The Overnight Report: Break Up?

Daily Market Reports | Jan 24 2023

This story features CORONADO GLOBAL RESOURCES INC, and other companies. For more info SHARE ANALYSIS: CRN

World Overnight
SPI Overnight 7426.00 + 25.00 0.34%
S&P ASX 200 7457.30 + 5.10 0.07%
S&P500 4019.81 + 47.20 1.19%
Nasdaq Comp 11364.41 + 223.98 2.01%
DJIA 33629.56 + 254.07 0.76%
S&P500 VIX 19.81 – 0.04 – 0.20%
US 10-year yield 3.53 + 0.04 1.18%
USD Index 102.11 + 0.10 0.10%
FTSE100 7784.67 + 14.08 0.18%
DAX30 15102.95 + 69.39 0.46%

By Greg Peel

January Joy

Yes hello, happy New Year, hope you all had a nice holiday break. Clearly not everyone’s been on the beach the whole time – the ASX200 is up 5% since Christmas, on a combination of a 4% rally for Wall Street and China’s reopening.

The ASX200 is now a mere -2.2% from its April 2022 (all-time) high.

Not much to say about yesterday, however. A 20 point spike in the morning for the index, on Wall Street strength, became an almost -20 point drop an hour later, before the market settled in for an otherwise dull session.

In a shortened week, with a cheeky long weekend on offer, a CPI result due tomorrow and RBA meeting next week (and Fed meeting too), and China closed for the week, a bit of a stall after such a strong month is hardly surprising.

Technology led the sectors yesterday (+1.3%), as the Nasdaq continues to rediscover its mojo after 2022’s shocker, while energy rose 0.9% on higher oil prices. Utilities were the only real drag (-0.5%) but among the bigger sectors, there was little to report.

On the subject of oil prices, there is a fear China’s reopening will lead to a renewed demand-push that threatens a return to the higher prices seen last year, and hence a further underpinning of headline inflation and cost of living pressures. Last I looked, China was buying its oil from Russia, which seems to have plenty to sell, so the impact on Brent prices may not be so severe.

But inflation is clearly in the spotlight, and UBS had a bit to say on the subject yesterday.

Firstly, food prices at the supermarket rose an average 9.2% in the December quarter, following 8.2% in the September quarter. While the war kicked off steep food inflation last year, everywhere you look across the globe at present it seems there are drought or floods or heatwaves, as well as locally. So food prices are not something monetary policy can control.

The RBA focuses on core inflation anyway (ex food & energy). We left 2022 feeling the RBA might have paused its rate hike cycle as early as December, but it didn’t. It paused in January, by not having a meeting, and next week will decide its next move. While a stubbornly tight labour market has consensus expecting more than one more rate hike in 2023, UBS is forecasting one and done.

UBS has cut its quarter-on-quarter headline CPI forecast to 1.7% from a prior 2.0%, taking its annual rate to 7.6%, up from 7.3% but below the RBA’s year-end forecast of 8.0%. UBS expects the RBA to lower its inflation peak forecast in next month’s Statement on Monetary Policy.

Anyway, the starting point is tomorrow’s CPI release.

State of Confusion

Since the beginning of December, the range for the S&P500 has been one of tenuous support above 3800 and a brick wall of resistance at 4000, with traders cutting off its head each time if deigned to exceed this level. The index hit 3999 on January 13 and was back at 3900 by January 19.

Last night the S&P closed at 4019 – not yet convincing, given the high of the day was 4039 (when the Dow was up over 400), but an apparent break-up through the downtrend beginning a year ago.

The Fed meeting is not until next week, but Wall Street is building in some risk. It is not quite clear, however, whether Wall Street is cheering on a recession, or believes a soft landing actually is achievable. Last night’s data showed a -1.0% fall in US leading economic indicators, when Wall Street had forecast -0.7%.

Throw in the steeply inverted yield curve, and the signals are all flashing red. But Wall Street believes the Fed will thus be forced to pause its rate hikes, as recession becomes apparent, or will go too far and have to start cutting in the second half.

It will, of course, come down to inflation, and Wall Street has been buoyed by a drop in the headline CPI into the sixes from the nines. But with wage price inflation continuing to run above average in a tight US labour market, it is believed the next three percentage points of disinflation required to get down to the threes will take a lot longer than the first three percentage points.

