The Overnight Report: Into The Blue

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

By Greg Peel

The Road Back

The ASX200 put in another solid session yesterday, as Wall Street on Friday night hit a new record high. Wall Street has now recovered from its January swoon, which was largely driven by Middle East issues that have not gone away – far from it.

The ASX200 still has a ways to go to retest the all-time high, having similarly waned through January. Also boosting hopes downunder have been signs of weakness in economic data that should at least keep the RBA on hold for now. As to the potential for actual rate cuts, well, a lot will depend on next month’s release of the December quarter CPI numbers.

Yesterday the Aussie ten-year bond fell -6 points to 4.23% and most rate sensitive sectors saw strength. Consumer discretionary led the way with a 1.7% gain and staples backed up with 1.3%. Industrials and real estate rose 1.1%, while the banks powered the market with 1.2%.

Utilities were left out (-0.2%) but the notable move was a -0.2% fall for materials, with lithium stocks being thumped yet again. After having its funding pulled, Liontown Resources ((LTR)) plunged -21.3% and triggered a wave of selling across all lithium miners. Those who were around in the noughties might remember the last lithium boom-bust cycle.

It’s not like Australians aren’t doing their bit – EV sales are surging here, albeit off a low base. In the US, EV sales growth is slowing rapidly, forcing manufacturers from Tesla to Ford to cut back EV production. Price is one issue, range anxiety another. To that end, sales of hybrid vehicles are steadily on the rise.

Technology (+0.7%), healthcare (+0.6%) and energy (+0.3%) were the lesser performers yesterday. In the latter case, oil prices were up strongly last night, which does not bode well for the aforementioned CPI in the next round.

In technology, AI company Appen ((APX)) dropped -40.2% after Google cancelled a contract, deciding it could cover the requirement with…um…AI.

The reason Wall Street is now making new highs and we’re not can be attributed to two factors more than anything else – the expectation of Fed rates cuts, and AI. We’re yet to see a rate-cut path ahead for the RBA and for AI, we’re just not in the game.

We’re good at mining lithium though.

Record-Breaking

As earnings season hots up in the US, the Dow last night hit 38,000 for the first time and the S&P500 marked a second day of all-time highs. Gains in the major indices were relatively muted, with the star being the Russell small cap index (+2.0%).

Small caps had a moment in the sun late last year when data were suggesting the US economy could quite possibly come in for a soft landing, as is the Fed’s hope. US bond rates collapsed from their peaks, which was blessed relief for small caps, on expectations of up to six Fed rate cuts this year.

But January has brought a return to that same tune of 2022 – it’s all about the Magnificent Seven and little else, and the story behind that renewed strength is simply AI. The Mag7 are so cash-rich, they laugh in the face of borrowing costs. Late in 2022 commentators were cheering on a return to breadth on Wall Street, which has faded in 2023.

The Russel small cap index is still -25% below its all-time high set in 2021.

Recent US data have nevertheless been stronger than expected, which has led to a bounce in bond yields (not surprising given their precipitous fall), but last night the US ten-year fell -5 points to 4.09% which boosted the Russell.

Earnings season to date has been a bit ho-hum, but not enough to upset positive sentiment. Commentators are concerned many a stock is now being “priced for perfection”, but there are plenty of big-name companies yet to report.

This week brings results from the likes of Johnson & Johnson, Netflix, Tesla and Visa.

On the economic front, Friday’s release of December PCE data will be critical.

Commodities

The jump in oil prices last night was not about escalating Middle East conflict, but about Ukrainian drones striking a major Russian oil terminal. The facility on the Baltic Sea exports 1.35m barrels per day of oil and refined products.

If Ukraine is now determined to strike at Russia’s oil infrastructure, that is not good news.

The US dollar continued to march higher last night despite the fall in bond yields, and the Aussie is down -0.3% at US$0.6573.

Today

Despite the mild rally on Wall Street, the SPI Overnight closed down one point this morning.

NAB’s business confidence survey for December is out today.

The Bank of Japan holds a policy meeting.

Production reports are due from Coronado Resources ((CRN)), Iluka Resources ((ILU)) and Stanmore Coal ((SMR)).

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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