Triple Witch haunts Wall St, oil drops 7%, Australian agriculture, Qantas under scrutiny: ASX to plunge

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Dow closed lower as Wall St falls to March 2020 levels. Iron ore prices eased on weak demand sentiment and weak steel spreads. Oil prices fell to a four-week low on fears that central bank interest rate hikes could hurt global demand. What to look for on the ASX today.

Hello. I’m Melissa Darmawan for Finance News. What a messy weeks it has been in the markets. I hope you had a good weekend. This is your market outlook.

The Australian stock market is expected to fall after a crazy week, globally.

US stocks mixed on Friday, down for the week again

Wall St had a mixed day on Friday but ended the week with strong losses of five to six percent, bonds didn’t do too badly given the news from the Fed, with the 10-year yield, in up seven basis points, ending the week at 3.23 percent.

At the closing bell, the Dow Jones lost 0.1% to 29,889, the S&P 500 added 0.2% to 3,675 and the Nasdaq gained 1.4% to 10,798.

The S&P 500 fell 5.8% for the week, its biggest drop since March 2020, the Dow Jones fell 4.8%, its biggest drop since October 2020, while the Nasdaq also lagged by 4.8%.

Why the reaction?

Besides the news from the Fed around its 75 basis point hike, it was on the Friday of the quarter that the perfect storm hit investors: the triple witching.

On the third Friday of every March, June, September and December, three key events come together to add volatility to the current oversold conditions – not that we need more.

These events are: the expiration of individual stock options, stock index futures and stock index options.

Also during the triple sorcery, a rebalancing of the index takes place. This means that the market can see around five to six times the trading volume and can really push a single action move one way or the other.

The point to note is that this is not a one-day activity – expect steady to high volumes to continue when Wall St reopens after its three-day long weekend.

Ongoing earnings pressure

Elsewhere, it’s not just profitless tech that’s falling, Bitcoin, cryptocurrencies, but also blue chip stalwarts – they’re starting to show signs of cracks in their earnings momentum.

Target made headlines three weeks ago with its second earnings downgrade. While some companies have already folded, like Revlon. The stock price jumped 91.3% to US$3.73. The company is struggling to cope with its mountain of debt valued at US$3.8 billion. The free money train is coming to an end as interest rates turn around in their biggest jump since 1994 in the United States.

We have been at historically low interest rates for some time, but there are also other factors at play other than interest rates, such as the tight supply chain and the war in Ukraine.

With Revlon, the 90-year-old cosmetics giant had its Kodak moment and failed to keep up with its younger, hipper rivals, while stretching debt to unsustainable levels. It was supply chain issues that broke the camel’s back, as logistical problems in meeting customer demand hampered the company’s ability to repay debt. Adding further color to the situation, rising prices for key ingredients and labor shortages have not helped.

There are also other early signs of stress with junk bond yields jumping significantly. This may be a sign of other problems to come.

However, against this backdrop, if earnings forecasts are to drop – the S&P 500, which trades at 15.4 times 12-month forward earnings, is not as cheap as it looks, according to Goldman Sachs that if S&P 500 companies earn $239 and trade 17 times, the index would be trading at 4,165, up 13% from Friday’s close. This is the optimistic case.

But if 2023 earnings fall to, say, $225, and the price-earnings ratio falls to 14, the index could fall to 3150, down 14% from Friday’s close. “Investors looking for value opportunities should consider both valuations and the potential downside risk to earnings estimates.”

Oil price drops 7%, worst one-day drop since March

Oil fell the most in three months as recession fears renewed, pushing the greenback higher and dragging the energy sector down 5.6%, the worst performer in the S&P 500.

Fed Chairman Jerome Powell reaffirmed his stance of suppressing hot inflation with more aggressive rate hikes. Crude prices fell 6.8% to US$109.56, the biggest daily drop since March.

Powell reiterated that the Fed is focused on getting inflation back to its 2% target. Some economists see this as a sign that a recession is inevitable as the central bank places inflation control on economic growth, which could lead to lower energy consumption.

Bitcoin Plunges Below US$20,000 Before Recovering

Elsewhere, Bitcoin plunged to its lowest since late 2020, before recovering some of its losses. The largest digital token by market value fell 15% to US$17,599 yesterday, marking a record 12th consecutive daily decline. The largest digital token by market value fell 15% to US$17,599 yesterday, marking a record 12th consecutive daily decline.

Numbers around the world

European markets closed mixed amid eurozone inflation, hitting a record high of 8.1% in May. Paris fell 0.1%, Frankfurt added 0.7%, while London’s FTSE closed down 0.4%, weighed down by BP fell 6.2% and Shell 5.3% .

Asian markets closed mixed, the Tokyo Nikkei falling 1.8% after the Bank of Japan kept interest rates unchanged. Hong Kong’s Hang Seng gained 1.1%, while China’s Shanghai Composite gained almost 1%.

Australia‘s stock market fell 1.8% to 6,475 on Friday, extending its losing streak to a sixth consecutive day to record its worst week since March 2020. The consumer staples sector closed higher as stocks other sectors fell, led by materials and information technology. During the week, it closed down 7.1% or 457 points.

SPI Futures Contracts

Taking all of that into the equation, SPI futures are pointing down 0.3%.

What to pay attention to today

As investors seek safety, the defensive appeal of consumer staples and gold mining may be in the spotlight today.

Airbus and Qantas (ASX: QAN) are set to invest up to $200 million to accelerate the establishment of a sustainable domestic aviation fuel (SAF) industry. Due to the lack of a local sustainable commercial-scale aviation fuel industry, Australia currently exports millions of tonnes of raw materials each year, such as canola and animal tallow for processing into SAF. In other countries. The partnership will provide funding for locally developed and produced SAF and feedstock initiatives.

Travel stocks in the United States, Carnival and Norwegian Cruise Line rebounded, climbing about 10% each. Qantas, flight center (ASX:FLT)Webjet (ASX: WEB)REX (ASX:REX) could take off if it’s a solid lead.

In times of high inflation, rising interest rates and growing concerns about economic growth, food production and wine stocks could be on the move. Keep an eye on Australian agriculture (ASX:AAC)Costa Group (ASX: CGC)Treasure Wine Estate (ASX: TWE).

Energy stocks could be under pressure, as Woodside Energy (ASX: WDS)Santos (ASX:STO).

New York-based buyout fund Blackstone has emerged as a suitor for data sourcing company Appen (ASX: APN)who was briefly the subject of a $1.2 billion takeover bid from a strategic suitor before walking away, according to The Australian.

Cooper Energy is (ASX: COE) is set to raise $245 million in new equity to buy APA Group’s Orbost gas processing plant this week, according to the FRG.

No economic news locally, but Chinese prime lending rates are expected today.

Goods

Iron ore futures point to a 5.6% decline.

Gold fell $9.30 or 0.5% to US$1,841 an ounce. Silver was down $0.29 or 1.3% at US$21.68 an ounce.

Oil fell $8.03 or 6.8% to US$109.56 a barrel.

Currencies

The 7:05 Australian dollar has weakened since Friday, buying 69.30 US cents (Fri: 70.53 US cents), 56.67 pence sterling, 93.49 yen and 66.09 euro cents.

Source: Bloomberg, FactSet, IRESS, TradingView, UBS, Bourse Data, Trading Economics

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