China’s reopening, as noted, may also prove a drag on disinflation.

Yet there is also a camp suggesting the odds of a US recession are actually low, or at least below 50%, and more than one survey has shown a reduction in recession expectations over the past few months. Wage growth is solid, and the consumer is proving resilient. As to whether consumers will prove resilient in 2023 is another matter. Card companies are reporting an increase in credit card use.

So take your pick. On Friday night we’ll see the December PCE inflation data, and then the Fed meets next week. Consensus has only a 25 point hike, after a drop to a 50 point hike in December following three 75s. It then comes down to how many more 25s may yet be forthcoming.

And, of course, the US earnings result season is just firing up, with Big Tech in the spotlight this week.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1928.80 + 2.50 0.13%
Silver (oz) 23.34 – 0.57 – 2.38%
Copper (lb) 4.20 – 0.01 – 0.26%
Aluminium (lb) 1.29 + 0.02 1.42%
Lead (lb) 0.96 – 0.01 – 1.02%
Nickel (lb) 12.80 + 0.10 0.80%
Zinc (lb) 1.53 – 0.00 – 0.17%
West Texas Crude 81.54 – 0.10 – 0.12%
Brent Crude 88.01 + 0.38 0.43%
Iron Ore (t) 122.15 – 0.01 – 0.01%

Pretty quiet with China absent.

The Aussie has nonetheless jumped 0.8% despite a slight rise in the dollar, to US$0.7025.

Today

The SPI Overnight closed up 25 points or 0.3%.

Today we’ll see the NAB business confidence survey for December.

Flash estimates of PMIs are due across the globe.

China remains closed until next week.

There are quite a few miners providing quarterly reports today, including Coronado Resources ((CRN)), Evolution Mining ((EVN)) and Sandfire Resources ((SFR)).

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ALD Ampol Downgrade to Neutral from Outperform Credit Suisse
AMC Amcor Downgrade to Hold from Accumulate Ord Minnett
ANZ ANZ Bank Upgrade to Outperform from Neutral Macquarie
ARB ARB Corp Downgrade to Equal-weight from Overweight Morgan Stanley
AWC Alumina Ltd Upgrade to Lighten from Sell Ord Minnett
Downgrade to Sell from Neutral Citi
BOQ Bank of Queensland Downgrade to Underperform from Neutral Macquarie
CBA CommBank Downgrade to Underperform from Neutral Macquarie
CGF Challenger Downgrade to Sell from Neutral Citi
CWP Cedar Woods Properties Downgrade to Hold from Add Morgans
FPH Fisher & Paykel Healthcare Downgrade to Neutral from Buy Citi
GPT GPT Group Upgrade to Equal-weight from Underweight Morgan Stanley
HCW HealthCo Healthcare & Wellness REIT Downgrade to Neutral from Outperform Macquarie
HVN Harvey Norman Downgrade to Lighten from Buy Ord Minnett
IAG Insurance Australia Group Upgrade to Equal-weight from Underweight Morgan Stanley
ILU Iluka Resources Downgrade to Hold from Buy Ord Minnett
MGR Mirvac Group Downgrade to Neutral from Outperform Macquarie
NAN Nanosonics Downgrade to Hold from Add Morgans
Downgrade to Lighten from Hold Ord Minnett
RBL Redbubble Downgrade to Hold from Add Morgans
S32 South32 Downgrade to Hold from Buy Ord Minnett
SCG Scentre Group Upgrade to Overweight from Equal-weight Morgan Stanley
SUN Suncorp Group Upgrade to Overweight from Equal-weight Morgan Stanley
VCX Vicinity Centres Upgrade to Equal-weight from Underweight Morgan Stanley
VEA Viva Energy Downgrade to Accumulate from Buy Ord Minnett
WBC Westpac Downgrade to Underperform from Neutral Macquarie

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

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CHARTS

CRN EVN SFR

For more info SHARE ANALYSIS: CRN - CORONADO GLOBAL RESOURCES INC

For more info SHARE ANALYSIS: EVN - EVOLUTION MINING LIMITED

For more info SHARE ANALYSIS: SFR - SANDFIRE RESOURCES LIMITED