CPI comes in hot, yet markets surge. And Morgan Stanley talk the miners and La Nina
Welcome to Charts and Caffeine - Livewire's pre-market open news and analysis wrap. We'll get you across the overnight session and share our best insights to get you better set for the investing day ahead.
- S&P 500 - 3,670 (+2.60%)
- NASDAQ - 10,649 (+2.23%)
- CBOE VIX - 32.09
- USD INDEX - 112.50
- US 10YR - 3.957%
- FTSE 100 - 6,850 (+0.35%)
- STOXX 600 - 389.15 (+0.85%)
- UK 10YR - 4.192%
- GOLD - $1677
- OIL - US$89.11 (+2.1%)
- IRON ORE - US$95.40 (-0.8%)
- Dow up more than 800 points as stocks erase plunge seen in wake of hot CPI print
- Worries over global financial stability mount as central banks tighten policy
- BoE ramps up bond buying as it fights fresh assault on bonds
- Yellen expresses concern about loss of adequate liquidity in the Treasury market
- G7 reaffirms warning against excess FX volatility
- Advisors tell UK PM Truss she needs to rip up her budget and raise corporate taxes
- Moody's economist expects US will see inflation cut in half within six months
- Fed signals they are more concerned about doing too little to combat inflation than too much
- ECB may be close to neutral but financial stability risks rising
- BoE chief economist Pill expects big rate hike in November
- BOJ's Kuroda vows to keep easing to support economic recovery
- IEA cuts 2023 oil demand growth forecast, says OPEC+ cuts could tip global economy into recession
- Biden team grows concerned Russia oil price cap may backfire after OPEC+ cut
US CPI OUTCOME AND IMPACT
Markets were wild overnight, with the Dow surging in the final hour of trading despite the September CPI number coming in hotter than expected, with the data reinforcing the likelihood the Fed will continue to hike rates aggressively to combat inflation.
Year-over-year headline inflation came in at 8.2%, down from 8.3%, but the core CPI number, which excludes food and energy prices, posted a monthly increase of 0.6% - against a forecast of 0.4%. The year-over-year core number subsequently increased from 6.3% to 6.6% - the biggest gain in 40 years. It was this core number that caused an initial selloff on Wall Street.
As for what caused the later rally, commentators attributed it to some combination of oversold positioning, profit-taking on shorts, and bargain-hunting - in other words, they couldn't really explain it. Whatever the reason, hot CPI numbers have caused some of the most volatile trading days on the S&P this year and the knee-jerk reaction typically isn't the lasting one. Keep that in mind.
As for what happens next, the Fed futures are pricing a 95% chance of a 75 basis point rate hike at the November Fed meeting, up from 83% before the latest CPI number was released. The pricing for a December hike of 75 basis points also rose, to a 60% chance.
It has been a while since I've looked at the technical picture for the ASX 200, but when I last did so, I was talking about the importance of the 6600 and 6400 levels as support. 6400 was ultimately tested and respected and, while it would have taken some courage, hindsight shows that was the price to be a buyer. With the Dow up 800+ points overnight, perhaps there is another opportunity being provided to be a buyer off the 6600 level. Short-term stuff. There are a lot of macro headwinds out there at the moment, but the technicals are pretty 'clean' at in terms of their respect of major levels. As for resistance, should the bulls get going, 6940-7000 will be tough to crack, whilst there is more resistance all the way up to 7200.
STOCKS TO WATCH
After the deluge we've seen in Melbourne in the past couple of days and the 'rain bomb' showering the east coast, it's fitting that today's Stocks to Watch has a weather focus.
It comes to us from Morgan Stanley's Australian Materials desk, and it focuses on the La Nina event that has been declared for 2022 - the third in a row. The last time that happened was in 1998-2001, and before that, 1973-76. So it is a relatively rare occurrence but it can have profound impacts. MS is focusing on the impact on mining operations, noting that the last La Nina in FY22 "caused a number of production downgrades for East Coast mines (~5-10%)".
MS goes on to note that open pit mines will likely be more impacted than underground mines, but all operations in impacted areas could suffer from transport route closures. MS goes on to highlight Whitehaven Coal (ASX: WHC) as the miner with the revenue base that is most exposed, with a 5% hit to sales and a 10% hit to production not outside the realms of possibility. MS goes on to note, however, that WHC can still produce strong free cash flow and dividend yields if they were to be impacted. Newcrest (ASX: NCM) and Evolution Mining (ASX: EVN) have the next highest revenue exposures, whilst diversifieds South32 (ASX: S32) and BHP Group (ASX: BHP) have smaller overall exposure from a revenue perspective.
TODAY'S TOP READ(S)
You may have noticed the Livewire team have been out asking the big questions of fund managers, bringing you up-to-the-minute market insights through the current volatile period.
The team have done some excellent work across multiple asset classes, and I thought I would collate the articles for you and make them today's top reads;
Two things you should watch out for in 2023 and beyond
- Three fixed-income veterans name their top conviction trade for FY23
- From rates bear to earnings bear: These are the stocks that will survive the second cliff
- Where to invest as recession fears worsen
- How much cash are you holding right now?
We look forward to bringing you more powerful insights and actionable ideas.
Chris Conway wrote today's report.
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Livewire and Market Index's pre-opening bell news and analysis wrap. Available weekday mornings and written by Chris Conway, Kerry Sun, and Hans Lee.
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