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A collapse in commodity prices points to early pressure on the ASX despite a huge comeback session for US stocks.

Oil plunged almost ten per cent overnight as recession fears tore through commodity markets. Copper plumbed a 17-month low. Natural gas, gasoline, wheat and precious metals declined.

The declines spell trouble for Australia’s commodities-heavy share market. ASX futures dropped 64 points or 0.98 per cent despite a broadly positive end to the US session. The Australian dollar sank below 68 US cents.

Wall Street

US stocks mounted a fierce intraday reversal as investors bought a deep opening dip. The main indices finished mixed as growth stocks resisted selling pressure on other sectors.

The S&P 500 closed six points or 0.16 per cent ahead after being down more than 2 per cent. Tech stocks led a reversal that lifted the Nasdaq Composite 194 points or 1.75 per cent. The Dow Jones Industrial Average slashed a 700-point loss to 129 points or 0.42 per cent.

Fears about the economy were sharpened early in the session by a classic recession indicator: an inversion of the two-year and ten-year treasury yields. When short-term returns exceed long-term returns, investors generally expect a sharp deterioration in the economy.  

“Recession concerns are dominating the market,” Sam Stovall, chief investment strategist at CFRA, said.

“The real question is if the economy is slowing, then by how much will second-quarter earnings or guidance disappoint. People are waiting until they get some news that could serve as a catalyst.”

Yield inversion has already taken place this year, but only briefly. As a recession indicator, the phenomenon is considered more reliable if it endures for an extended period.

Energy and mining stocks led the selling. The energy sector dived 4.01 per cent to a five-month low as US oil fell below US$100 a barrel and Brent crude skidded 9.5 per cent (more below). The materials sector sank 2 per cent to an 18-month low.

Businesses tied to the global economy declined. Freeport-McMoRan sank 6.64 per cent, Deere & Co 3.15 per cent and Caterpillar 2.54 per cent.

“The US market is all about pricing in a slowdown, and pricing in the fact that the Fed is forced to hike rates into a slowdown,” Allianz chief economic advisor Mohamed El-Erian told CNBC.

Growth stocks outperformed as long-term interest rates retreated. The three sectors associated with ‘Big Tech’ were the night’s only advancers.

Australian outlook

A night of extreme moves suggests a two-speed market this session. A decline in the cost of borrowing should help tech and other growth sectors. However, the energy and mining sectors face strong headwinds following a revival in global growth fears.

The S&P/ASX 200 is more weighted towards commodities than growth, so down we go. The index is coming off the back of two solid sessions that have lifted it 90 points, even as the RBA hiked rates by a hefty 50 basis points.

The dollar slumped in the face of a classic “flight to safety” on forex markets. The Aussie is largely seen as a proxy for commodity prices on overseas markets. The local unit was lately down 1.03 per cent at 68 US cents after trading lower overnight.

US energy and materials plumbed multi-month lows. The energy sector plunged 4.01 per cent. Materials fell 2 per cent. Utilities was also notably weak, falling 3.43 per cent.

Just three sectors were responsible for US gains: communication services +2.67 per cent, consumer discretionary +2.28 per cent and tech +1.24 per cent. The rest finished lower.

IPOs: “green metal” explorer MetalsGrove Mining lists at 1pm AEST. MetalsGrove has projects in WA and the NT with potential for lithium, tin, rare earths, copper and manganese.

Commodities

Oil prices tumbled as the US dollar surged and demand worries reached a crescendo. Falls appeared to accelerate on news Shanghai was recommencing mass Covid testing, triggering fears of renewed Chinese lockdowns.

Brent crude skidded US$10.73 or 9.5 per cent to US$102.77 a barrel. The US benchmark, West Texas Intermediate, slumped 8.2 per cent to US$99.50.

“We’re getting creamed and the only way you can explain that away is fear of recession,” Robert Yawger, director of energy futures at Mizuho, told Reuters. “You’re feeling the pressure.”

US gasoline prices dropped 9.7 per cent. US natural gas shed 3.6 per cent.

Copper slumped to a fresh 17-month low. Benchmark copper on the London Metal Exchange fell 4.3 per cent to US$7,657.75 a tonne. US-traded copper dived 5.2 per cent to US$3.415 per pound.

“There’s no return on commodities so speculators are rotating their money out of commodities into U.S. dollars, property, any U.S. dollar asset outside of commodities that will give you a return,” Tom Price, head of commodities strategy at Liberum, said.

Aluminium declined 3.2 per cent, zinc 4.2 per cent, lead 0.1 per cent and tin 2.4 per cent. Nickel edged up 0.6 per cent.

BHP and Rio Tinto fell in overseas trade despite a rebound in iron ore prices. The spot price for ore landed in China rose US$3.48 or 3.2 per cent to US$113.42 a tonne.

BHP‘s US-traded depositary receipts fell 2.2 per cent. The miner’s UK stock shed 3.12 per cent. Rio Tinto dived 4.26 per cent in the US and 4.01 per cent in the UK.

Gold settled at a 2022 low as the US dollar surged. Metal for August delivery settled US$37.60 or 2.1 per cent weaker at US$1,763.90 an ounce. The NYSE Arca Gold Bugs Index slumped 4.63 per cent.

Silver dropped 2.8 per cent to its weakest close since July 2020. Wheat skidded 4.32 per cent.

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