Archives: Reports
Yesterday saw Gina Rinehart emerge as a significant player in Lynas (LYC) after taking her stake to almost 6% over the last few days, although compared to her net wealth, the purchases were a poultry drop in the ocean. LYC is the world’s largest non-China producer of rare earths, although China still produces almost 70% of the world’s rare earths, with Australia’s ~5% output more of a supporting role. Gina’s move could be largely motivated by her intention to merge US-listed MP Materials (MP US), which has a market cap. of ~$4.3bn, and the local and larger $6bn rare earth player Lynas (LYC), i.e. it would form a relative $10bn rare earth giant.
After a muted open, the market seemed to find its groove, rallying 40pts from early lows into the lunchtime peak before buying stepped away. Shares had given back almost all of the gains by 4pm at which time the UK released their monthly CPI figure which was hotter than expected, sending down for the session, right on the close. There was little diversion between sectors, particularly when you strip out Utilities which was supported by the heavyweights of the area.
Earlier in the year, we felt markets were far too optimistic towards rate cuts, i.e. US futures were pricing in three cuts before Christmas, the best possible outcome and even with the Feds rhetoric continually targeting three cuts, the risks of two remained high. Now, we believe things are swinging in the other direction. The market is now pricing in 1.69 cuts by Christmas; at MM, we’re rarely keen to fight the Fed, and we think two cuts remain a strong possibility, as they remain keen to cut at some stage, i.e. markets are now too pessimistic, ultimately good news for rate-sensitive stocks/sectors.
The local market is now on a 4-day losing streak – its worst run since January (5 sessions) – with today being the worst of the batch. As we said this morning, US stocks are leading the weakness, having fallen for six consecutive days; their worst losing streak since June. Equities were on the back foot early following a soft session overnight, stemming from strong-than-expected retail sales numbers, which put pressure on rate cut expectations. Early buyers were hurt today with the market not “feeling right all day”, come the close, 92% of the ASX200 finished down, and not surprisingly, all sectors finished lower today, though there was some relief late in the session as the index closed 27pts / 0.35% off the lows.
The London Metal Exchange (LME) has banned the delivery of Russian metal following tough sanctions imposed by the US and UK. The LME is a central market for metals such as aluminium, copper, and zinc. If the supply taps are turned off, prices will likely rise as they did overnight, e.g. over 90% of the aluminium on the LME is of Russian origin. However, prices have a tendency, just like water, to move in the path of least resistance and with plenty of buyers still happy to take delivery of Russian metal, by whatever means, advances are likely to be controlled in nature, assuming they do occur.
An escalation of aggression in the Middle East over the weekend was the main cause for concern today, weighing on the local market from the get-go. The weakness didn’t cause any contagion though, equities seemed pretty well supported after hitting a low just before midday, i.e. panic didn’t set in and traders are still using dips to edge into the ASX. Energy was the main winner today, that was despite Oil markets giving back some of the gains seen on Friday night. Materials were also surprisingly well-supported thanks to US imposing further sanctions on Russian commodities, a trade we are well-positioned for.
Iran and a number of its allies launched a large-scale drone and missile attack upon Israel on Saturday night in retaliation for a suspected Israeli strike on an Iranian diplomatic complex in Syria. The prospects of a full-blown conflict in the region have increased dramatically over the last week, with at least nine countries involved in Saturday’s conflict, projectiles fired from Iran, Iraq, Syria and Yemen were downed by Israel, the US and France, as well as Jordan. Following Iran’s attack, the U.S. pledged “ironclad” backing for Israel, but President Joe Biden made it clear the US would not participate in any offensive operations against Iran.
The ASX200 edged higher last week even though eight of the eleven main sectors closed lower. The influential Resources Sector’s strong performance allowed the local market to eke out a +0.2% gain, while the rate-sensitive Real Estate Sector led the declines, ending the week down -2.7%. Investors had to weigh up some very conflicting news flow on the US inflation front, with a strong CPI on Wednesday night denting hopes of three rate cuts before Christmas before a tame PPI soothed inflation concerns, which was helped by ongoing dovish commentary from a number of Fed officials, both past and present.
A choppy, range bound session on the ASX today with little conviction in either direction as we head into the weekend, and the start of School Holidays in NSW which leads to weaker volumes across the market.
We are adding a new position to the Active Income Portfolio
