US stocks end lower as dip buying fades into close

• On Wall St: Dow -0.2% S&P 500 -1.2% Nasdaq -2.3%
• In New York: BHP -1.3% Rio +0.6% Atlassian -4.5%
• Tesla -1.3% Apple -1.1% Amazon -3.2% Netflix -5.4%
• Microsoft -2.7% Alphabet -2.8% Meta -2.8%

Nine of the 11 S&P 500 industry groups fell, paced by a 2.3 per cent drop in information technology and a 2.2 per cent drop in communication services. Tech shares fluctuated in a wide range; the NYSE Fang + Index was down 2.2 per cent; the index has shed near 16 per cent so far in 2022.

The VIX was 4.3 per cent higher on the day. It has leapt about 80 per cent so far this year.

The ASX is closed today for Australia Day. Trading will resume on Thursday.

The local currency edged up 0.1 per cent; the Bloomberg dollar spot index edged 0.1 per cent higher. Bitcoin was trading near $US36,550.

The yield on the US 10-year note was 1 basis point higher to 1.78 per cent at 4.25pm in New York.

In a note, Goldman Sachs tipped the potential for more volatility. “We found that equities tend to digest higher bond yields eventually during Fed hiking cycles as long as the growth/rates mix is favourable, but there is the risk that a rates shock triggers a growth shock. That risk looks higher, as inflation pressures are much higher than since the 1980s.”

Goldman’s economists see the risk of a rate increase at every meeting until the inflation picture changes.

“Since the 90s the Fed has been countercyclical – a key question is if there is still a Fed put, how much lower the strike is and how it evolves in function of inflation and labour markets,” Goldman also said. “We are pro-risk in our asset allocation for 2022 but see the risk of more volatility in the near term – the interplay of growth, inflation and policy matters critically.”

In a blog post, Barry Ritholtz attributed the market moves to several reasons. “For the past decade, the cost of capital has been essentially free. This has stimulated the economy, encouraged more debt-based consumption, and enhanced corporate profits. This period is ending.”

Ritholtz said markets, and investors, are pricing “quite a few unknowns” including when will the Fed hike, how much, how will it impact the economy, will it cool off inflation, and what will happen to corporate profits.

In reality, last year’s market surge is the outlier, Ritholtz said: “We have been lulled into complacency by the 2021 market that went straight up with little volatility and almost no pullbacks. Volatility is a feature, not a bug of markets. This is what it’s supposed to be like – a 10 per cent correction once every two years, a 20 per cent bear market once every seven years, and a 30 per cent crash once every 12 years.”

Bank of America’s Savita Subramanian said the year-to-date selling has taken out some “froth” though the S&P 500 at an index level is still poised for tepid returns through 2023.

Subramanian said it’s important to note that support for the S&P 500 is not part of the Federal Reserve’s mandate: “investors should not assume the Fed will step in to placate volatile markets”.

BofA recommends 15 stocks that have strong fundamentals and are less vulnerable to the economy including Broadcom, Cisco, DR Horton, Home Depot, Lowe’s, NRG Energy and Pfizer.

Today's agenda

Local: Australia Day

Overseas data: NZ December trade balance, December credit card spending; US December new home sales; Federal Reserve two-day meeting begins

Market highlights

ASX futures up 39 points or 0.6 per cent to 6916 near 8am AEDT

• AUD +0.1% to 71.53 US cents
• Bitcoin on bitstamp.net -1.4% to $US36,564.82 as of 8.25am AEDT
• On Wall St: Dow -0.2% S&P 500 -1.2% Nasdaq -2.3%
• In New York: BHP -1.3% Rio +0.6% Atlassian -4.5%
• Tesla -1.3% Apple -1.1% Amazon -3.2% Netflix -5.4%
• Microsoft -2.7% Alphabet -2.8% Meta -2.8%

Commodities

• Spot gold +0.5% to $US1852.20/oz at 1.19pm New York time
• Brent crude +2% to $US87.97 a barrel
• US oil +2.3% to $US85.19 a barrel
• Iron ore +3.1% to $US137.85 a tonne
• LME copper +0.7% to $US9796.50 a tonne
• LME aluminium +1.9% to $US3086 a tonne

Governments

• 2-year yield: US 1.03% Australia 0.90%
• 5-year yield: US 1.57% Australia 1.65%
• 10-year yield: US 1.78% Australia 1.94% Germany -0.09%
• US prices as of 4.25pm in New York

From today's Financial Review

Economists predict rate increases from mid-2022: A surprise jump in both headline and underlying inflation has economists convinced the Reserve Bank of Australia will be forced to lift interest rates as early as May.

