Evening Wrap: ASX 200 breaks three-day losing streak, lithium stocks sell off on multiple downgrades

The S&P/ASX 200 closed 35 points higher, up 0.51%. 

The Index bounces from 11-month lows, lithium stocks extend losses after three investment banks downgrade their outlook for the battery metal, oil stocks pull back sharply after oil prices tumble 5% overnight plus UBS' take on energy and coal stocks.

Let's dive in.

ASX 200 Session Chart

ASX 200 bounces from session lows to finish near best levels (Source: Market Index)

Markets

The ASX 200 finished higher and near best levels on Thursday. Things were looking pretty shaky at 11:00 am when the ASX 200 faded back to breakeven.

Yield sensitive and growthy sectors like Real Estate, Tech and Telcos led to the upside. While Energy stocks underperformed following a sharp ~5% drop in oil prices overnight.

The all-important US 10-year yield is starting to ease, now down 17 bps from Wednesday's peak of 4.88%. But is this just a little pullback in preparation of another jump towards quarter-century highs? At least for now, markets are enjoying a bit of a bounce from extremely oversold levels. Let's see how yields shape up over the next few days.

Economy

Australia’s trade surplus rose to $9.64bn in August from $7.3bn in July.

• Exceeded analyst expectations of a rise to $8.7bn

• Exports rose 4% driven by gold

• Imports fell 0.4% driven by a decrease in industrial transport equipment

Latest news

Iron Ore Premiums

Bloomberg on iron ore premiums:

• "The spread between spot high-grade Brazilian ore with 65% iron content and benchmark Australian material with 62% content has been narrowing. Back in March, the gap was north of $16/ton, now it’s shrunk to less than half that figure."

• "The slumping premium suggests users in top market China are less willing to pay extra for the good stuff as their profitability is under pressure."

• "High-grade ore is both more efficient and less polluting, so it’s preferred when the steel industry is doing well, or when officials are cracking down on smog."

The Coal Complex

I came across an interesting note from Totus Capital's monthly fund update:

"There is a once-in-a-generation transfer of value underway from the mining majors BHP and Rio Tinto whose boards want out of unfashionable commodities, selling to mid-cap companies who see the long-term value of these scarce, irreplaceable long-life assets. As the law of physics and economic reality set in over the next few years, these companies (almost all are already profitable and have no debt) have potential to generate exceptional returns ..."

This has somewhat already taken place for Stanmore, which purchased BHP's met coal JV in Queensland last year. This allowed the company to transform from a short mine life and single asset company to a relatively long mine life (~14 years) with multi assets.

Interesting news and movers

Trading higher

• +14.1% Strandline Resources (STA) – Project Update

• +11.5% Strike Energy (STX) – South Erregulla Update

• +4.9% SRG Global (SRG) – Contract renewal

• +2.2% Qantas (QAN) – Beneficiary of overnight oil price selloff

Trading lower

• -6.3% Core Lithium (CXO) – Downgraded by JPMorgan

• -4.0% IGO (IGO) – Downgraded by JPMorgan

• -1.3% Trajan Group (TRJ) – Reaffirms FY guidance

Broker notes

UBS on energy stocks:

• “We lift our 4Q23 and avg 2024 Brent oil price to US$92/bb and US$87/bbl (from US$85/bbl and US$80/bbl prior) reflecting increasing supply tightness over 3Q holding the oil market in deficit until 2Q24 supported by large inventory draws having materialised in parallel with Saudi Arabia's voluntary 1Mb/d production cut.”

• “On demand, we see robust Chinese demand into 4Q23 (avg demand growth of 1.5MB/d over 2023), however remain conservative on 2024 oil demand growth, forecasting only 1.1Mb/d (the bottom end of major Agencies' forecasts) in line with the IEA.”

• “Santos remains our top pick in Australian Energy, currently implying an oil price of US$63/bbl. A resumption of drilling at Barossa by year-end could remove a material overhang on the stock in our view, allowing investors to focus on the 14% production CAGR we forecast for STO over 2023-27.”

UBS on coal:

• “Met coal prices continue to show strength at >+25% 1mth at US$340/t. Australia (in particular QLD) reported Aug/Sep shipments at >10yr lows driven in part by maintenance across the sector (BHP in particular) and weakness post FY23.”

• “We still expect met coal prices to drift lower into Q4 on seasonal supply uplift, but in our view thermal coal prices are more exposed.”

• “We expect China's coal supply in 2023 to exceed market expectations by 80Mt and push prices lower into H2 (note). This translates to downside risk to thermal coal prices in Q4-23 vs our US$150/t and spot price.”

Scans