The Monday Report – 12 September 2022

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            [4] => ((NEC))
            [5] => ((RHC))
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This story features MINERAL RESOURCES LIMITED, and other companies.
For more info SHARE ANALYSIS: MIN
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Resource Bounce

After a very strong rally on Thursday, driven by expectations the RBA will now slow the pace, a second day of rally was not necessarily on the cards on Friday after slight gains on Wall Street overnight. Indeed the futures were undecided on Friday morning, closing unchanged.

But that was to ignore a bounce overnight in most metal and mineral prices, including 3% for iron ore, and a slight recovery after a couple of days of falls for oil prices.

Thus on Friday, the materials sector rallied 3.3%, aided by 1.1% for energy.

And there’s your 45 index points. There was added excitement nonetheless when Mineral Resources ((MIN)) announced it was considering spinning off its lithium business from its core iron ore and mineral services businesses, sending that stock up 13.6%.

Following MinRes was Sandfire Resources ((SFR)), up 8.0% (copper), Fortescue Metals ((FMG)), up 6.1% (iron ore), Pilbara Minerals, up 5.9% (lithium) and IGO ((IGO)), up 5.7% (nickel and lithium). In the ASX300, 17 of the top twenty gainers were miners.

It would appear investors chose to take profits from the recently outperforming consumer staples sector, as it fell -1.2% to be a rare worst performer on the day.

A -0.3% fall for discretionary included Nine Entertainment ((NEC)) going ex-dividend. A -0.5% fall for healthcare included a -1.2% drop for Ramsay Health Care ((RHC)) after it announced the end of discussions with IHH Healthcare over its bid to acquire 100% of Asian JV Ramsay Sime Darby

Otherwise, communication services (-0.7%) and real estate (-0.8%) provided some counter to resources.

Metals prices were again stronger on Friday night and oil prices shot up more significantly. Add in a second session of solid relief rally on Wall Street and our futures were up 79 points on Saturday morning.

That will leave both Wall Street and our market in an interesting position from which to gauge Tuesday night’s US August CPI result, which is shaping up to be the biggest global event this month.

(By the way I thought the German hearse was a nice touch.)

Day Two

There was no specific trigger for Wall Street’s kick-on rally on Friday night other than this is how relief rallies tend to work. Stock markets were again declared oversold from the first post-June relief rally so there could be more relief yet.

The CPI stands in the way, of course, but investors are increasingly confident August will show a meaningful drop in the headline CPI given pullbacks in oil (particularly gasoline) and food costs.

That may not be the case for the core CPI nonetheless, which is more under the influence of higher wages and rents.

Yet few believe the rally will be sustainable – rather just another “trader’s rally” in an ongoing bear market, with the months of September and October reason enough to bring further volatility.

The issue is one of both earnings forecasts and the market PE multiple being still too high under the circumstances of ongoing Fed tightening and subsequent recession risk. If earnings forecasts come down, then mathematically the PE will go up, and thus P must come down.

Yet those less bearish argue the market earnings forecasts are heavily influenced at present by energy sector earnings, which in the current environment are not expected to retreat. Then there’s the matter of the S&P500 PE being above average, but not so much the equal-weighted S&P500.

This implies there are a handful of big stocks – you know the ones – keeping the market multiple elevated above what it realistically might be. And one sells Apple at one's peril.

As the for the Fed, Friday night saw Wall Street ignoring comments from Fed governor suggesting the FOMC may have to raise its benchmark interest rate “well above 4%” if inflation doesn’t wane (currently 2.25-2.50%).

By now Wall Street is pretty much used to hawkish Fed commentary, and there are those prepared to do the unthinkable and “fight the Fed” by believing there will have to be a pause along the way to assess just what damage hard and fast rate rises have had, in their typically lagged effect, on the economy.

Another element supporting strength on Friday night was a sharp bounce in the euro following a period of recession-led weakness, which took the currency under the benchmark level of parity with the US dollar. That bounce had the US dollar index falling back -0.6%.

So we have tonight’s session to get through ahead of Tuesday night’s CPI.

Commodities

That dollar pullback provided a boost for commodity prices, which appear to also be enjoying more of a relief rally than a change in outlook.

The bounce in oil prices may have been driven by concerns from European signatories to the Iran nuclear deal that Iran is not at all living up to its side of the bargain, which would put the deal back in jeopardy after Biden has pushed ahead in order to bring oil prices down.

The bounce comes despite an extension to the Chengdu lockdown, announced on Thursday.

On the greenback’s pullback and commodity price jumps, the Aussie is up 1.2% at US$0.6838.

The SPI Overnight closed up 79 points or 1.2% on Saturday morning.

The Week Ahead

US CPI tomorrow night, followed by the PPI on Wednesday night. Wednesday night also brings UK August inflation numbers.

The Bank of England meets on Thursday night.

The US will also see August retail sales and industrial production data this week, and the consumer sentiment index.

China is closed today but will release August retail sales, industrial production and fixed asset investment numbers on Friday.

New Zealand releases its June quarter GDP result on Thursday.

Locally, we’ll see the NAB business confidence survey tomorrow and Westpac consumer confidence on Wednesday, followed by jobs numbers on Thursday.

The ex-dividend season has begun to wind down in terms of numbers of daily stocks and bigger names, although there are quite a number on the list for Thursday.

The changes to S&P/ASX indices announced last week become effective after the close on Friday.

The Australian share market over the past thirty days…

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