Rio now in lithium, China manufacturing to contract, Australian budget stocks to watch

What’s happening in equites that you need to know?

• Australia’s share market (ASX200) rose 0.8% on Tuesday (briefing touching 7,480 (its highest level since Jan 13)), after US stocks rose for the third straight day, with the S&P500 up 0.7% overnight. If the ASX200 closes above 7478 points, the market could continue to rally higher from a technical perspective, given the other technical indicators (the MACD and RSI) also suggest further blue sky can be reached. Higher levels for the ASX are being supported by Australia’s commodity sector gaining muscly momentum; with lithium, coal and fertilizer stocks soaring this month, like AVZ, Whitehaven Coal, Liontown, Incitec Pivot, Allkem and Pilbara Minerals up 20-50%. On top of this, the ASX is also supported by the positive shift in sentiment in the US; given the market is expecting a cracking Q1 earnings score card, with record oil and mining earnings expected to be released from S&P500  companies next month. Remember earnings growth drives shares price growth, which supports commodity companies stocks in 2022.

• Asian stocks moved higher on Tuesday morning. Asian stocks benefited from overnight gains in US equities as megacaps moved higher and oil extended its slide in the Asian morning hours, amid demand destruction fears from Shanghai’s lockdown. Russia-Ukraine talks are on watch, but oil prices are still likely to remain elevated even if there is a peace deal, given stock levels remain low. India is buying from Russia, and China could do the same. This could mean higher crude prices to come.

• Wheat prices look poised to stay higher than oil (according to forecast and futures contracts that is).

• Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) Hang Seng Index moved higher Tuesday.  Chinese Internet stocks rose and Hang Seng TECH Index (HSTECH.I) were up almost 2% at the time of writing. Alibaba (09988), Tencent (00700) and Meituan (03690) rose 2% to 4%.  JD Health (06618) rose 13%, after reporting better than expected revenue and earnings. Revenue was 61% higher and non-GAAP net profit rose 104% YoY in 2H21. XPeng (09868) reported higher than expected revenue and smaller loess in 4Q21. The company guides 1Q22 EV deliveries of between 33,500 and 34,000 units and below expectation revenue.  Sunac China (01918) fell as much as 17% after the Chinse property developer said that it would not be able to report results by March 31. 

• The Australian dollar (AUDUSD) is taking a breather for now, at 74.81 US and could see further falls in the short term, as the price of coal and natural gas are pulling back amid China’s lockdowns (as the tiger economy is the biggest consumer of Australian coal and LNG). As long as China is in lockdown in regions, AUD could continue to fall, mimicking the Coal and Gas prices pulling back, as these are Australia’s 2^nd and 4^th biggest exports. Meanwhile, it could be worth watching the Brazilian Real against the US dollar (BRLUSD) as it looks set continue its rally, mimicking the support and higher levels in iron ore and soybeans - two of Brazil’s biggest revenue earners.

• The iron ore futures price (SCOA) is holding above US$152, and shares in mining and iron ore giants remain in their long term uptrends. BHP (BHP) shares are slightly lower at AU$50.58, however BHP shares remain in their long term uptrend, supported by Chinese stimulus and rising demand for iron ore over the longer term, after China dropped interest rates and relaxed its emissions targets.

• Rio Tinto (RIO) has formally moved into lithium. Rio completed its purchase of a lithium project in the tightly held lithium triangle in Argentina for $825 million, following approval from Australia’s Foreign Investment Review Board (FIRB). Rio says, the Rincon Mining project strengthens its battery materials business and positions it to meet the double-digit growth in demand for lithium over the next decade, at a time when supply is constrained.
  

