Market digest Tues 21 Dec: EV stocks slide on stimulus block, Pilbara Minerals cuts forecasts, iron ore surges 4%, RBA ending tapering in May
Australian Market Strategist
Summary: Bidens $2 trillion green-energy program got an amber light, shaking EV stocks, as there is likely to be no $12,500 US incentive. Iron ore extends its rally up 3.9%, trading at $115.85, a new two-month high on China increasing its buying. The RBA says it will stop bond buying in Feb or May, which will pressure long term interest rates to rise. Plus, the three elements to watch today.
Firstly - what you need to know now and consider
US stocks started their holiday week lower, with the US benchmark S&P 500 falling below its 50 day-average, seeing its biggest three-day drop since September. All three major indices fell over 1%, despite thin holiday volumes. The dollar mostly rose against the G-10 basket, while money continued to come out of bonds pushing up the US 10-year yield to 1.42%. So what’s going on? Three important elements are a play;
Firstly--traders are also contenting with month and year end – repositioning portfolios.
Secondly; Biden’s top domestic priority, a $2 trillion green-energy program, got a huge amber light on Sunday. A ‘no’ vote from Senator Joe Manchin. Meaning… there will likely NOT be an EV incentive for up to $12,500 per vehicle that would push EVs. And $7.5 billion will likely NOT be allocated to EV chargers throughout the US (which was the infrastructure bill allocated), given Senator Manchin said he would vote ‘no’ in the 50-50 Senate in the new year. So...now stocks start to price that in. EV start-up stocks already did on Monday; Lordstown Motors, Faraday Future and Nikola, all fell 7% Monday. Rivian shares hit a new all time low after falling 30% since their IPO.
So given there will be less stimulus in the US in 2022, economic growth will likely slow, right? As such, Goldman Sachs reduced its US economic growth after Manchin blindsided Biden’s $2 trillion package (lowering GPD by 1% for the first quarter of 2022, from 3 to 2%), while UBS said its outlook for equities won’t change.
What does this mean for EV stocks (with less US stimulus). EV stocks that have run on sentiment alone, not on earnings and revenue growth may be finding it tough. Just look at Rivian's shares, hitting an all time low. As growth stocks continued to get squeezed, with the markets pricing in - interest rate rises next year...investors ought to take heed and consider quality EV names (those with strong balance sheets, as opposed to chasing meme stocks). For a list of EV stocks, see the Saxo Basket basket for ideas.
And Thirdly - World Health Organisation said Omicron is infecting the vaccinated, while Moderna says its booster can protect against Omicron (well it did in the lab setting, anyway). Hospitalisations in London surged 34% in a week and US schools closing jumped 82% on the week. In Australia, COVID19 cases surge to a record and Aussies may soon need to get a 3rd COVID19 shot to be fully vaccinated. So this is causing uncertainty in markets.
What to watch now
Aussie market trades 0.4% higher after 1.15pm.
Best performers: Nanosonics NAN up 5%, Washington H. Soul Pattinson SOL up 4%, Gold stocks like Regis Resources RRL, and Sandfire SFR are up over 3%. Stay home beneficiaries stocks; Breville BRG, and Inghams ING are also leading the ASX200.
Worst performers are in lithium, or are working on supplying battery minerals to the EV sector; Pilbara Minerals PLS is down 9% and Chalice CHN is down 3%.
Pilbara Minerals PLS: the ASX’s biggest lithium company, $8 billion in size, has been one of this year’s best performers, up 188%. However today Pilbara Minerals cut its spodumene concentrate production and shipments forecast for 2022 due to due to delays with commissioning - citing an industry wide shortage of skilled workers in construction production and maintenance in WA. The company also cut forecasts due to plant shutdowns at both its processing plants in WA. On the positive side, Pilbara's sales have been rising since 2018, and it now has positive cash from operations. Pilbara Minerals also noted that the lithium market conditions remain very strong, with high demand and constrained supply leading to record product pricing, which is still trending higher.
