The Monday Report – 17 May 2021

This story features WHITEHAVEN COAL LIMITED, and other companies. For more info SHARE ANALYSIS: WHC

By Greg Peel

That was inevitable

China finally took steps on Friday to curb runaway iron ore prices which are damaging its economy. The local government in Tangshan – China’s steelmaking heart — also warned its steel mills to maintain market order and safeguard normal operations.

The local government said it would look into illegal behaviour including market manipulation, spreading rumours and hoarding, and would punish and suspend businesses found guilty. Chinese futures exchanges have joined in by raising trading limits for iron ore and increasing fees for steel and coking coal.

Beijing has been attempting to reduce steelmaking capacity to support emissions reduction but to date has not succeeded. The problem is elevated demand for steel, which is sufficient to raise steel prices to match iron ore and coal prices, such that margins are not impacted. Reduce steel capacity and steel prices can only rise further, allowing more scope for iron ore price gains.

Still, spot iron ore fell over -10% in Singapore on Friday, having peaked last week at a record US$237/t. In reality, not a lot of damage was done given the recent price surge, although locally the materials sector fell -1.2% to be the only sector to close down on the day.

This despite Whitehaven Coal ((WHC)) topping the index with a 9.2% rally, following upgrades to Buy from Macquarie and Credit Suisse. All seven FNArena database brokers covering the stock now have Buy or equivalent ratings.

Otherwise, the ASX200 followed the bounce on Wall Street, led out by energy (+1.7%), consumer discretionary (+1.3%), consumer staples (+1.2%) and the banks (+1.0%).

Energy rebounded as the Colonial pipeline stared flowing again in the US and oil prices responded accordingly. Discretionary saw budget-related buying after analysts spent the week selecting their budget winners. Eagers Automotive ((APE)) rose 3.9% and Aristocrat Leisure ((ALL)) 2.1%.

Staples was aided by ongoing buying in Treasury Wine Estates ((TWE)), which added another 6.1% post Thursday’s update, while the banks followed up their US counterparts, as usual. Commonwealth Bank ((CBA)) hit an all-time high. So much for the Royal Commission.

Xero ((XRO)) continued to see selling post result (-4.2%), although the tech sector just managed to stumble over the line (+0.1%), while the losers’ board was otherwise dominated by other miners of lithium, nickel and rare earths, possibly fearing wider crackdowns in China.

The ASX200 opened comfortably above 7000 on the day and held on to the gain until some Friday afternoon selling emerged.

With Wall Street surging back again on Friday night, our futures were up 48 points on Friday night, which suggest we might test 7100 again today.

Fears Ease

All three major US indices closed last week down over -1%, but it could have been worse but for Friday’s gains, which can be attributed to various factors.

Thursday night’s rebound had been wobbly but definitive by the end of the session. The past two pullbacks in February (bond yield spike) and January (GameStop madness) had seen similar percentage losses, and indeed since the covid bottom Wall Street has been unable to post any meaningful correction despite constant claims of overvaluation.

US retail sales rose 0.0% in April when economists had forecast 0.8%. In any other era 0.8% would be seen as a solid jump, so it was a bit of a surprise. But sales jumped a full 9.8% in March after Americans received their stimulus cheques, so a pull-forward of demand is obvious.

It goes somewhat to easing inflation fears, given part of the April inflation surge was attributed to pent-up consumer demand. Friday night’s fortnightly Michigan Uni consumer sentiment index surprisingly fell to 82.8 from 88.3 end-April, when economists had forecast a gain to 90.1. It appears economists have been getting a bit carried away.

These results fall into the “bad news good” category, when normally they’d be construed as bad, because of last week’s inflation shock. The US ten-year yield fell -3 basis points to 1.63%.

A 0.7% jump in industrial production in April, albeit shy of 0.8% forecasts, is still good.

More good news came in the form of the CDC declaring anyone who has been fully vaccinated no longer has to wear a mask. Airline stocks, in particular, jumped in relief.

So it’s again a case of “as you were” on Wall Street, at least until the May CPI data (we’ll also see April PCE in between). Having recovered from the April CPI shock, Wall Street appears less likely to again be shocked if May brings similar numbers.

Having spiked up to 27 earlier last week, the VIX volatility index on the S&P500 has fallen back below 20, indeed down to under 19, which represents somewhat of an “all clear” for the ongoing rally.

Having underperformed all week, the Nasdaq unsurprisingly outperformed, but buying was otherwise across the board, in both value and growth.

Commodities

One move rather stands out in the table above.

Beyond that, gold had a good session thanks to lower US yields and a lower greenback on the retail sales number, while the oils have recovered from the pipeline closure.

Alas, the plunge in the iron ore price was not enough to impact the Aussie, which is up 0.7% on the greenback’s fall. It’s hard to see an iron ore pullback lasting too long. A swift shake out of the speculators is always healthy.

The SPI Overnight closed up 48 points or 0.7% on Saturday morning.

The Week Ahead

China will report April industrial production, retail sales and fixed asset investment numbers today.

The US will see housing sentiment and the Empire State activity index tonight, housing starts tomorrow, the Philadelphia Fed index on Thursday and existing home sales on Friday. Flash estimates of May manufacturing PMIs are due across the globe on Friday.

The minutes of the last Fed meeting are out on Wednesday, but pre-date the CPI release.

The minutes of the May RBA meeting are out tomorrow.

Japan and the eurozone report March quarter GDP numbers tomorrow.

There’s a slew of corporate earnings results out locally this week, along with a handful of AGMs, which I will note daily.

Today sees results from Elders ((ELD)), Incitec Pivot ((IPL)) and Temple & Webster ((TPW)).

Macquarie Group ((MQG)) goes ex today.

The Australian share market over the past thirty days…

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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