Evening Wrap: ASX 200 falls to near 12-month low, holds key 6,900 level

The Index finishes the week down 2.1% and not far off a 12-month low, Japan's core inflation in September slowed below the 3% threshold for the first time in over a year, how Liontown shares traded after a steep selloff, an iron ore miner that's printing cash and a few Macquarie notes of interest.

Let's dive in.

ASX 200 Session Chart

ASX 200 tumbled to finish near worst levels on Friday (Source: Market Index)

Markets

The ASX 200 puked towards the downside as the all-important US 10-year yield briefly crossed the psychologically key 5.0% level overnight. Energy was the only sector to finish higher amid a 1.1% uptick in oil prices from the prior session. Defensive sectors like Utilities, Industrials and Staples also outperformed on a relative basis.

The Index is holding onto the key 6,900 level – A level that held its ground during sharp pullbacks we've experienced in early January, mid-March, mid-July and the early October. Can yields peak and allow the market to bounce? Or maybe we need a panic-driven selloff to mark the low?

ASX 200 daily chart (Source: TradingView)

Economy

Japan’s inflation eased to 3.0% in September, down from 3.2% in August.

• Core inflation fell to 2.8% from 3.1% in August

• Core inflation has slowed to levels not seen since August 2022

• Inflation remains above the Bank of Japan's 2.0% target, exceeding this level for the 18th consecutive month

Latest news

Liontown's Free Fall

Liontown (ASX: LTR) nosedived 31.9% on Friday after a big-discount raise at $1.80 (35.5% discount to last close). Everywhere's written about it, so here's my value add:

• The price action was very calm at the open, down 34.1% to $1.84 and it traded around these levels through to around 11:30 am AEDT

• The stock rallied around 9% from the open to a session high of $2.01

Here's the logic behind why the stock was so strong from the open:

• Liontown is the 4th most shorted stock on the ASX (approximately 10% of shares are short)

• Covering the short would place upward pressure on the share price

• There was no available shorts at pretty much all lenders (Gina probably absorbed them all)

• The raise received massive interest and oversubscribed

• A strongly received raised would force participants that missed out to buy on market

Liontown intraday chart (Source: TradingView)

It's worth noting that the above only applies to today's session. Is Liontown now fully funded and ready to head into production? Or will it face more operational and broader lithium-market related challenges? We shall see.

Mount Gibson Iron: Printing Cash

Sometimes the companies that are printing money never get the recognition they deserve. And Mount Gibson Iron (ASX: MGX) might be one of them.

The company reported its September quarter figures on Friday and here are the key numbers for the quarter:

• Market cap: $580 million (to add context to the below)

• Iron ore sales (65.5% grades): Record 1.3 million wet metric tonnes

• Ore sales revenue: $208 million

• Cashflow: $124 million

• Cash and investments: $257 million

• FY24 guidance reaffirmed: 3.8 to 4.2 million wet metric tonnes

One of the key risks for MGX is minimal hedging (aka exposure to iron ore price fluctuations), short mine life and a few major Chinese shareholders in the Top 20.

Interesting news and movers

Trading higher

• +6.7% Mount Gibson (MGX) – Q1 results

• +5.6% Imdex (IMD) – Q1 results (Thu)

• +5.2% WA1 Resources (WA1) – Q1 results

• +4.1% Nick Scali (NCK) – Macquarie upgrade

• +3.5% Invictus Energy (IVZ) – Elevated gas shows at Mukuyu-2

• +2.0% AMA Group (AMA) – Q1 results

Trading lower

• -31.9% Liontown Resources (LTR) – Completes $365m placement

• -12.8% Insignia Financial (IFL) – CEO to step down

• -3.7% Netwealth Group (NWL) – Broker downgrades (Thu)

• -2.4% Winsome Resources (WR1) – Q1 results

• -1.7% Neuren Pharma (NEU) – Q3 results

Broker notes

A few Macquarie notes of interest:

Alumina (AWC) – Underperform with $0.80 target ($0.90 at Oct 18)

• “While the 3QCY23 results were within 8% of our expectations, we maintain cautious stance around the mid-term production outlook at AWAC with currently approved areas mining suboptimal bauxite grades which results in higher unit costs and squeezed margins.”

Iluka Resources (ILU)

• “ILU’s 3QCY23 results were soft with mixed production and weak sales.”

• “We cut near-term premium zircon prices to US$1,980/t (prev. US $2,070/t) given demand headwinds.”

• "ILU has multiple catalysts and growth paths, including Eneabba phase 3, which is progressing, and Balranald, with EPCM contract awarded.”

Santos (STO) – Outperform with $9.80 ($7.85 at Oct 19)

• “STO's valuation discount has been persistent, however we expect this to close over time - this could occur organically (PNG selldown and Barossa resumption have been the two major overhangs in our view), or via a restructuring (we expect a Strategic Review following receipt of a demerger proposal).”

Transurban (TCL) – Outperform with $13.65 ($12.30 at Oct 18)

• “Traffic was strong in Melbourne (+3.8%) and Brisbane (+3.9%) consistent with a slight multiplier to rego growth or +2.2% and 3.5%, respectively.”

• “Sydney was softer, with impact of road works on ED, LCT and M2 evident and diversion on CCT. This drag should continue in the coming quarters.”

• “TCL remains a high-quality defensive benefiting from population growth (1.5-2.0%) and has the road capacity to capture that growth. Combined with the openings, cash flow should grow at ~6.6% pa and dividend at 4.3% pa for the next five years.”

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