What is happening?
Dip buyers swoop in ahead of Thursday’s Fed meeting. Since December 2021 we've seen investors aggressively selling down high value stocks ahead of rates rising (3-4 times in 2022), with expectations the US central bank will pave our rates rises on Thursday. On Monday the broad S&P500 (SP500.I) fell 4%, but ended up 0.3% up with traders noticing the index and many profitable companies have been in oversold-territory from a technical perspective. The Nasdaq 100 (USNAS100.I) plunged 4.9% lower before ending Tuesday 0.6% higher. But if you are 'dip-buying' US stocks, be careful as markets tend to fall after the Fed’s first hike of the cycle; S&P500 traditionally falls 6% in three months after first 1st rate hike.
Netflix (NFLX) was trading about 8% lower on Monday but after retailers bought-the dip intraday, Netflix ended 2.6% down. Netflix shares plunged to a two-year low last week, on a disappointing outlook for the year. From a technical perspective Netflix shares could be in oversold territory; so expect 'dip buyers' to enter the market again. But beware; the fundamentals indicate Netflix’s subscribers and revenue will growth slow, yet headline revenue could likely rise to a record in 2022.
Aussie share market (ASXSP200.I) fell 2.9% at 1pm AEST, taking the market lower for the third session, with the ASX200 now 9% lower than its record high. The market appears to be oversold from a technical perspective and also hit a key support level and bounced off the low of the day (6,921). Ultimately, depending on what goes on overnight, and on Thursday (the Fed meeting), we could see 'dip-buyers' re-enter the ASX200 at these levels. Note, the ASX will be closed on Wednesday January 26 (Australia Day public holiday). ASX Trading resumes Thursday January 27. That means, the ASX200, will react the Fed’s meeting outcome, on Friday. The other major catalyst to watch? The RBA hold its next interest rate meeting Tuesday, February 1; with traders expecting hints of when rates will rise in Australia.
Australian Inflation and interest rate update. Today’s closely watched inflation data showed prices are rising far more than expected, with prices rising at their fastest pace since 2008. The Consumer Price Index (CPI), a key inflation measure, measuring price rises of a ‘basket’ of goods and services, surged 3.5% year on year, vs 3.2% expected YOY in the December quarter. That’s far above the RBA target (of 2-3% year on year). Petrol was the biggest contributor, fuel prices surged 32% YOY, which is the biggest jump since 1990 and takes fuel CPI, to a record high. New dwelling prices also surged amid rising material and labour costs. This surprises markets, so Australia’s benchmark 3-year bond yield jumped 0.9% to 1.44% (to its highest level since April 2019), while the Australian dollar extended its advance to 71.66 US cents. And now, the ASX is now pricing in a 0.25% interest rates rise by May, with a total of four interest rate hikes in 2022. For today's interesting charts from the Australian Bureau of Statistics, see below. **
New China stimulus supports commodity prices, commodity stocks and Hong Kong’s market. The Hang Seng (HK50.I) –is the best performing market globally, up 4% year to date, despite trading 1.6% lower on Tuesday. Yesterday China central bank cut interest rates for the third time this month and injected 150 billion Chinese Yuan into the banking system. Earlier this year, China also pledged or started 3 trillion yuan of infrastructure projects. This supports China’s economy growing and its property sector recovering from its recession. So far YTD: The Hang Seng’s Finance sector, up 11%, while its Property Sector is up 8% with investors betting China’s government will pledge even more stimulus and support these sectors roaring back in 2022, following a negative 2021.
What to watch
When will ASX tech stocks bounce? Probably not yet. Zip (Z1P) shares rose 2% earlier on confirming it will potentially take over US competitor Sezzle (SZL), which is listed on the ASX. SZL shares today rose 19% on the news. Meanwhile, on the flip slide, ASX tech heavyweights; like accounting software business Xero (XRO) and logistics tech giant WiseTech (WTC) appear to be oversold from a technical perspective, while both tech giants are tipped to report higher profits in 2022. Also trading lower, ASX new comer, Block (SQ2) formerly Square who took over Afterpay. SQ2 continues to fall after listing, and its shares hit a new all-time low as its outlook remains slightly patchy amid its move into blockchain. Broadly, Australian Tech stocks, tracked by the ETF ATEC (ATEC) for example, are down 22%, with sector moving lower ahead of rate hikes. The tech sector appears to be oversold from a technical perspective. However, the next catalyst to watch will be what happens with rate hikes by the Fed (Thursday) and RBA (next week).
The energy crisis continues; Crude oil (OILUSFEB22 & OILUKMAR22) is 10% higher this year however fell 2% to US$83.85 overnight on profit taking and as the US dollar rose to a two-week high. Oil holds 7-year highs and could rise to $100 in the second half of this year as; 1) Russia Ukraine tensions remain - fueling fears of a supply disruption, plus 2) 14 out of the 18 OPEC oil supply nations are still failing to meet production targets -so there is a daily/monthly oil shortage. And lastly, 3) there’s a cold snap in Europe, Canada, and China so oil (and heating) demand is rising. Follow our Head of Commodity Strategy for detailed analysis.
Iron ore price futures (SCOF2) are steady, with iron ore trading at $132. Iron ore prices are up 43% from November lows, supporting iron ore stocks. However, please beware China will likely heavily slow down iron ore orders due to Lunar New Year holidays and Beijing Olympics kicking off. However beyond March, iron ore orders will slowly pick up again. So if you’re playing the long game, beware of a potential pull back before iron ore could move higher up again. From a technical perspective iron ore still needs to close above $133, to indicate it could rise to $150.
ASX Reporting season results out today: Codan (CDA) shares opened 14% higher after the mining tech business announced 1H net profit will be 21% higher than the same time last year (with profit of $50 million expected). Fortescue Metals (FMG) reported a 3% rise iron ore shipments to a record in the second half of FY22, despite Chinese steel production falling from its record. Fortescue Metals says it will ship between 180-185 million tonnes of iron ore in FY22 while costs will be slightly higher than expected, between US$15 to US$15.50 per wet tonne (versus $15.09 estimated) due to rising labour rates and diesel costs.
Rio Tinto (RIO). Got a clearway for its major copper project in Mongolia going ahead after years of disputes. It will be a flagship project for Rio involving a US$7 billion mine expansion of the Oyu Tolgoi copper project in Mongolia. It’s good news, following last week’s disappointment where the Serbian government blocked its US$2.4 billion lithium mine being built there. In Mongolia, underground undercutting, will start in the coming days, which unlocks the most valuable part of the mine. First sustainable production of copper and other metals occurs the first half of 2023, and will put the Mongolian mine on track to be a top five global copper producer by 2030.
BHP (BHP). Today ASX fund managers and ETF providers started to increase their majority holdings of BHP ahead of the BHP UK listing unwinding, and moving to the ASX listed BHP by close of trade Friday January 28, 2022 (subject to final court approvals). BlackRock increased its holdings to 7%, JPMorgan increased its holding to 7.6%. BHP is due to stop trading in the FTSE 100 and the UK will lose its third biggest stock by Monday January 31. On the ASX, BHP’s weight of the market will grow from 6% to 10%.
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**Interesting charts reflecting our thinking, that inflation will likely rise as oil rises;
- Fuel prices vs CPI % change. Graph 1 - shows CPI could rise to record if the oil prices continue to rise.
- Petrol prices rise over 30% year on year, taking Australian inflation to a 14 year high (Middle chart)
- Petrol prices rose to a record, and have lifted in line with CPI since records began (Graph 2).