Market Digest Friday 10 Dec; hold your breath, big elements to watch inflation, volatility and iron ore

Firstly, investors are holding their breath ahead of key events: Friday’s US inflation data (tipped to show inflation rose 6.8% YOY in November), plus we are also seeing investors pre-empt that the Federal Reserve next week, will map out tapering and interest rate hikes for 2022. A poll by Reuters showed that 30 of the 36 economists expect the Fed to hike rates sooner than thought, rising rates four times from the third quarter of the year 2022 to the second quarter of 2023 (expecting rates to be 1.25-1.50%). This explains why investors took profits from nine of the major 11 US sectors overnight. So growth stocks and sectors that thrive in low interest rates; consumer discretionary, real estate and information technology, saw the most selling as a result. From a stock perspective Tesla fell 6%, Semiconductor giant Advanced Micro Devices, and Etsy-the e-commerce vintage store, both fell 5%, and chip maker Nvidia fell 4%. If you look at Saxo Markets themes that we track, you can also see the most money on a month-on-month basis, has come out of semiconductors, while the other themes we track are posting monthly gains.

Secondly, it’s critical to be aware, the UK Prime Minister announced restrictions to curb Omicron’s spread -  so the UK entered new work-from-home guidance, that could cost the UK economy $2.6 billion a month (according to Bloomberg). Meanwhile, a study by a Japanese scientist found the new variant to be 4.2 times more transmissible in its early stage than delta. As such some companies are responding like Lyft saying their workforce can work remotely in 2022, while Jefferies asked staffers to WFH. This means, travel and tourism stocks could see short term pressure, Australian and US stocks that are exposed to the UK could also see pressure, while oil could see demand weakness here. Plus, it could be time to again rethink exposure to the office property sector, as it’s a likely to remain squeezed, while industrial and logistics real estate remain supported given the likely new shift to WFH.

Thirdly – be aware of volatility. A measure of this, VIX CBOE Volatility Index rose for the first time in four days, rising back above the 50 day average. Volatility has fallen from its 12-month high and remains contained right now as Pfizer said its vaccine can neutralize the new COVID strain Omicron after three doses (two doses offer protection again severe disease). However, keep your ears to the ground. If tomorrow’s inflation data from the US is worse than expected, expect volatility to spike, and growth stocks to see further selling and expect safe haven assets (USD, bonds, USDJPY) to gain more attraction.

Aside from the above – here’s 5 things to watch today;

Firstly - let's go over Fortescue Metals (FMG)

1.FMG’s CEO, Elizabeth Gains just announced she is standing down, right in the thick of iron ore having a murky outlook. It’s not been an easy 12 month for FMG holders. FMG trades 7% lower this year, but it’s a far cry from its all-time high, down 30% from its peak as iron ore price remains in a bear market (down 40% from May).

2. FMG’s trading range has been restricted for two weeks as the world holds its breath to learn more about China’s property sector. FMG shares have broken out above their 50 day moving average but its trading has been even more so restricted over the last three days as its stock hit a key resistance level awaiting news from China. If good news comes, FMG could break out higher. But it looks murky. Majority of FMG revenue (94%) comes from iron ore, and its majority sold to China (90%) (unlike BHP that now diversifies its sales to other countries). And now… we are getting mixed signals from China, making iron ore’s outlook look hazy.

3. On the positive side; week-on-week Australian iron ore exports are up. China has increased its monthly imports of Australian iron ore in November, more than expected. This has supported the iron ore price rising 8.9% this week.

3. But on the negative side - Evergrande, one of China’s biggest property developers was just officially downgraded -labelled a defaulter by Fitch Ratings after failing to meet two coupon payments after a grace period expired Monday. This may now trigger cross defaults on Evergrande’s $19.2 billion of dollar debt. Also at the same time JP Morgan downgraded its outlook for iron ore expecting the iron ore to fall 7% to $92, while Citi expects seaborne iron ore prices to fall 60-$80/t in 2022 on Chinese policy changes.

4. However, Fortescue has been in the news this week, for its shift to a green future. Was this a tactic? A smoke Bomb? Yesterday FMG announced its Future Industries department signed a pact with the Indonesia to explore hydrogen projects. The day before Fortescue Future Industries (FFI) and AGL Energy (AGL) teamed up to explore repurposing NSW coal-fired power plants and turning them into green hydrogen production facilities – to hopefully create renewable electricity production, 250 megawatts (which will generate 30,000 tonnes of green hydrogen per year). AGL and FMG will undertake a feasibility study to repurpose AGL’s Liddell and Bayswater power stations, that both accounted for 40% of NSW’s carbon dioxide emissions. Sheesh.

Secondly  – Australian analyst rating changes to consider

ANZ AU: Reiterated as a Bell Potter BUY, PT $30.00,

RRL AU: Regis Resources Raised to Outperform at RBC; PT A$2.50

EBO NZ: EBOS Raised to Outperform at Credit Suisse; PT NZ$43.14

FMG AU: JPMorgan downgrades FMG from Overweight to Neutral, dropping its PT from $22 to $20.

RIO AU: JPMorgan downgrades RIO from Overweight to Neutral, dropping its PT from 113.00 to 102.

MIN AU:  Reiterated as JPMorgan hold/neutral, dropping its PT from $47 to $40

Thirdly  - what else to watch today

Annual General Meetings: HMC AU, PDL AU, PH2 AU, SOL AU

Other Shareholder Events: AOF AU, HMC AU

THL NZ: Tourism Holdings Halted in NZ Pending Proposed Transaction

ADPZ NA: APG Buys 16.8% Stake in Ausgrid from AustralianSuper

EBO NZ: Ebos Successfully Raises A$642m From Share Placement

Fourthly - Economic news out

8:30am: (NZ) Nov. Business NZ Manufacturing PMI, prior 54.3

8:45am: (NZ) Nov. Card Spending Total MoM, prior 9.5%

8:45am: (NZ) Nov. Card Spending Retail MoM, prior 10.1%

Fifthly - Other news to keep in mind:

Australia Seen Facing Steeper Borrowing Costs If Slow on Climate

RBA Likely to Stick With QE Until Election Over, BofA Says      

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Markets - the numbers

US Major indices fell: S&P 500 -0.7% Nasdaq -1.7%

Europe indices closed lower: Euro Stoxx 50 lost 0.6%,London’s FTSE 100 lost 0.2% flat, Germany’s DAX fell 0.3%

Asian markets closed mixed: Japan’s Nikkei fell 0.5%, Hong Kong’s Hang Seng rose 1.1%, China’s CSI 300 rose 1.7%. Yesterday Australia’s ASX200 fell 0.3%

Futures: ASX200 hints of a 0.14% fall today

Commodities: Iron ore rose 1.3% to $110.50. Gold fell 0.4%, WTI crude fell 2% to  $70.94 per barrel. Copper fell 1.4%

Currencies: Aussie dollar trades 0.4% lower at 0.7146 US. Kiwi down 0.3% to 0.6788 per US$

Bonds: U.S. 10-year yield fell 3.5bps to 1.4871%,Australia 3-year bond yield fell 0.8bps to 0.95%, Australia 10-year bond yield rose 6bps to 1.68%