Stocks tumbled to a 13-month low on Monday as we continue to see risk-off moves across asset classes amid concerns around ongoing Chinese lockdowns as well as the Federal Reserve’s ability to tame inflation without causing a recession.
The S&P500 retreated -3.20% on Monday with 86% of stocks lower as technology -3.94%, consumer discretionary -4.26% and energy -8.30% weighed on the index as oil prices slumped. The Dow Jones also weakened -1.99%, as did the Nasdaq Composite -4.29% and Russell 2000 -4.21% with the VIX climbing +15.1% to 34.75. Both the Nasdaq Composite and Russell 2000 are considered in bear markets, having fallen more than 20% from their record highs, while the Dow Jones and S&P500 are edging closer to the widely considered bear market threshold. Pandemic-era performers continue to see the brunt of selling with Cathie Wood’s flagship ETF ARKK falling -9.86% having fallen -69% from its record high in June 2021. European equities were also lower reaching a two-month low on Monday with travel and leisure sectors as well as technology leading losses amid worries over COVID-19 curbs in China and surging bond yields. The Euro Stoxx 600 declined -2.90%, as did the DAX -2.15%, CAC -2.75% and FTSE100 -2.32% with major benchmarks across the region all lower.
The debate as to whether capitulation levels have been reached yet continues, with First Trust and JP Morgan analysts arguing that the sell-off is overdone and investors are too pessimistic. First Trust noted they don’t see a recession as soon as 2023 and a wall of worry can help boost stocks with the bad news in the near term already over-priced in. JP Morgan argues its base case if to avoid a recession and is overweight equities and commodities citing policy easing in China, stock labour markets, distraught investor sentiment and healthy consumer and corporate balance sheets. On the other side, Jim Bianco, a widely watched commentator and founder of Bianco Research argues the Fed is losing credibility and placing stress on the financial system while economist David Rosenberg said we have not yet reached levels of heightened panic consistent with capitulation and recommends staying liquid.
Investors await several Fed speakers this week with Fed Bank of Atlanta President Raphael Bostic saying he favours continuing to raise rates by half-point increments rather than doing anything larger, although said he is not taking the possibility of a +0.75% increase off the table. The April consumer price index report is due on Wednesday amid a quiet week for economic data, which is expected to show a moderation in price growth on both a monthly and annual basis. Investors remain worried about the limits to Fed policy while supply-chain disruptions amid China’s lockdowns as well the ongoing war in Ukraine pose a significant threat to inflation.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX looks set to open sharply lower again this morning with ASX200 futures down -99 points or -1.39% to 7,003. The index retreated -1.18% on Monday weighed by materials -2.13%, real estate -4.13% and consumer discretionary -1.56% with selling broad-based as 83% of stocks declined as China intensifies its zero-COVID policy, deepening supply chain issues. China’s government has ordered Shanghai residents to return to their homes and banned food deliveries of the next week as President Xi Jinping doubles down on efforts to eliminate cases regardless of economic and social costs. Materials were hit as iron ore futures in Dalian declined as much as -6.8% while Chinese data showed exports and imports in April struggled as COVID-19 outbreaks cut demand, undermined production, and caused havoc on logistics. The Australian dollar, which is also a bell weather for risk declined -1.79% on Monday falling to 0.6949 while the 10-year yield rose +9.2 basis points to 3.563%.
Oil prices fell overnight with both WTI and Brent crude -6.75% and -6.5% weaker at US$102.36 and US$105.08 respectively. Iron ore futures in Singapore retreated -6.23% and are down a further -2.54% in early trade this morning. Gold declined -1.57% to US$1,854.27 as did silver -2.60% to US$21.78 and Bitcoin slumped -9.07% to US$31,119.
Economic data:
- Australian Retail Sales (MoM Mar) 11:30
- Eurozone Economic Sentiment (MoM May) 19:00
- Fed Williams Speech 21:40
- Fed Bostic Speech 22:30
- Fed Kashkari & Waller Speeches 03:00
- Fed Mester Speech 05:00
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
