The Monday Report (On Tuesday) – 13 June 2023

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This story features NICKEL INDUSTRIES LIMITED, and other companies.
For more info SHARE ANALYSIS: NIC
The company is included in ASX200, ASX300 and ALL-ORDS

By Greg Peel

Friday

The ASX200 stumbled along unconvincingly to a 22 point gain on Friday, failing to be as excited as Wall Street had been overnight. Wall Street was barely higher on Friday night, and our futures closed down -29 points on Saturday morning.

While Wall Street is “technically” now in a bull market, the ASX200 has tracked quietly lower since the mid-April high of 7380.

After the Canada-driven surge on Thursday, bond yields fell back somewhat on Friday to allow some of the sectors thumped by Thursday’s surge to make a bit of a comeback. Technology rose 1.6% and discretionary 0.6%, but real estate dipped a further -0.1%.

The banks sat out the yield surge on Thursday but gained 0.3% on Friday as they began to pass on the RBA rate hike to borrowers.

Bank economists are now lining up behind a forecast of another 25 point hike, either in July or August, and another thereafter for a peak rate of 4.60%, with rate cuts not to come until 2024.

It would be somewhat ironic if Philip Lowe started cutting rates in 2024.

CommBank is among that number, and on Friday CommBank’s economists downgraded their GDP forecast, suggesting a 50% chance of recession this year due to the impact of cash rate rises on household cash flow.

The bank also passed on the full 25 points to borrowers.

While the Aussie dollar has been making a solid comeback from recent lows, the materials sector is not caught up in domestic policy issues, with the iron ore price continuing to push higher. Materials rose 1.0% on Friday.

Other sector moves were mixed and immaterial.

Nickel Industries ((NIC)) topped the index with a 13.3% gain, after announcing a conditional capital placement with a large Indonesian mining and mining services conglomerate at a sizeable premium, which implies a 20% stake, as a collaborator in the company’s nickel/cobalt project in Indonesia.

Meanwhile in China, the headline CPI rose to 0.2% from 0.1% (annual) in May, below expectation, and the PPI fell -4.6% to mark the steepest year on year drop in seven years.

When will Beijing act?

Friday Night

There were only two subjects being discussed on Wall Street on Friday night: developments in Miami; and whether a new bull market has just begun.

For the record, the new bull market is defined by the S&P500 having posted a 20% rally from the October low on Thursday night. It is therefore a definition in hindsight, much like a recession (two quarters of negative growth), and if only now you decide to get in, well you’re already missed 20%.

And it could easily turn around and go straight back down again.

The S&P spent Friday night trying hard to hang on to a level above 4300, but closed at 4298.86. Having broken through staunch resistance at 4200 in early June, 4300 is now the new target because (a) it’s a psychologically important round number and (b), the prior August high was just above 4300.

From which point the S&P fell to the October low, before beginning its 20% recovery.

A lot will depend on Tuesday night’s May CPI numbers, and after Friday night there was still one more session to go.

Friday night saw the Dow up 0.13%, the S&P 0.11% and the Nasdaq 0.16%.

Commodities

Metals prices were for the most part higher on Friday night.

With regard oil, it was noted that Saudi Arabia’s announced one million barrel per day production cut would only remove one-third of a single day’s worth of global oil production over the course of July.

Oil prices closed lower for the second week running.

The Aussie rose 0.4% to US$0.6742.

The SPI Overnight closed down -29 points or -0.4%.

Monday Night

Having reached 4300 in the S&P500, Wall Street took the ball and ran with it last night. The S&P closed at 4338.

Which suggests investors are taking the “new bull market” call to heart. The doubters point to the likelihood of short-covering providing some of the upside, along with FOMO.

But it has also been noted that fund managers are largely overweight cash, and also underweight exposure to tech. If tech is going to focus more on AI and less on monetary policy, and on economic data, then it may be unwise to assume the run is over.

Still, we may yet see the air let out of the balloon tonight when the CPI numbers drop. But the CPI will next month be cycling last year’s June reading of 9.1% — the peak – and forecasts for tonight’s May reading are for a headline of 4.0%, down from 4.9% in April.

Wall Street is thus heavily backing a pause in rate hikes on Wednesday night. A resumption in July remains nevertheless at greater than 50% odds.

Assuming the Fed does pause, the rhetoric will be the important factor. Could it pause further? We’ll likely hear “data dependence”.

There was no other impetus for last night’s rally.

Moreover, there was a lot of talk leading into the debt ceiling resolution warning that the US Treasury would need to start issuing large amounts of bills and bonds in order to refill the coffers, thus draining further liquidity out of the market.

Last night the Treasury issued US$200bn of debt, as part of an estimated US$800bn-US$1trn requirement, and Wall Street didn’t blink. Bond yields were barely moved.

Commodities

Last night Goldman Sachs cut its 2023 oil forecast by -10%. Oil prices responded in falling -4%.

Mind you, that takes its year-end Brent forecast down to US$86/bbl from a prior US$95/bbl, and WTI to US$89/bbl from US$89/bbl. WTI is now trading under US$70/bbl.

Goldman cited weak demand from China amidst a slow recovery, but more so increased supply from sanctioned countries Russia, Iran and Venezuela.

“Russian supply is nearly fully recovered despite the decision by many companies to stop buying Russian barrels and a ban on Western financial and logistical services,” wrote Goldman.

Western countries are still permitted to buy Russian oil as long as they respect the price cap imposed by the G7, which is US$60/bbl.

Metals prices that were all higher on Friday night fell back last night.

The Aussie is up another 0.2% at US$0.6753.

The SPI Overnight closed up 25 points this morning, implying a net two-session fall of -4 points ahead of the ASX reopening today.

The Week Ahead

We begin with the release of US May CPI numbers tonight, followed by the Fed’s rate decision on Wednesday night.

Following the rate decision the US will see May retails sales. Numbers for industrial production, housing sentiment and consumer sentiment are due during the week along with the Empire State and Philly Fed indices.

The ECB and Bank of Japan also hold policy meetings this week.

China will release May industrial production, retail sales and fixed asset investment data on Thursday. If there remains little sign of an economic uplift post lockdowns, surely Beijing will act as has been highly anticipated. April’s numbers sorely disappointed.

Locally we’ll see the NAB business and Westpac consumer confidence surveys today, along with May jobs numbers on Thursday.

New Zealand reveals its March quarter GDP on Wednesday.

Local corporate events are very thin on the ground now as we head towards EOFY.

Nevertheless, Block ((SQ2)) holds its AGM this week, and Insurance Australia Group ((IAG)) and AGL Energy ((AGL)) host investor days.

The Australian share market over the past thirty days…

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