Evening Wrap: ASX 200 falls, Defensive sectors shine + Why did lithium stocks sell off?

The ASX 200 finished a volatile week up 0.15%, defensive sectors like Healthcare, Staples and Utilities led to the upside on Friday, lithium stocks tank as Chinese future prices hit limit down of more than 10%, Newcrest shares sink 5% after disappointing earnings from Newmont and a few Macquarie notes of interest.

Let's dive in.

ASX 200 Session Chart

ASX 200 lower but off worst levels (Source: Market Index)

Markets

The ASX 200 finished lower but well above session lows of 0.5%. We're entering a bit of a weird stage for markets. The so far weaker-than-expected earnings from high-profile tech companies like Tesla and TSMC is driving a pullback for the Nasdaq while the Dow kicks on. This places sector rotation dynamics at play and a potential tailwind for Defensive like Staples, Healthcare and Utilities, which is what happened in today's session. At the Index level, it's driving a lot of volatility as sectors offset each other.

That said, all the dynamics above could change in an instant as US earnings season continues to pick up. There's also quite a bit on the agenda next week including Australian inflation (Wed), Fed interest rate decision (Thurs) and US GDP (Thurs).

Economy

Japan’s inflation rose 3.3% in June from 3.2% in May.

• Below market expectations of a jump to 3.5%

• Core inflation was 3.3% in June fro, 3.2% in May

• This was in-line with consensus expectations

UK retail sales jumped 0.7% month-on-month in June from 0.3% in May.

• Beat market expectations of a 0.2% increase

• Retail sales are down 1.0% year-on-year in June, an improvement from the 2.3% drop in the previous month

Latest news

What happened today?

Lithium futures tank big time: I was watching Pilbara Minerals (ASX: PLS) tumble intraday and finish 4.5% lower. Why is it getting smashed? As it turns out, lithium carbonate futures in Guangzhou hit limit-downs, slumping 14% to 211,600 yuan a tonne. The lithium sector is now on the backfoot again as Chinese prices turn.

Don't underestimate the power of announcements: I want to recap the price action of two recent announcements from Flight Centre (ASX: FLT) and Syrah Resources (ASX: SYR). There's quite a bit we can learn about what has taken place.

Flight Centre shares rose 2.3% today, finishing at levels not seen since May 2022. This follows a 4.0% rally on Thursday (its chart is basically vertical) after announcing an FY23 EBITDA upgrade to $295-305m vs. consensus expectations of $280m. The upgrade was a sizeable beat against consensus expectations and there quite a few follow through in terms of positive broker updates on Friday. Across 16 ratings, 50% are Buy rated, 44% Hold and 6% Sell. The average price target rose 0.2% to $22.26 after the trading update.

Syrah is the complete opposite. The stock tumbled 16.3% on Tuesday to a two-and-a-half year low after pausing production at its Balama operation. The graphite market is struggling and June quarter sales fell 43% quarter-on-quarter. A investor might look at Syrah and think "it looks very oversold, is the largest pure play graphite stock on the ASX and will soon be strategically a major vertically integrated graphite producer." But catching a falling knife is easier said than done. Macquarie warned investors that the company faces a US$100 million funding gap for its Vidalia anode facility. It says the gap will be funded via a capital raising in the March quarter 2024. Yes, a US$100 million capital raising from a ~$500m market cap company. Now that's what you'd call overhang.

Interesting news and movers

Trading higher

• +15.0% Doctor Care Anywhere (DOC) – Earnings

• +14.9% Starpharma (SPL) – Product demonstrates imaging benefits

• +9.3% Pact Group (PGH)

• +7.3% Service Stream (SSM) – Contract awards

• +4.4% Mach7 Technologies (M7T) – Secures contract

• +3.7% IPD Group (IPG) – Acquisition

• +2.8% Coronado Global (CRN) – Q2 production

• +2.3% Flight Centre (FLT) – Upgraded by several brokers 

Trading lower

• -15.6% Noumi (NOU)

• -9.4% Cettire (CTT)

• -6.1% Bigtincan (BTH) – Business update

• -6.1% 29Metals (29M)

• -5.3% Newcrest Mining (NCM) – NEM earnings

• -5.0% Grange Resources (GRR)

• -4.6% DGL Group (DGL) 

• -4.4% Perseus Mining (PRU)

• -3.0% Premier Investments (PMV) – Downgraded by Macquarie 

• -2.4% Charter Hall (CLW) – Downgraded by Macquarie

• Tech sector move: Weebit Nano (-4.7%), Xero (-3.9%), Technology One (-2.9%), Life360 (-2.9%), Wisetech Global (-2.4%)

• Lithium sector move: Lake Resources (-7.3%), Core Lithium (-4.9%), Pilbara Minerals (-4.5%), Allkem (-3.3%), Sayona (-2.9%)

Broker notes

A few Macquarie notes of interest:

BHP (BHP) – Outperform with $47.00 target ($44.62 at 20 July)

• “BHP’s 4QFY23 result was weak with record iron-ore shipments below our estimates while realised iron-ore prices were in line.”

• “Realised prices were also mixed with lower coal and copper prices offset by in-line iron-ore prices. Guidance for FY24 was below our estimates for copper and coal but in line for iron-ore.”

Deterra Royalties (DRR) – Outperform with $4.80 target ($4.69 at 20 July)

• “Production from Mining Area C in 4QFY23 of 33.9mt was in line with our expectations and was 14% higher QoQ.”

• “The capacity payment and full-year dividend is a key near-term catalyst for DRR. Free cash flow yield in a spot price scenario is 8% from FY24 onward.”

Evolution Mining (EVN) – Underperform with $3.10 target ($3.72 at 20 July) 

• “EVN's end to FY23 was softer than we expected; performance slipped below the production and AISC guidance that was updated in April 2023.”

• “The softer implied cash performance was primarily driven by weather impacts at Ernest Henry. Importantly, there was no change to FY24 guidance.”

Premier Investments (PMV) – Neutral with $21.00 target ($21.64 at 20 July)

• “We downgrade to Neutral. Margin normalisation post-Covid amid a weak macro driving downside risk and remains an overhang.”

• “PMV is not immune to vulnerable consumption and macro pressures. This will remain an overhang in the next ~6-9 mths as PMV cycles tough comps.”

QBE Insurance (QBE) – Outperform with $16.90 target ($15.24 at 20 July)

• “QBE have provided a 1H23 result update, including higher catastrophes and reserve strengthening but reiterated FY23 CoR outlook.”

• “QBE is trading at a significant premium to weighted international peers, which compares to a three-year average discount of ~2.1%, but this reflects peers being more affected by global economic challenges.”

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