The Monday Report – 20 September 2021

This story features FORTESCUE LIMITED, and other companies. For more info SHARE ANALYSIS: FMG

By Greg Peel

Material Weakness

It started with Beijing’s clampdown on steel production in the name of the environment, supposedly, and was exacerbated by the gradual collapse of China’s biggest property developer, Evergrande, owing $400bn to state-owned banks. Throughout the earlier stages of the plunge in the iron ore price, the big miners were supported ahead of going ex-dividend.

Thereafter they still saw some support as iron ore fell below the production cost for higher-price producers but on Friday, the levee broke.

Evergrande went bankrupt, the Chinese iron ore futures price dipped below US$100/t and brokers moved to downgrade the big miners, including UBS downgrading Fortescue Metals ((FMG)) to Sell.

Fortescue was the worst performing index stock on Friday (-11.5%) as the materials sector dropped -4.0%. BHP Group ((BHP)) fell -3.7% and Rio Tinto ((RIO)) -4.7% while Mineral Resources ((MIN)) lost -8.5% and Mt Gibson Iron ((MGX)) -10.5%.

Falls among material names were not reserved for iron ore. Iluka Resources ((ILU)) dropped -8.8% and Whitehaven Coal ((WHC)) -6.8% while gold miners were again hit on another failure for the gold price.

There was contagion among oil & gas companies, with energy dropping -1.3% and utilities -1.9%. Beleaguered AGL Energy ((AGL)) fell another -6.6%.

The only non-resources company on the top-five losers’ board was Iress ((IRE)), which fell -10.7% after private equity suitor EQT decided its original thesis didn't hold up, having conducted due diligence up until then.

Outside the resource sectors the next worst fall was in consumer staples (-0.7%) but all of discretionary, healthcare, industrials, property and technology closed in the green, the latter by 2.1% on the back of a rise in the Square share price.

Things aren’t looking much rosier today, with spot iron ore falling another -5% on Friday to be down -22% for the week and holding, for now, right on US$100/t. Base metal prices were fairly quiet on Friday, as was gold, but silver fell -2% and the oils are weaker.

With the S&P500 down -0.9% on Friday night our futures were down -0.6% on Saturday morning.

Will the reopening of the Australian economy, presumably before Christmas, be enough of a boost to counter the end of the resource boom?

There is now talk that Australian agricultural exports may be the target of Chinese retaliation over the submarine fiasco. So we bought some subs – what’s your problem? How many do you have?

I’d probably be steering clear of French restaurants for the time being, nonetheless.

Double, double

Australia saw its September quarter equity derivatives expiry on Thursday and on Friday night it was Wall Street’s turn, in what’s known as quadruple witching. It’s invariably a very high volume session, coinciding with index rebalancing at the bell, and typically evokes volatility.

Commentators had been calling out approaching expiry as to perhaps why Wall Street in general had been volatile as last week progressed, so the question is one of how fundamental is the latest pullback? The S&P500 has always bounced off its 50-day moving average, or from just below, in every minor pullback in 2021 and on Friday night again closed a tad below.

But there is also the Fed meeting to be fearful of this week and the wheels are in motion regarding Biden’s planned capital gains tax increase, which potentially is driving investors to sell ahead of any success with that endeavour, although the counter argument is what do you do with that money?

You don’t put it into bonds, apparently, with the US ten-year yield rising another 4 basis points on Friday night to 1.37%, which appears to have sparked selling in Big Tech.

Facebook is again under pressure (-2.2%) after a leaked internal document confirmed management knew Instagram was “toxic” to teenage girls but elected to do nothing about it. But don’t fear, there’s going to be an inquiry.

US consumer sentiment, as measured by the twice-monthly Michigan Uni survey, ticked up slightly in the first September reading to 71.0 from a prior 70.3, but it’s still close to the ten-year low measured in August (and bearing in mind 100 is the line between pessimistic and optimistic).

On Friday night the FDA voted against 16 year-olds and over needing a vaccine booster, ultimately deciding they were only suitable at this time for those over 65. Not enough evidence at this stage is the call, despite the likes of Israel and the UK moving ahead with boosters for all.

The vaccine producer stocks all took a hit on Wall Street but in the end healthcare was the only S&P sector to close in the green (just). The biggest falls were in tech, materials and utilities.

So we move on into Fed week. Depending on your interpretation, the past two big economic data points (weaker CPI, strong retail sales) suggest the Fed should be raring to go with its taper, but the perennially dovish Jay Powell may yet have other ideas.

Commodities

Largely covered above. Can iron ore hold US$100/t?

Analysts don’t believe it will.

The Aussie is understandably off -0.4% at US$0.7266 but then the greenback continues its move higher, up 0.3%.

The SPI Overnight closed down -47 points or -0.6% on Saturday morning.

The Week Ahead

In a big week for monetary policy, the Fed meets Tuesday-Wednesday, the Bank of Japan meets on Wednesday, and the Bank of England meets on Thursday.

The minutes of the September RBA meeting are out tomorrow.

The US will see numbers for housing sentiment and starts, and new and existing home sales.

Thursday brings flash estimates of September PMIs from across the globe.

Japan and China are closed today, China again tomorrow and Japan again on Thursday.

Brickworks ((BKW)), Soul Pattinson ((SOL)) and Karoon Energy ((KAR)) report earnings on Thursday.

It will be fun times at AGL Energy’s AGM on Wednesday while Suncorp’s ((SUN)) AGM follows on Thursday.

There are a few ex-divs across the week – mostly on Thursday – while Sydney Airport ((SYD)) provides August traffic stats today, for what it’s worth.

The Australian share market over the past thirty days…

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