What you need to consider

• The Australian Budget, is to be handed down this evening Sydney time, here are the stocks to watch. The pre-election budget is tipped to show Australia’s unemployment rate will fall to 3.75% this year, its lowest level in 50 years, which is also one of the lowest unemployment rates in the world and G20 countries. Meanwhile a fuel excise and low income one off cash bonus is set to be paid of $250 to help with cost of living, so watch stocks like Coles (COL), Woolworths (WOW), Harvey Norman (HVN), Premier Investment (PMV), Metcash (MTS), City Chic (CCX) and JB Hi-Fi (JBH).  First home buyers are tipped to win, with deposits to drop to 2%, so keep an eye on banks like CBA (CBA), Westpac (WBC), NAB (NAB), Suncorp (SUN), Bendigo & Adelaide Bank (BEN) and Bank of Queensland (BOQ). Infrastructure will also be a winner with $18 billion to be committed, so keep an eye on Adbri (ABR), Lendlease (LLC), Bluescope Steel (BSL) and Boral (BLD). $60 million is tipped to go toward travel and tourism to encourage foreign visitors to return to Australia, so watch Qantas (QAN), Corporate Travel (CTD), Webjet (WEB) and Flight Centre (FLT).  I’d also be expecting further funding to Australia’s commodity sector, to encourage green energy mining technology, so keep an eye on BHP (BHP), Rio (RIO), Lynas (LYC), Allkem (AKE), Pilbara (PLS) and AVZ Minerals (AVZ).

• Keep an eye out for higher volatility for end of quarter. It’s not just end of Quarter but, keep it’s End of Financial Year in Japan on Thursday 31 March 2022, so expect higher volatility as professional investors adjust their portfolios and bring their asset allocations back in alignment.

• Part of the US curve inverted. The 5-year US Treasury yield has vaulted above the 30-year for the first time since 2006. Two-year yields could continue their rise to 2.85% as markets are now pricing in 200bps of rate hikes by the end of the year. Does it signal that a recession is coming? We believe concerns of a recession are unfounded as the long part of the yield curve is not falling but steadily rising, indicating that the bond market is not concerned about an imminent recession. Also, real yields remain in deeply negative territory, keeping financing conditions extremely easy. This week the focus is going to be on the PCE Index and the non-farm payrolls on Friday as strong inflationary and jobs data might provide ground to the Fed to be more aggressive.

• China releasing PMI data this week. China is announcing PMI this Thursday. The market expects calling Manufacturing PMI to go below 50 to 49.8 (last 50.2) and Non-manufacturing PMI to 50.3 (last 51.6).  Caixin PMI Manufacturing will be out on Friday.  Survey expects 49.9 (last 50.4).

• Container Freight Rates from China fell.  The SCFI China Containerized Freight (Export) Index fell again last by 0.8% and the China to Europe Freight Index fell 1.6%, continuing its down trend from last month. Freight rates from Shanghai to Europe and the US West Coast, declined 2.6% and 7.2% according to the SCFI. This may be a sign of softening of Chinese exports.

• The Japanese yen crashed further on Monday. USD/JPY printed 7-year highs of 125+ on back of double BOJ intervention to cap yields offering to buy an unlimited amount of 10-year notes, while the US treasury yields continued to climb. These severe one way move might bring some opposition from the BoJ - it could be verbal but if volatility continues, it could also mean physical intervention.

Trading ideas

• Singapore eases restrictions today. We are looking at a near-full border reopening from the end of this week and this should bring interest in travel related and aviation stocks in the region.
• US and European consumer demand for Chinese goods may have peaked.  We are cautious towards Chinese consumer goods manufacturers that are exposed to the US and European markets, so consider taking profits on these stocks.

Important economic releases this week

• Mar 30: US ADP employment report
• Mar 31: US PCE price index, Japan Tankan Index, OPEC+ meeting, China PMIs, Japan year-end
• Apr 1: Asia Markit PMIs, US NFP

Earnings to watch

In Hong Kong & mainland China; For the rest of the week, major Chinese banks and securities companies report results, along with Chinese property developers, automakers and the leading Chinese lithium developer, Gangfeng. 

• Mar 29: BYD (01121), BYD Electronic (00285), China Construction Bank (00939), Country Garden Services (06098), Dengfeng Motor (00489), Great Wall Motor (02333), Haitong Securities (06837), Innovent Biologics (01801), Powerlong Real Estate (01238)
• Mar 30: Agricultural Bank of China (01288), Beijing Enterprises Water (00371), Changjiang Electric (600584), China Galaxy Securities (06881), CICC(03908), China Vanke (02202), Hair Smart Home (06690), ICBC (01398), Jiangxi Ganfeng Lithium (01772), Postal Savings Bank of China (01658), SF Holding (002352)
• Mar 31: China Overseas Land & Dev (00688), China Resources Land (01109), Shimao Services (00873).

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