The Monday Report – 25 October 2021

This story features LYNAS RARE EARTHS LIMITED, and other companies. For more info SHARE ANALYSIS: LYC

World Overnight
SPI Overnight	7416.00	+ 30.00	0.41%
S&P ASX 200	7415.50	+ 0.10	0.00%
S&P500	4544.90	– 4.88	– 0.11%
Nasdaq Comp	15090.20	– 125.50	– 0.82%
DJIA	35677.02	+ 73.94	0.21%
S&P500 VIX	15.43	+ 0.42	2.80%
US 10-year yield	1.66	– 0.02	– 1.25%
USD Index	93.64	– 0.13	– 0.14%
FTSE100	7204.55	+ 14.25	0.20%
DAX30	15542.98	+ 70.42	0.46%

By Greg Peel

Stalemate

The ASX200 banged around in a 40-point range on Friday morning before stalling, at what would roughly be its closing price, at 1.30pm after no one in Melbourne came back from lunch.

One of the two big news items of the day was Melbourne’s reopening. It was nevertheless well flagged and Sydney had already stolen the thunder.

The other news was that after scratching around beneath the couch and checking jacket pockets, Evergrande managed to make the US$83.5m bond payment due on Saturday to avoid default. Another payment is due this Friday.

Evergrande also announced it had recommenced work on eleven projects. Sounds promising, on both fronts, except that there are a lot more payments due ahead on the company’s US$300bn of debt and it is unclear just how many of some 1300 of the company’s projects are currently halted.

Energy (-2.2%) and materials (-1.2%) were nonetheless the standout worst performers on the day after commodity prices dropped in unison on the Thursday night after Evergrande had failed to find a buyer for either the half of its property business up for sale or even its Hong Kong headquarters, suggesting it was unlikely the company would be able to make the payment it did manage to make.

There was little respite among commodity prices on Friday night, however. Oil and iron ore saw rebounds but all base metals fell once more, in particular copper and aluminium. Thermal coal prices also continued their drop from the heavens, which is related to government intervention, not the property market.

With the banks having the day off it was up to the consumer sectors and healthcare to balance resource sector losses, with some help from REITs.

Among individual stocks, miners unsurprisingly made up four of the bottom five spots, led out by Lynas Rare Earths ((LYC)), which fell -8.1% on covid-related problems in Malaysia. Aurizon Holdings ((AZJ)) was the odd one out, although it does haul coal, but it fell -6.2% after announcing a takeover bid.

The winners were otherwise a mixed bag, topped by a 4.0% gain for virus-tester Healius ((HLS)). Still plenty of demand there.

The Aussie ten-year bond yield continued to rise, up 3 points to 1.81%, further widening the gap to the US which closed at 1.64% on Friday night and thus further supporting strength in the Aussie dollar.

Yet if market participants decided to give it away on Friday afternoon they were back ready to have a go by Saturday morning. The S&P500 closed down -0.1% but our futures are up 30 points this morning.

Ad Nauseam

I reported on Friday morning that shares in Snap had plunged in the US aftermarket on Thursday night after the company reported earnings. In Friday night’s session, Snap fell -27%.

The issue was not September quarter earnings – they were actually a beat – but December quarter guidance, which was impacted by two major problems.

The first is that Apple’s new operating platform has privacy changes that allow users to opt out of having their data tracked by social media, reducing the capacity for social media platforms to assess the effectiveness of advertising. Snap, for one, is now scrambling to build its own in-house system.

The second is that supply chain issues have reduced the capacity for companies to offer new products for sale (automakers for example have been slashing production) and hence they are not spending money on advertising products they can’t offer. Snap’s ad-spend guidance for this quarter missed estimates substantially.

The news reverberated through the internet advertiser space, with Facebook and Twitter down -5% and Google down -3%. Apple fell only fractionally.

Hence the Nasdaq underperformed on the day with a -0.8% drop while the Dow’s 0.2% gain took it to a new all-time high.

It still took a 5% jump on earnings result for American Express to get the Dow over the line with chip-maker Intel falling -12% on its result.

In other news, Fed chair Jay Powell said in a speech to the Bank for International Settlements on Friday night “I think it’s very possible we’ll be at or near labour market conditions that are consistent with our maximum employment goal next year.” Given inflation is well above the Fed’s 2% target, this would tick the other box required for the first rate hike.

But, Wall Street didn’t panic. The ten-year yield fell -3 points to 1.64%. The market is already pricing in the first rate hike coming as early as next year.

Over on the fiscal side, President Biden suggested in a virtual “town hall” meeting on Friday night that he probably doesn’t have the votes to boost corporate taxes. While this would be sweet news for corporate America, it does bring into question how any of Biden’s infrastructure plans can be paid for.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1792.00	+ 9.00	0.50%
Silver (oz)	24.30	+ 0.17	0.70%
Copper (lb)	4.43	– 0.10	– 2.31%
Aluminium (lb)	1.28	– 0.06	– 4.36%
Lead (lb)	1.09	– 0.01	– 0.95%
Nickel (lb)	8.97	– 0.05	– 0.58%
Zinc (lb)	1.58	– 0.02	– 1.24%
West Texas Crude	83.76	+ 1.11	1.34%
Brent Crude	85.53	+ 0.78	0.92%
Iron Ore (t)	120.35	+ 2.85	2.43%

While Evergrande’s bond payment may have provided some relief, there are other factors in China continuing to impact on metals markets.

Bit of a boost for gold as US long bond rates retreat slightly.

The Aussie is up slightly at US$0.7472.

The SPI Overnight closed up 30 points or 0.4%.

The Week Ahead

This week is the biggest in the US earnings season by number of reporting companies and the feature will be results from a handful of the Big Tech names.

Locally, ANZ Bank ((ANZ)) reports on Thursday to kick off bank reporting season. Macquarie Group ((MQG)) follows on Friday.

It’s also the peak week for AGMs and quarterly reports.

And look out, it’s our turn to report inflation numbers. Following on from New Zealand’s shock numbers last week, we’ll see our September quarter CPI on Wednesday and PPI on Friday.

The US will see a first estimate of September GDP on Thursday, and the eurozone on Friday.

US data releases during the week include consumer confidence, new home sales and durable goods orders.

China will report October PMIs on Friday. 

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
BAP	Bapcor	Upgrade to Add from Hold	Morgans
BHP	BHP Group	Upgrade to Add from Hold	Morgans
BSL	BlueScope Steel	Upgrade to Outperform from Neutral	Credit Suisse
CHL	Camplify	Downgrade to Hold from Add	Morgans
CL1	Class	Downgrade to Hold from Buy	Ord Minnett
DMP	Domino's Pizza Enterprises	Upgrade to Neutral from Underperform	Macquarie
IEL	IDP Education	Downgrade to Hold from Add	Morgans
NAN	Nanosonics	Upgrade to Add from Hold	Morgans
ORA	Orora	Upgrade to Outperform from Neutral	Macquarie
OZL	OZ Minerals	Downgrade to Neutral from Buy	Citi
		Equal-weight	Morgan Stanley
PAN	Panoramic Resources	Upgrade to Outperform from Neutral	Macquarie
SRL	Sunrise Energy Metals	Downgrade to Neutral from Outperform	Macquarie
SUL	Super Retail	Downgrade to Hold from Accumulate	Ord Minnett
SXY	Senex Energy	Downgrade to Neutral from Outperform	Credit Suisse
VMY	Vimy Resources	Downgrade to Hold from Add	Morgans
WEB	Webjet	Downgrade to Neutral from Outperform	Macquarie
WOR	Worley	Upgrade to Buy from Neutral	UBS

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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