• Shock inflation spike hits 3.5 per cent
• Inflation to force RBA interest rate pivot
• IMF warns Fed hikes to hit struggling economies

United States

Warren Buffett’s Berkshire Hathaway plans this year to let shareholders attend the company’s annual meeting for the first time in three years, amid signs the omicron wave may have peaked in the United States.

In a statement, the Omaha, Nebraska-based conglomerate said “we are planning for an in-person meeting” on April 30, while also webcasting the event for a seventh straight year.

3M reported better-than-expected quarterly revenue and profit, as demand for its home improvement and personal safety products helped offset lower sales in the transportation and electronics unit, which is suffering from supply chain snarls.

GE reported a decline in quarterly revenue amid persistent global supply chain disruptions.

J&J forecast as much as $US3.5 billion in sales of its COVID-19 vaccine in 2022, a 46 per cent jump for the shot that has fared poorly compared to rivals.

Verizon Communications said it added more than expected wireless subscribers that pay a monthly bill in the fourth quarter and expects a strong year ahead helped by increased adoption of 5G services.

US data drop

US consumer confidence “moderated” in January though remained steady. The Conference Board Consumer Confidence Index declined to 113.8 from 115.2 in December.

The Present Situation Index – based on consumers’ assessment of current business and labour market conditions – improved to 148.2 from 144.8 last month.

The Expectations Index – based on consumers’ short-term outlook for income, business, and labour market conditions – declined to 90.8 from 95.4.

Global data

IMF has pared its growth forecast for this year. “We project global growth this year at 4.4 per cent, 0.5 percentage point lower than previously forecast, mainly because of downgrades for the United States and China.”

The IMF expects global growth to slow to 3.8 per cent in 2023, that’s a 0.2 percentage point increase from its previous forecast in October 2021.

What to expect from the Fed

TD Securities’ base case: “Strong suggestion of ‘liftoff’ at the next meeting, in March. QE still on track to end in March. No significant change in tone on the economy, with Omicron-related weakness seen as temporary.”

David Rosenberg: “Memo to Powell: say as little as possible ... Do not commit to anything, including a March rate hike. Keep your options open in this period of intense market volatility and economic uncertainty. You can always revisit your hawkish intentions another time.”

Rosenberg also tweeted: “Take note that Powell himself never pledged to hike rates in March. But everyone else seems convinced. Any wavering on this front, and all he has to do is not sound hawkish, and the Treasury market is going to rip. He doesn’t even need to sound dovish, only measured.”

Stephen Stanley, chief economist at Amherst Pierpont, said “the Fed has historically played it conservative in the early stages of a rate hike cycle” and he expects that to happen now too. He expects quarter-point increases in March, June, September and December.

“Most importantly, I would expect the FOMC statement to signal the likelihood of a March liftoff and possibly to offer some forward guidance on the pace of normalisation,” Stanley said. “Officials will also continue their discussion of balance sheet policy, though the Committee may still be a few meetings away from making any final decisions on that front.”

Europe

European shares recovered some lost ground on Tuesday following their worst sell-off since June 2020, after upbeat earnings reports from Ericsson and Logitech provided support.

The top European stock index gained 0.7 per cent after shedding 3.8 per cent in the previous session.

Swiss computer peripherals-maker Logitech International gained 6.2 per cent after raising its earnings forecast for the current fiscal year.

Sweden’s Ericsson jumped 7.6 per cent as it reported fourth-quarter core earnings above market estimates, helped by higher sales of telecoms gear with more countries rolling out 5G networks.

Credit Suisse slipped 0.9 per cent to hit a 20-month low after the scandal-hit lender warned it was likely to report a net loss in the fourth quarter as it flagged fresh legal costs and said business in its trading and wealth management divisions had slowed.

Watchmaker Swatch Group slipped 3.9 per cent even as it forecast double-digit sales growth in local currencies this year.

Asia

In Shanghai on Tuesday, the blue-chip CSI300 index fell 2.3 per cent to close at 4678.45, its lowest since October 2020, while the Shanghai Composite Index lost 2.6 per cent to 3433.06.

Nearly 94 per cent of the stocks listed in China’s A-share markets dropped, according to data from financial information services provider Wind.

In Hong Kong, the Hang Seng Index fell 1.7 per cent, to 24,243.61, while the China Enterprises index lost 1.8 per cent to 8503.35 points.

