Evening Wrap: ASX 200 chalks third win as long term rates tumble

The Aussie market made it three in a row today as investors globally breathed a massive sigh of relief over long term interest rates. It was one of those days where pretty much everything went up, signalling animal spirits may just be sneaking back after three straight lousy months for stocks.

Let's dive in.

ASX 200 Session Chart

Make that three in a row for the ASX 200 (Source: Market Index)

Markets

There's always plenty of noise and uncertainty bumping around markets. So it's always nice to get the occasional vote of confidence in the form of bullish price action. Yesterday I remarked how important it was the benchmark S&P/ASX 200 (XJO) closed near its session highs. Typically this is only going to happen if the demand side still wants in by the end of the day, and the supply side has refused to engage them in any meaningful way. It smacks of excess demand, and excess demand is what you need to keep prices rising.

And rise they did today! We didn't quite close on the high, though, which indicates a modicum of buyer fatigue / building seller impetus. Breadth was excellent, however. Advancers in the S&P/ASX300 beat decliners by a massive 6 to 1. Good breath is usually a good sign for further short-term upside potential.

In terms of winners, it appeared to me to be a story about debt and duration. Debt's pretty self-explanatory, lower market rates are good for companies with high debt levels. The S&P/ASX 200 Property Sector Index (XPJ) was today's second best performer, rising 2.4%. It's the second worst performing sector over the last 12-months, down 4.5%. Given the business model of most of the companies in the sector is based upon leverage, it's no surprise its fortunes today and beyond are so closely tied to interest rates. This is a sector you definitely want to keep an eye on if long term rates keep falling.

Some of the better performing property stocks today: Cromwell Property Group (ASX: CMW) +7.7%, Centuria Capital Group (ASX: CNI) +5.5%, Charter Hall Group (ASX: CHC) +5%, Lifestyle Communities (ASX: LIC) +4.6%, HMC Capital (ASX: HMC) +4.2%.

The best sector today was the S&P/ASX 200 Information Technology Sector Index (XIJ) which rose 3.2%. This gain is all about duration, which is a fancy word for interest rate sensitivity versus time. Tech stocks are typically what we call 'long duration' stocks because they tend to be earlier in their business cycle. This has two major impacts when it comes to interest rate sensitivity. Firstly, their incomes tend to be skewed into the future, that is, they are spending big now to invest in future profits. Secondly, because of the first, they tend to have a relatively higher reliance on debt than more well-established businesses. There's a double whammy impact here because future profits are discounted more harshly by higher interest rates than current profits, and higher debt means lower profits anyway. The bottom line: Tech stocks love lower long term interest rates and today they got them.

Some of the better performing tech stocks today: EML Payments (ASX: EML) +6.7%, Readytech Holdings (ASX: RDY) +5%, Life360 Inc. (ASX: 360) +4.6%, Tyro Payments (ASX: TYR) +4%, Altium (ASX: ALU) +3.5%

If we are to see further steep declines in long term rates, you really want to understand which sectors stand to benefit the most.

Economy

A relatively quiet day for economic data today with no major releases in the region. We did get some data on Australia's trade balance which showed a strong import environment against a weakening export environment. This caused the nation's trade surplus to narrow to $6.786 billion in September from $9.64 billion in August. Economists had forecast a September surplus of $9.40 billion. Basically the data points to a robust local economy amidst the backdrop of a weakening one.

Home loan data released by the ABS showed investors and first home buyers continue to wade into the property market while owner-occupier commitments continued to fall. Investor loans were up 2% in September and 2.6% annually, compared to +0.5% and -0.6% respectively for first home buyers, and -0.1% and -0.6% for owner occupiers. It looks like higher rates are hitting those with the least the most.

Watch out tonight weekly jobless claims in the USA (+210,000 consensus) as well as data on US productivity (+4.2% q/q consensus) and unit labor costs (+0.4% q/q consensus).

Latest news

Sayona bounces, but was it better than a dead cat?

Today's Sayona Mining bounce is merely a blip of white in a sea of black candles

One of the most bitterly disappointing companies in ASX lithium sector history has to be Sayona Mining (ASX: SYA). Has there ever been a stock which has garnered such lament among investors across chat rooms this year? The chart above tells the story. Promise, disappointment, and just a little bit of promise today. Sayona reported what it describes as "multiple, high-grade lithium intercepts" from recent drilling at the Company's NAL operation in Quebec, Canada. According to management, the results are "hugely significant" and demonstrate the potential for a resource upgrade at NAL. As a trend follower, there's so much which needs to occur in the SYA chart to get me on board. At the very least, I'd like to see higher peaks and higher troughs punctuated with large white candles and/or downward pointing shadows. Then, the short term trend ribbon would have to flip, and then the long term trend ribbon, and then…well you get the picture. True believers and short-coverers only at this stage I suggest.

Origin rally loses energy

Big black candles are to uptrends what the meteor was to dinosaurs

Heading the other way today was Origin Energy (ASX: ORG). You can read all about why here. I'm more interested in the giant black candle which appeared on the chart today. Black candles indicate excess supply. The bigger the black candle, the bigger the excess supply. Basically, the supply side wanted out in a big way and the demand side was nowhere to be found. Even more damning is the fact that after such a big fall, supply still wanted out and demand couldn't see a bargain yet. If I squint there was a tiny bounce from my long term trend ribbon (dark green zone) which tends to act as an area of dynamic support (refer to the February 2023 low). Normally I would label big black candles such as this one a "species ending event". Make of that what you will.

Interesting news and movers

Trading higher

• +10.6% Magnis Energy (MNS) – Chair discloses purchase of 2.2m shares

• +8.9% Alpha HPA (A4N) – Secures $40m strategic placement

• +8.2% Pacific Current (PAC) – Takeover offer from GQG partners (Wed)

• +5.6% Helia Group (HLI) – Reports Q3 results

Trading lower

• -15.2% SSR Mining (SSR) – Reports Q3 results

• -6.6% Origin Energy (ORG) – AustralianSuper rejects revised bid

Broker notes

A few Morgan Stanley notes of interest:

Uranium and updates from the largest producers: 

• “The uranium price is now at the highest level since 2008. Cameco is seeing strong contracting demand, while Kazakhstan flagged production challenges on lack of access to materials. Given the strong demand and increasing supply risks, we see upside to our $75/lb Q2'24 target.”

Amcor (AMC) – Equal-weight with $14.50 target 9$13.84 at Oct 31)

• “The 1Q24 result is consistent with MSe and consensus with guidance unchanged. 2H23 trends have continued with no sign of an inflection point in consumer demand or destocking.”

• Positive EPS trajectory expected in the second half

Domino’s Pizza (DMP) – Overweight with $65.00 target ($50.80 at Oct 31)

• “Group SSSg +2.7% YTD (vs -1.0% pcp); with the trend tracking slightly below the first 7wk FY24 update of +2.8%.”

• “Mgt intends to deliver continued momentum in ANZ and Europe and a turnaround in sales performance in Japan.”

• Commodity pricing continues to be challenging

Siteminder (SDR) – Overweight with $4.75 target ($4.07 at Oct 31)

• When Morgan Stanley initiated coverage in July, Siteminder was burning cash with only a broad outline of its monetisation strategy 

• “SDR has progressed on all 3 fronts, de-risking the business and potentially materially improving unit economics; move Overweight.”

• “SDR announced two new products: Dynamic Revenue Plus (DR+) and Channels Plus, tools to help hotels optimise for price and volume respectively.”

Scans