Evening Wrap: ASX 200 finishes the week on a positive note, iron ore back below US$100

Phew. What a stacked week with megacap US tech earnings, First Republic being bought out by JPMorgan and the RBA unexpectedly raising rates by 25 bps. The ASX 200 finishes the Friday session at best levels, iron ore slumps to US$97 a tonne amid falling steel prices in China, new home loan commitments in Australia bounce in March and how does the market perform historically in the month of May?

Let's dive in.

ASX 200 Session Chart

ASX 200 rallies intraday to close at session highs (Source: Market Index)

Markets

A rather positive finish to what has been a tumultuous week with US earnings, an unexpected RBA rate hike, the resumption of the US banking crisis and FOMC. The ASX 200 closed at best levels on Friday to finish the week down 1.2%. Markets remain in a volatile state and trying to set a low after three heavy sessions. Let's see where next week takes us amid the ongoing US banking crisis and debt ceiling debate, and the tail end of earnings season.

Economy

New loan commitments for housing rose 4.9% month-on-month in March to $24.0bn, according to the ABS.

• Follows a 1% fall in February

• Marks the first month-on-month increase since January 2022 but still down 26.3% compared to a year ago

• New loan commitments for owner-occupier housing rose 5.5% to $16bn but down 24.8% compared to a year ago

• Number of new-occupier first home buyer loan commitments rose 15.8% in March after reaching a five-year low in February

China’s services PMI eased to 56.4 in March from 57.8 in March.

• Marks the fourth consecutive month above 50

• China’s post-Covid recovery has been uneven with strong activity in services and a contraction in manufacturing

• China’s inbound and outbound passengers reached 6.3 million during the May Day holiday, up 220% year-on-year and 59.2% above 2019 levels 

Latest news

Market Insights

ASX 200 seasonality update

The ASX 200 performed in-line with the seasonally strong month of April. Historically, the ASX 200 has rallied 3.4% on average in April.

Now, we're working through the choppy months of May and June. Where the ASX 200 has historically fallen 0.58% and 0.68% respectively, on average.

ASX 200 seasonal performance from June 1992 to March 2023 (Source: market Index)

Iron ore: Back below US$100 a tonne

Singapore iron ore futures fell another 2.7% on Friday and down around 18% since late April.

"The pessimism prevailing in China's ferrous markets last month sent steel prices nationwide on a steep slide that will continue this month and only end when market participants regain their confidence," Mysteel's chief analyst Wang Jianhua predicts in his monthly outlook.

"However, the sharp and rapid price drop is not necessarily bad, because it's the only way to drag down raw materials prices and force steelmakers to cut production," Wang stated. "This could lay a more solid foundation for the recovery of prices later," he added.

Singapore iron ore futures (Source: TradingView)

Talking Technicals: Chop city

Markets experienced a powerful rebound from late March through to mid April. But now, we're on the backfoot again. As volatility picks up, you can see a lot of stocks try to break out, only to whipsaw back into the base.

Carsales chart (Source: TradingView)

Aristocrat weekly chart (Source: TradingView)

Audinate chart (Source: TradingView)

Vulcan Energy: Zero carbon lithium vs. Massive capex

Vulcan Energy (ASX: VUL) successfully raised $109 million at $5.10 per share to fund the development of its Phase One Lithium Plant in Germany.

What's interesting is that the company's Phase One DFS flagged a total capex of 1.5 billion euros or almost A$2.5 billion. Vulcan planned to fund this via a debt to equity ratio of 65:35% or A$1.65 billion and $875 million respectively.

Vulcan currently has a market cap of $880 million, which means the equity component would effectively double its outstanding shares and blow out its debt to equity ratio.

The company has a market-leading zero carbon lithium product with high-profile offtake partners like Stellantis and Renault. But it'll be interesting to see how the economics and finance play out.

Interesting news and movers

Trading higher

• +9.0% SSR Mining (SSR)

• +7.7% Syrah Resources (SYR) - Bounce

• +7.5% Weebit Nano (WBT) – Continuation rally, up 12% in previous three

• +4.4% Splitit (SPT) – Visa deal

• Gold sector move: Evolution (+2.3%), Newcrest (+2.2%), Gold Road (+1.6%)

• Real Estate sector move: Goodman (+3.0%), Dexus (+3.1%), Stockland (+2.3%)

Trading lower

• -16.4% Vulcan Energy (VUL) – Capital raising

• -5.3% Virgin Money (VUK)

• -1.6% Genesis Minerals (GMD) – SLR proposed takeover of SBM asset

Broker updates

Citi's updated estimates for commodity prices:

• "Moving forward, macro uncertainties in 2H CY23 are centred on the potential United States recession and the spillover of China growth."

• "We are bullish precious metals and see 2023 as having the ingredients for a strong bull market in gold and silver."

• "The team is very bullish copper mid-term with decarbonisation to underpin long-run demand growth."

• "Steel production cuts and regulatory risks have capped the upside for iron ore prices."

Citi's take on Macquarie's FY23 result:

• Macquarie shares eased on Friday but well above session lows of -3.4%

• "Although the result was in-line at the group level, compositionally it was much different by segment."

• "CGM printed a NPC of $6bn (CitiE $5.5bn), led by a strong commodities revenue beat of $6bn vs our forecast $5.5bn."

• "We think the market will question the composition of the result, however, with an increasing reliance on commodities revenue to drive group profit. The other annuity-style segments missed expectations, which we think ultimately leads the market to query the right P/E for the stock given the inherent volatility, lack of visibility, and increasing reliance on CGM earnings."

Macquarie notes:

NAB (NAB): Neutral with $28.00 target price

• "Continuation of current pricing trends suggests that higher rate benefits will be largely passed to borrowers rather than shareholders."

• "Good underlying performance across most business units, sector-leading provisions and a sound capital position were key positives in NAB’s result."

• "With ongoing inflationary pressure headwinds, we expect earnings and returns to decline in FY24, leaving NAB and peers in a challenging position."

• "NAB is trading at a ~14% and ~6% premium to ANZ and WBC, respectively, but a ~29% discount to CBA. Given a better performing franchise, we see the relative valuation as justified."

oOh!media (OML): Outperform with $1.82 target price

• oOh!media presented at the 2023 Macquarie Conference and provided a trading update. Margin compression flagged with contract renewals.

• "Soft trading update with the margin compression piece a bigger part of our earnings downgrades. The OOH industry remains well positioned to gain share from other media formats."

Super Retail Group (SUL): Neutral with $12.50 target price

• "LfLs remain strong, +9% YTD, driving upgrades to our FY23 forecasts."

• "2H margins under pressure with discounting in the market and cost inflation."

• "We reiterate our caution of SUL needing to defend tough comps moving forward. This timing coincides with macro headwinds accelerating."

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