APAC Market Digest Feb 16: Normalcy yet gold buying mounts, Iron ore down 12% ahead of China buying more

Written by APAC Strategists Jessica Amir in Australia and Redmond Wong in Hong Kong.

What’s happening in markets?

• The Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I). Tuesday was a rebound day, the S&P500 gained 1.6% the Nasdaq surged 2.5% on news that Russian President Putin signaled that there can be a diplomatic solution to Ukraine, while he pulled some troops back from the border. However risk remains.. as markets hold their breath for the Fed to rise interest rates. Sophisticated investors and fund managers are also cautious as they think a US recession could be breathing down markets neck, as bond yields are rising and could even invert in 2022. A inverted yield curve, for example is if the 2 year yield rises above the 10 year yield on U.S. Treasuries. Historically, it indicates a US recession is coming.

• Commodities: Crude oil (OILUSMAR22 & OILUKAPR22) retreated from its 7-year high, falling back to U$$92.41, where it found support. Safe haven commodity, Gold (XAUUSD) lost traction as certainty returned to markets. We are still long-term bullish on gold as a safe haven. And we’ve seen buying into gold and gold stocks like Newcrest (NCM), Northern Star (NST), Evolution (EVN), Regis Resources (RRL), Resolute Mining (RSG), OZ Minerals (OZL) pick up over the last three weeks (taking these stocks off their three week lows), given Gold has a history of providing better returns than equities, when the Fed rises rates. 

• The Australian share market ASX200 (ASXSP200.I) rose 0.5% as a 1.pm Sydney time today, erasing Tuesday’s fall and put the Aussie share market back on track to close higher for the third week. The next key level to watch is to see if the market can rally back to a key resistance level and its 50 day moving average, 7,291 points. If global sentiment continues to improve, and better than expected local company news is released amid earnings season…then the Australia share market could extend its technical uptrend. Today most of the sectors are higher with Healthcare up the most, and Materials and Energy lagging. Shares in CSL (CSL), the world’s biggest blood therapy business jumped 6% after noting a big turnaround in operations in the last six months and amid CSL forecasting plasma collections to rebound - which is vital as it supports its biggest revenue division. As for stand out shares across the board, lithium darling Liontown Resources (LTR) shares rose 17% after inking an agreement with Tesla, to sell its lithium spodumene to the EV giant, for an initial five years. Shares in global wine giant Treasury Wine Estates (TWE) rose 12% after reporting better than expected results after pivoted to selling more wine the USA, offsetting a decline in Chinese shipments

• Hong Kong’s Hang Seng (HK50.I) and China A shares: During Asian hours yesterday, the Hang Seng fell 0.8%, continued to be pressured by the prospect of US monetary normalization and tension in Ukraine. South-bound flows registered a net outflow of HKD1.5 billion. Financials and energy stocks fell and semiconductors did well. SMIC (981.HK) rallied 1.7%. In A-shares, bargain hunting emerged in EV, solar, tech and healthcare and CSI 300 went up 1%. After market close, news of de-escalation in Ukraine brought about a relief rally through the U.S. session. Hang Seng Futures and ADRs (e.g. BABA.US +3.6%) rallied in overnight in U.S. hours. Air China (753.HK) and Eastern Airlines (671.HK) released traffic data with passenger traffic down 0.7% and 2% YoY in January respectively. Chinese President Xi pledged support to Hong Kong in containing the spread in COVID

What to consider

• Fortescue Metals (FMG); the world’s fourth biggest iron ore exporter reported results in line with expectations, declaring a $0.86 interim dividend ($0.858 was expected) and FMG declared its profit fell 32% from a year earlier to US$2.77 billion (slightly ahead of expectations). FMG says it’s facing growing cost pressures and increased investor scrutiny of its management of environmental, social and governance issues. Fortescue set aside 10% of annual profit for investment in green energy projects via its Fortescue Future Industries division, expecting to fork out $400-$600 million.

• Block (SQ2) formerly known as Square (and who took over the ASX tech giant, Afterpay) has seen its shares slide since debuting on the ASX. SQ2 shares started to B-line up, setting higher-highs and have now rallied off their all time low and above the 30-day moving average for the first time, finding support at $158.85. Several reasons are behind this, firstly Bitcoin rebounded above the $44,000 level (this is important as 47% of Square’s sales are from Bitcoin). Meanwhile Block’s business seems to be increasingly adopted. 84% of customers surveyed by Square say they preferred contactless payments and 84% of customers found shopping more ‘enjoyable’ via contactless payments. 94% of restaurants also offer contactless payment options.

• Iron ore (SCOH2) futures traded in lower in Singapore falling 0.4% to $135.35, taking is four day pull back to 12%. It comes as Beijing ramped up its campaign to stop prices from overheating, before the government rolls out demand-boosting stimulus this year. The steel making ingredients price is up 60% from November last year. This week, several iron ore companies received a warning about speculation and hoarding at a meeting with Bejiing regulators. The iron ore technical indicators suggest the price could retrace back to $120, near its 200-day moving average, before possibly extending its long term uptrend in line with Chinese stimulus and relaxing of the steel emissions targets.

• Asian markets: In line with market expectations, yesterday the PBoC lent out RMB 300 billion (including roll-overs) and RMB 10 billion via the Medium-term Liquidity Facility (MLF) and 7-day reverse repo respectively at the same interest rates as in January. While the Chinese central bank is very much likely to continue to loosen its monetary policies in support of growth, its steps will remain measured. One notable observation from the PBoC’s Q4 Monetary Report, it reiterated that the central bank would not “flood the whole economy with liquidity irrespectively” but adopt a targeted approach in “supporting essential industries and the weak links of the economy”. This statement of caution was omitted in its Q3 Report. Moreover, as the interest rate gap between China and the U.S. has been closing, the PBoC seems taking a pre-emptive stance to move its previous focus of “policy independency” to lower priority from the policy framework section (as previously in its Q3 Report) to under the exchange rate policy section towards the end of the Q4 Report. This cautions us that the window of easing by the PBoC may be somewhat constrained by the US-China interest rate gap and the direction of the renminbi. 

• Economic news: In China China PPI and CPI came in below expectation at +9.1% (vs consensus estimate +9.5%, last +10.3%) and +0.9% (vs consensus estimate +1.0%, last +1.5%) respectively. Tomorrow in Australia, all eyes will be unemployment data.

Trading ideas

Australian rating changes to considerfor ASX stocks upgraded; 

• Atomos (AMS): Rated New Overweight at Barrenjoey; PT A$1.78.
• Lifestyle Communities (LIC): Raised to Buy at Canaccord; PT A$19.50.
• Seek (SEK): Raised to Buy at Jefferies; PT A$37.52.
• Temple & Webster (TPW): Raised to Buy at Goldman; PT A$12.65.
• Sims (SGM) Cut to Underperform at Jefferies; PT A$14.40.
• Temple & Webster (TPW) Raised to Buy at Goldman; PT A$12.65

Australian rating changes to consider for ASX stocks downgraded-

• Sims (SGM AU): Cut to Underperform at Jefferies; PT A$14.40

Written by APAC Strategist : Jessica Amir in Australia and Redmond Wong in Hong Kong.

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