Market Digest Jan 18, lithium stocks shine, iron ore stocks rebound on Rio’s outlook

Market Digest Jan 18, lithium stocks shine, iron ore stocks rebound on Rio’s outlook

Equities 5 minutes to read
Jessica Amir

Market Strategist

Summary:  The Australian market trades higher for the second day, moving off its 30 day average, buoyed by gains in lithium with Novonix up 7%, Liontown is up 4%, while retailer JB Hi Fi jumped over 7% after reporting better than expected earnings results. But the news of day is from lithium giant, Allkem expecting the lithium price to jump 80% in the second half of the year, while Rio Tinto reported its quarterly report, expects yearly production to rise across all major commodities. Plus, we dissect how professional investors are investing vs retail, and why to watch iron ore stocks like a hawk at these levels as iron ore has fallen for the third session, and could pull back further before potentially rising again in March.


ASX News of the day

Australia’s second biggest lithium stock, Allkem (AKE) (founded after Orocobre and Galaxy Resources merged) released its quarterly report, announcing higher overall sales, production and shipments in the quarter, while also expecting the lithium carbonate price to rise 80% on the first half of 2022 (to $20,000/t) due limited supply, while it’s observing ‘very strong demand’. This not only supports Allkem’s stock but also the lithium sector, as higher prices imply higher earnings and higher earnings support share price growth. As for Allkem’s flagship lithium mine in Olaroz in Argentina, in the lithium triangle, total sales revenue jumped 68% QoQ and up 149% from the prior corresponding period. Allkem is also expanding the facility and works reached 68% completion, with first production expected in the second half of this year. As a result of the extra work done capital expenditure was raised 10-15% to ($365-$390m); with spending funded from guaranteed funds. Allkem’s other mine, Mt Cattlin in Australia, revenue was 15% lower in the quarter as it shipped 58% less. Also in the quarter, AKE was added the ASX100 Index. AKE shares rose to a record al time high, $11.91 pulling most lithium stocks up with it.  

Rio Tinto (RIO), the world’s second biggest miner, released its quarterly results seeing a 1% a upturn in quarterly exports in the final three months of 2021, while also noting its expects 2022 iron ore shipments to rise as much as 4% (expecting 320- 335 million tons). However Rio says iron ore shipments remain subject to weather and market conditions. The miner also said shipments have not been as strong in the Pilbara due to staff shortages in Western Australia, and delays in starting new mines. As for copper, guidance for 2022, Rio sees mined copper shipments rising from 494 kt 1.2-to 16% (to 500 to  575 kt), while Diamond shipments are tipped to rise as much as 57% in 2022, Bauxite shipments could rise up to 5%, and Alumina shipments up to 6%.  Rio Tinto shares trade 0.4% higher at $110.42, a 4-month high.  

What is happening in markets

US markets were closed overnight for a public holiday. However the next big driver for equity is that earnings season is underway. Earnings are expected show the S&P500 companies grew their earnings by 20%. Remember earnings growth drive share price growth. And better than expected results often result in share price rallies. While inversely, weaker than expected results or forecasts often result in shares pulling back. This week in the US Procter & Gamble and Netflix will be watched on the consumer side and Goldman Sachs and Bank of American will be watched in banking.

Professional vs retail investors, are investing differently

  • Professional investors have been; reducing their positions in tech, high-growth, high-valuation stocks since December, all ahead of the US Fed hiking rates and the fed slowing down bond buying next month.b This has taken sales in these stocks (high value stocks, tech stocks, stocks with little to not profits), to their highest level in 10 years.
  •  While professional investors are also working building diversified portfolios that will benefit from higher inflation and interest rates; with investors putting a lot of money into the Oil and Gas sector in the US, which is why it’s up the most this year (up 23%), while the US Banking sector is up 12%. In Australia, investors have also been doing the same to some extent, the ASX Energy Sector is up 10%, while the Mining sector has also seen a lot of flows and is up 6% (with Pilbara Minerals and Min Res up over 16%).
  •  On the flip side, retail investors have been; buying the dips. For example, gaming chip maker Nvida shares are down 20% from November low. On Friday Nvida shares jumped 1.4%, bouncing off its two month low after falling through key level. The company’s last financials were strong - they generated revenue of $7 billion up 50% year-over-year. That included record gaming revenue of $3.2 billion up 42%. And Nvidia’s gross margin is ticking higher from just under 63% a year ago.

