Market Highlights: Wall Street falls as Moody's downgrades US banks; fundie explains why a US recession is coming

The ASX is set to open slightly lower on Wednesday
Wall Street fell after Moody’s downgraded US regional banks
Hong Kong issues new crypto exchange licences

The ASX is set to open slightly lower on Wednesday amid new concerns about the US economic outlook. At 8am AEST, the ASX 200 index futures was pointing down by -0.1%.

Overnight, the S&P 500 fell -0.42%, blue chips Dow Jones by -0.45%, and tech heavy Nasdaq by -0.79%.

Traders were caught surprised after rating agency Moody’s came out with a slew of downgrades in a number of US regional banks. The agency also said it may downgrade bigger players such as Bank of New York Mellon and State Street.

“Risks may be more pronounced if the US enters a recession – which we expect will happen in early 2024 – because asset quality will worsen and increase the potential for capital erosion,” Moody’s report said.

In stock news, Eli Lilly & Co gained 15% after sales of its weight-loss treatment blew past forecasts.

Co-working space stock WeWork Inc fell -27% post-market after saying there’s “substantial doubt” about its ability to continue operating, citing growing cancelled memberships.

Ride-hailing stock Lyft fell 7% after the bell after reporting the slowest revenue growth in two years.

“Stocks are down, but it is not too ugly as Wall Street is starting to become very confident that global economic weakness will do the trick in getting inflation back to the Fed’s 2% target,” said Oanda analyst, Edward Moya.

Is a recession probable?

Global equity manager ClearBridge Investments believes a recession is on the horizon in the US despite improving economic sentiment which leans toward a soft landing.

Jeffrey Schulze, head of Economic and Market Strategy at ClearBridge, says macro data suggest continued caution with a recession still the most likely outcome.

Schulze noted that a rally in the stock market often preceded a recession.

“A resilient equity market has a checkered history in correctly sniffing out a recession.

“In fact, the market has delivered a positive return 42% of the time in the six months prior to the start of a recession, and been positive 25% of the time in the three months prior,” he said.

He also said that historically, a recession started 23 months after the first increase of a persistent hiking cycle, noting that the Fed made its first rate hike 16.5 months ago.

Schulze believes caution is warranted despite improving sentiment.

“This leaves investors to ponder when a recession should be expected, if one in fact materialises.”

In other markets …

Overnight, gold traded lower by -0.6% to US$1,924.99 an ounce.

Crude prices rose by +1%, with WTI now trading at US$82.84 a barrel.

Iron ore 62% fe fell -0.3% to $US104.41 a tonne.

Bitcoin meanwhile briefly touched US$30k, but pulled back to trade now at US$29,859.

China has just made a significant move on crypto after Hong Kong issued the first licences for crypto exchanges, potentially opening up crypto trading to the Chinese mass market.

The licences were awarded to crypto exchanges HashKey and OSL, allowing them to serve retail customers in Hong Kong.

5 ASX small caps to watch today

Universal Biosensors (ASX:UBI)
UBI has won its first major tender to supply Xprecia Prime in Italy. The tender is for an initial period of two years commencing in Q423, and includes the purchase of more than a hundred Xprecia Prime devices and 130,000 strips pa. No dollar figures were provided.

Sezzle Inc (ASX:SZL)
The BNPL player reported a 19.4% year-on-year increase in net income to US34.9m. Sezzle recorded GAAP net income of US$1.1m for Q2, compared to US$15.1m loss in the pcp. The company is well funded with US$63.4m of cash on hand.

Auteco Minerals (ASX:AUT)
The maiden surface exploration program at the Sioux Lookout prospect in Canada returned significant results. The company reported discovery along the strike of Treasury Metals’ 2.9Moz Goliath Gold Project, including 73.6g/t gold and 15.1g/t gold.

Image Resources (ASX:IMA)
IMA provided initial test results for synthetic rutile production from ilmenite composite samples collected from its 100%-owned Bidaminna mineral sands project. Highlights of test results include initial Bidaminna ilmenite grade of 60% TiO2, and final SR grade of >95% TiO2 (same as natural rutile).

Buxton Resources (ASX:BUX)
Buxton announced that its CEO, Eamon Hannon, will be stepping down from his role to take up a non-executive position. Hannon has been with Buxton for nine years, and will be succeeded by Martin Moloney as interim CEO. Moloney has been with Buxton for four years in the roles of chief geologist and head of Resources.