Iron ore charged 3.9% on Monday to $115.85: a brand new two-month high growing hopes of a recovery in steel demand in China. According to Fastmarkets MB, the benchmark 62% Fe fines imported into Northern China were changing hands for $123.51 a tonne during afternoon trading, up over 3% compared to Friday’s closing, which was its highest since October 21. The iron ore price has continue to push above its 50-day moving average. Iron ore crossed its 50DMA on December 7, rising above the 50-day for the first time since August all thanks to China’s banks cutting interest rates. While talk is positive and trade are picking up iron ore stocks, there is a bit of a cloud hanging over the sector… and that is there is rising imported iron ore stockpiles, which hit their highest level last week since mid-2018. Also don’t forget steel production curbs that are expected to be enforced as China aims for smog-free skies for the Beijing Olympics in February.
Reserve Bank: Australia’s central bank, the RBA released its meeting minutes today from its December interest rate meeting – saying tapering (bond buying) will could end in February if better-than-expected progress was made toward its employment and inflation goals. However if progress was lower, it would review tapering in May. The RBA said this reflects its expectation that the economy would continue to bounce back… while the RBA also reminded us that although the omicron variant was new source of uncertainty, ‘it was not expected to derail the recovery.” Markets are pricing in three (3) interest rates hikes next year. The takeaway… bond yields will likely rise as tapering ends… the flight to quality will be on for young and old.
Fortescue (FMG AU): Crosses Above Bollinger Band
Soul Pattinson shares surged 3%, rebounding after it was in a technical RSI Oversold range.
Companies trading below 20/50/200 DMAs, Bollinger lower band with RSI below 30: CIM, CSL, MFG, SOL
Largest increase in total short positions Collins Foods, Wisetech, Charter Hall Retail REIT
Largest decrease in short positions: Afterpay, Carsales, Allkem (According to ASIC Bloomberg).
Secondly, companies with Australian analyst rating changes
ALU AU: Altium Rated New Overweight at Barrenjoey; PT A$50
APX AU: Appen Rated New Overweight at Barrenjoey; PT A$15.40
HDN AU: HomeCo Daily Needs REIT Rated New Overweight at JPMorgan
MFG AU: Magellan Financial Raised to Neutral at Evans & Partners Pty Ltd
NAN AU: Nanosonics Rated New Overweight at Barrenjoey; PT A$7.30
PME AU: Pro Medicus Rated New Neutral 1 at Barrenjoey; PT A$60
TNE AU: Technology One Rated New Neutral 1 at Barrenjoey; PT A$12.65
Thirdly, company news
Annual General Meetings: AEE AU, HLG NZ, ICT AU, WCG AU
AGL Energy: Australia State Approves Gas Plant to Replace Aging Coal Station
Cimic Halts Trading After Plunging on Report of Unpaid Wages
Santos: Said to Have Given Thought to Potential Spin Off of Oil & Gas Infrastructure Assets Worth About A$5b: Australian
APA Group APA: ACCC Decides to Discontinue Probe Into Proposed APA-AusNet Deal
Nine Entertainment NEC:: In NRL Broadcast Rights Pact for 2023-2027
Nine Entertainment in NRL Broadcast Rights Pact for 2023-2027
Markets - Overnight numbers
ASX200 futures indicated the market would open flat at 7,191.00
In the US: The Dow Jones fell over 430 points, or 1.2%. The S&P 500 index fell 1.1% and the tech-heavy Nasdaq fell 1.2 per cent. Europe: FTSE 100 fell 1% to 7,198. The Germany DAX fell 1.9%.
Commodities: Iron ore futures are up 1.6%. Gold spot down 0.4% to $1,790.98. Brent futures down 2.2% to $71.89/bbl
Currencies: USD index, the DXY fell 0.03% but trades but holds July 2020 highs. Euro up 0.3% to $1.1279. Aussie down 0.2% to 0.7113 per US$. Kiwi down 0.5% to 0.6716 per US$
Bonds: U.S. 10-year yield rose 1.5bps to 1.4174%, Australia 3-year bond yield fell 4bps to 0.93%, Australia 10-year bond yield fell 5bps to 1.54%
Quarterly Outlook Q2 2022
Quarterly Outlook Q2 2022: The End Game has arrived
- Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
Productivity and innovation have never been more importantAs the world economy hits physical limits and central banks tighten their belts, could equities be facing a 10-15% downside?
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.