IMF view on China: “In China, disruption in the housing sector has served as a prelude to a broader slowdown. With a strict zero-COVID strategy leading to recurrent mobility restrictions and deteriorating prospects for construction sector employment, private consumption is likely to be lower than anticipated.

“In combination with lower investment in real estate, this means that the growth forecast for 2022 is revised down relative to October by 0.8 percentage point, at 4.8 per cent, with negative implications for trading partners’ prospects.”

The IMF asks, will China’s real estate slowdown intensify? “A broader slowdown in China will affect global prospects, principally via spillovers to commodity exporters and emerging markets. The baseline assumes a significant moderation in real estate investment growth in 2022, reflecting continued tight policies to rein in risks related to leveraged property developers.

“If the real estate slowdown intensifies further and balance sheet stresses spread beyond property developers, exposed banks and other financial intermediaries may be forced to shrink credit to the broader economy. Such an outcome would hold back investment and consumption, dragging overall growth lower with adverse implications for commodity exporters and other emerging markets.”

Currencies

S&P Global on cryptocurrencies: ”Bitcoin’s recent tumble from its November 2021 highs is getting a lot of the headlines lately, but it’s still having a better 2022 than the broader cryptocurrency market.

“The S&P Cryptocurrency Broad Digital Market Index (BDM) measures the performance of 350 digital coins including bitcoin, ethereum, binance coin, cardano and HEX. Year to date, the index has declined just over 25 per cent. When you strip out bitcoin and ethereum, which together comprise nearly 70 per cent of the BDM’s market cap, that decline increases to 29.3 per cent.

“In the longer term, the broader crypto market has significantly outperformed bitcoin in the last 12 months at a comparison of 115.6 per cent to 11.24 per cent. But expanding the timeline even further, the largest coins have returned more over the last three years than their smaller counterparts, speaking to the volatility of this digital asset class.”

Commodities

World crude steel production for the 64 countries reporting to the World Steel Association (worldsteel) was 158.7 million tonnes in December 2021, a 3.0 per cent decrease compared to December 2020.

China produced 1.03 billion tonnes of steel in 2021, down 3 per cent from 2020. China’s output accounted for 52.9 per cent of the total calculated by worldsteel.

China produced 86.2 million tonnes in December 2021, down 6.8 per cent on December 2020.

In a note, Fitch Solutions said it was maintaining its growth forecast for Australian iron ore production at 3.0 per cent in 2022 and at 1.5 per cent in 2023 as delayed new projects and expansions come onstream and elevated seaborne prices support production.

“Additionally, Hancock Prospecting and MinRes are considering new projects in the next few years to expand production quickly and investment in exploration for iron reserves rose in 2021, posing upside risks to our production forecast in 2024,” Fitch also said.

Iron ore futures in China and Singapore rose on Tuesday after Fortescue Metals Group raised concerns over a labour shortage in Australia because of COVID-19 curbs, which could hamper output and shipments of the steelmaking ingredient.

Iron ore’s most-traded May contract on China’s Dalian Commodity Exchange ended daytime trading 1.4 per cent higher at 766.50 yuan ($US121.14) a tonne, rising for a fifth straight day after overnight gains erased Monday’s daytime losses.

On the Singapore Exchange, the most-active March contract was up 2.5 per cent at $US136.20 a tonne by 0704 GMT.

Fortescue wants a ‘defined plan’ for WA reopening: Needing more workers for its $US3.5 billion Iron Bridge project, a disappointed Fortescue is trying to clarify skilled worker exemptions to WA’s hard border.

Fortescue exports, price penalties soar: There was good news and bad news for Fortescue investors, with an impressive export rate offset by sharper price discounts on the miner’s lower quality iron ore.

For now, traders’ optimism is likely to be tempered ahead of the Chinese Spring Festival holidays from January 31 to February 6, and with operations at steel mills expected to remain curtailed throughout February to improve air quality during the Beijing Winter Olympic Games.

Australian sharemarket

ASX pummelled as inflation shock escalates rate nerves: The S&P/ASX 200 Index sunk 2.5 per cent to 6961.6 on Tuesday, with all 11 sharemarket sectors posting losses.

Street Talk

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• Retailer Jaycar shops for new owner, Barrenjoey on ticket
• E&P banks analyst off to Latitude

Chanticleer

• Fortescue shows the inflation headache facing the ASX
• Rio Tinto’s big copper win lifts one dark cloud
• Tech valuations are dropping but VC leaders are unfazed

With Bloomberg