Iron ore price fell 2% on Monday, falling for the third session, what's next? 

  • Fresh wind taken out of the sails of iron ore stocks. Iron ore now trades at $122.92, but holds October highs.

    On Monday; Fortescue Metals (FMG) fell 3%, but on Tuesday FMG trades 1.3% up. On Monday BHP lost 1.1%, and today it erased that and rose 1.5% and trades at $46.85. Champion Iron (touted as the most undervalued) was steady on Monday and trades 1.8% up today. But be careful if you are trading iron ore stocks as they are susceptible of a pull back, before another potential rally again. Why;

  • On the negative side; privately owned Hancock Prospecting (owned by Australia’s richest woman) announced plans to develop a 20 million tonnes per annum iron ore mine in the Pilbara, that would operate for up to five years. And secondly; the iron ore price eased as orders are expected to slow in Luna new year holiday.

  • On the positive side; iron ore orders are expected to pick up after the Winter Olympics games are over, so if you are a long term investor, you could have your time to buy the dip. Iron ore orders are likely to continue to pick up as the PBOC cut interest rates yesterday and the country is ramping up more infrastructure stimulus, all while its economy is growing stronger than expected.

  • For Iron Ore analysis, see the latest here. 

Recent news from China is positive; 

  •  On Monday we learnt China’s economy grew stronger than expected; GPD grew 4% in the fourth quart of the year, vs 3.3% estimate. Although China is slowing down right now and it grapples with lockdowns to offset covid,
  • I personally believe China’s economy could grew 5.5%, this year we’ll likely see more infrastructure stimulus announced, after China  announced or kick-started 3 trillion yuan ($471 billion) in projects just two weeks into 2022.  
  • If you care more about the figures released yesterday from China, here you go; Industrial output rose 4.3% vs 3.7% estimates, Fixed assets investment grew 4.9% vs 4.8%. While retail data disappointed (sales grew 1.7% vs 3.8% expected).

Oil’s bull run continues;

  •  Crude rose trades at over US$84.00, up 0.4% on Tuesday (holding its highest level since November 10). While Oil has already set a new 2022 high, calls getting louder than oil could soon trade at $100 a barrel, as demand is outpacing supply and frantic oil buying is taking place. 
  • On Monday the ASX Energy sector rose 1.4%; Woodside Petroleum - the biggest oil stock on the ASX rose, While Santos, the second biggest oil stock on the ASX rose 2%. Other strong performers in in energy include Whitehaven Coal up 4.3%, Beach Energy up 3.9%

Currencies

  • The Aussie dollar’s has fallen for the 4th session, and trades at a 4-day low 72.04 US cents Which has been a key level of support since late December 2021 when Omicron cases spiraled.
  • The next catalysts for the AUD are the eco news mentioned below, and then of course, WA’s border opening to Australia on February 4 and to internationals on February 5 and if this will occur.  

What to watch this week

  • Company news:
    • Wednesday 19th:  BHP, Lynas, Woodside release sales results. 
    • Thursday 20th: Northern Star, Sandfire release results
  • Economic news; 
    • Wednesday 19th: Australian consumer confidence data is released for January. December new home sales data is also out.
    • Thursday 20th: Australia Employment data will be watched and is expected to show unemployment fell from 4.6% o 4.5% in December, with 30,000 expected to have gained jobs last month.

Potential Trading ideas

  • If you believe iron ore orders will pick up beyond March, you could potentially look at investing in iron ore stocks and buy the dip. But trade with caution. For more on iron stocks on the ASX, read this story. 
  • I’d also consider a position in energy if you already haven’t, given the energy crisis is rumbling on. For more on energy read the latest from our Head of Commodity Strategy

Today’s ASX broker upgrades to peruse

  • ACL AU: Australian Clinical Labs Rated New Outperform at RBC; PT A$6.50
  • CAJ AU: Capitol Health Rated New Sector Perform at RBC
  • HLS AU: Healius Rated New Sector Perform at RBC; PT A$5
  • IDX AU: Integral Diagnostics Rated New Outperform at RBC; PT A$5.50
  • SHL AU: Sonic Healthcare Rated New Outperform at RBC; PT A$47
  • SXY AU: Senex Cut to Hold at Canaccord; PT A$4.65
  • WES AU: Wesfarmers Raised to Add at Morgans Financial Limited
For a global look at markets – tune into our Podcast 

Quarterly Outlook

01 /

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992