Evening Wrap: ASX 200 claws back losses, Pilbara Minerals rallies 6% + Australian PMIs tick positive

The S&P/ASX 200 closed 3.6 points higher, up 0.05%. 

The Index rallied from a steep gap down to finish in positive territory on Friday, Australia's PMIs bounce back to a 4-month high and expansionary territory, shares in Pilbara Minerals flag a potential short squeeze as shares close 6.8% higher, Citi upgrades Megaport shares to a Buy and Macquarie downgrades the banking sector to Underweight.

Let's dive in.

ASX 200 Session Chart

ASX 200 rallies from session lows to close at best levels (Source: Market Index)

Markets

What a session. The ASX 200 finished at breakeven from a session low of -1.53%. Heavyweight sectors such as Materials, Energy and Financials experienced some of the biggest intraday swings. But after all we've seen with oil prices, central banks and bond yields – Is this all but a dead cat bounce? I guess the good thing is that we didn't see things snowball into full blown panic. (At least for now)

At today's lows, the Index would've been on a five day losing streak down 4.4%. We're seeing a rather powerful oversold bounce take place but can this continue next week? So many questions, so little answers but plenty of volatility. Let's see what Monday brings.

Economy

Australia’s Manufacturing PMI eased to 48.2 in September, down from 49.6 in August.

• “A sharper fall in new orders led to manufacturing output shrinking for a tenth straight month in September.” – Judo Bank

• “Input cost inflation eased amid the drop in purchasing activity, while firms also raised their own selling prices at a slower rate.”

• “The good news is that Australia’s manufacturing sector is not deteriorating after a soft start to 2023. We appear to be achieving the soft landing with few signs of a recession in manufacturing at this stage.” – Warren Hogan, Chief Economic Advisor at Judo Bank

Australia’s Services PMI jumped to 50.5 in September, up from 47.8 in August.

• “Incoming new business, including new business from abroad, increased in September, contributing to higher services activity.”

• “At no stage has the services sector employment index fallen below the neutral 50 level despite broader activity indicators falling into contractionary territory.” – Hogan

• “The inflation indicators remain elevated at levels pointing to above-target CPI over the next 6-9 months.”

• Note: Overall composite PMI rose to 50.2 from 48.0 in August, a 4-month high

Japan’s inflation was 3.2% in August, down from 3.3% in July.

• Market he 17th consecutive month where inflation was above the central bank’s target of 2.0%

• Bank of Japan kept interest rates unchanged at 0.1%

Latest news

Turns Out It Was a BTFD

The Resource space demonstrated some of the most volatile intraday swings, from a sharp gap down at the open to bids all throughout the day to close near best levels. (You can go figure out what BTFD means)

Pilbara Minerals (ASX: PLS) experienced one of the largest swings. It fell 3.0% in early trade but managed to close 6.8% higher. This kind of price action was likely exacerbated by the fact that short interest in the stock has climbed to a record high of 11.5%.

On the topic of short interest in Pilbara Minerals, it's probably one of the most liquid and pure ways to short the industry (from an ASX perspective). Could this be why short interest is so high?

And if that's the case, could this be used as a hedging strategy? Or a strategy where you short Pilbara Minerals and long an explorer (that's less exposed to spot prices).

Pilbara Minerals intraday chart (Source: TradingView)

Fear & Greed Index

Sentiment and positioning indicators often serve as a useful tool to gauge the market. The market tends to unravel when things get too frothy, which was the case when CNN's Fear & Greed Index was tracking at Extreme Greed levels (~80) back in mid-late July.

The Index has reset back to Fear, which could provide some fuel for a market rally. The question is, can macro conditions allow for such a rally to take place?

Source: CNN

Interesting news and movers

Trading higher

• +16.4% Symbio (SYM) – Revised offer from Superloop

• +8.9% Count (CUP) – To acquire Diverger for $1.14 per share

• +6.6% Costa Group (CGC) – Enters into Scheme Implementation

• +4.4% Carbon Revolution (CBR) – Enters into equity facility

• +2.3% Red Hill Minerals (RHI) – Earnings 

Trading lower

• -4.1% Next Science (NXS) – Completes SSP

Broker notes

Citi’s take on Megaport:

• Upgrade to Buy from Neutral with $12.50 target price

• “While we see potential for the return on investment in go-to-market to take longer, we upgrade to Buy given: i) we see upside risk to FY24e forecasts … ii) we see Megaport as a beneficiary of increased cloud-adoption, especially multi-cloud, as Enterprises look to adopt GenAI; and iii) we expect the increased investment and focus on the customer to result in increased share-of-wallet.”

Macquarie on Australian banks:

• “With >70% of expenses relating to people, bank cost bases are likely to remain under pressure.”

• “We see a further ~1-7% headwind to expense growth in FY 24-26 from higher amortisation expenses and rising investment spend.”

• “We see a high likelihood that current impairment charge forecasts are likely to be too high in FY24.”

• “We move our sector view back to underweight. We also downgrade our recommendations on regional banks (BEN and BOQ) to Underperform (from Neutral). NAB remains our preferred exposure within the sector.”

Scans