SESSION CHART

Deeper Dive

Markets were pretty heavy overnight. There's a little bit of angst heading into FOMC minutes and debt ceiling debates as well as the formidable tech rally showing some signs of weakness. Indices are still trading within their recent ranges but now with a bearish lean. Let's see if things can hold up.

• Copper: Copper spot prices hit a fresh 6-month low overnight of US$3.64/lb. The Global X Copper Miners ETF tanked in-line with this weakness, down 2.6% to a 2-month low. This could see some negative flow for local names like BHP, 29Metals and Sandfire.
• Tech: Big tech took a hit overnight and most of our tech-y ETFs were down around 1.5%. The S&P/ASX 200 Info Tech Index is up 8.05% in the last five sessions, so do we begin to see a pullback take place? Its worth noting the Index closed 0.22% higher on Tuesday, down from session highs of 1.36%.

This rate hiking cycle and favourable deposit pricing has led to an average margin expansion of 19 bps for major banks in late 2022, according to Morgan Stanley. However, they expect margins to fall by an average of 15 bps over the next 18 months amid mortgage discounting, deposit competition and higher wholesale funding costs. Here are their main takeaways:

• A more competitive environment: "With little diversification and fewer growth options, all four banks are even more focused on maintaining or gaining share in their "core" segments."
• Consensus is too optimistic: "In our view, NAB's below-system growth in Australian mortgages and above-average exposure to SME loans will not compensate for a greater margin headwind from deposits, while WBC will continue to face mortgage headwinds."
• Ratings changes: "We have: downgraded our rating on NAB to UW from EW and lowered our price target ~9%; downgraded our rating on WBC to EW from OW and reduced our price target ~8%; trimmed our ANZ price target ~2%; and reduced our CBA price target ~4%."
• Order of preference: "We favour banks which can best manage margin headwinds and limit cost growth relative to current expecta- tions, while managing the challenges of higher rates and a weaker economic outlook. Our revised order of preference is ANZ (ASX: ANZ), Westpac (ASX: WBC)  (EW), NAB (ASX: NAB), Commonwealth Bank (ASX: CBA)."

Note: UW = Underweight (aka Sell) EW = Equal-weight (Neutral) and OW = Overweight (Buy)

Key Events

ASX corporate actions occurring today:

• Trading ex-div: Aristocrat Leisure (ALL) – $0.30, Orica (ORI) – $0.18, Nufarm (NUF) – $0.05
• Dividends paid: None
• Listing: None

Economic calendar (AEST):

• 4:00 pm: UK Inflation Rate
• 6:00 pm: Germany IFO Business Climate
• 4:00 am: FOMC Minutes

This Morning Wrap was first published for Market Index by Kerry Sun.