Evening Wrap: ASX 200 fizzles, iron ore miners pull back, tech stocks rally to five month highs

The local sharemarket failed to hold onto session highs amid a pullback for iron ore stocks, the ASX 200 Tech Index rallies to a fresh five month high, gold stocks surge thanks to a dovish Powell and large cap lithium stocks continue to struggle.

Let's dive in.

Markets

The ASX 200 continues to show signs of fatigue, finishing the session up 0.18% from session highs of 0.62%. Still, the weakness mainly reflected a pullback for heavyweight iron ore miners, which have been on an extraordinary run. Outside of that, many sectors were still moving in-line with how the US markets rallied overnight.

• Tech stocks led to the upside with outsized moves from names like Wisetech (+6.7%), Xero (+7.5%), Altium (+3.5%), Block (+5.9%), NextDC (+2.9%)

• Growthy discretionary stocks outperformed, led by names like Wesfarmers (+0.8%) and Aristocrat Leisure (+3.4%)

• Energy stocks weighed on the market after oil prices fell almost 3% overnight due to the EIA reporting a surprise 2.6m crude oil inventory build

• Materials were also heavy, with iron ore majors BHP, Rio Tinto and Fortescue down between 0.5% and 2.5%

Economy

Australian building approvals jumped 18.5% month-on-month in December following an 8.8% decrease in the previous month.

• "The increase in the total number of dwellings approved in December was led by a sharp rise in approvals for private sector dwellings excluding houses (+56.6 per cent). The result was driven by a number of large apartment developments approved in New South Wales and Victoria." - Daniel Rossi, ABS Head of Construction Statistics

Latest news

Deeper Dive

Thinking out loud

In Monday's Morning Wrap, I briefly talked about how the ASX 200 was looking deceptively strong because of heavyweights like Commonwealth Bank and BHP. I also noted how "perhaps its time to shift focus away from the index and look at a) individual stocks and b) major US benchmarks."

We're kind of seeing that unravel now. The Index is looking tired but there's still action beneath the hood.

Stocks and sectors of interest

Tech: Tech has been on a rather V-shaped rally since early January. It had a big push above the 200-day moving average on Monday and now its continued to rally towards a six month high. We're seeing a lot of tech names like Xero, Wisetech and Altium poke their head to highs after several months of consolidation.

Betashares ATEC ETF chart (Source: TradingView)

Iron ore: Heavyweights BHP, Rio Tinto and Fortescue are starting to stall after the massive reopening inspired rally. Can a name like BHP find some support around the 20-day moving average? Or will it succumb to a much deeper pullback?

BHP chart (Source: TradingView)

Gold: Lots of gold names rallied after Powell somewhat deviated from his hawkish script. With the US dollar falling and bond yields easing, does this set gold up for a solid comeback?

Lithium: The last couple of Wraps have talked about the distribution we're seeing among large cap lithium names like Pilbara Minerals and Allkem. They both sold off around 5-7% on Tuesday and have struggled to bounce in the last two days - even amid a rather risk-on day like today where tech stocks are soaring. Still, there are still some names finding success like Argosy and Atlantic Lithium.

Wall St and the Fed

A few interesting lines after a rather frothy overnight session thanks to Powell's comments about how the "disinflationary process has begun" and the possibility that rates could stay below 5%.

• Wall Street Journal: “Markets rallied fiercely despite the hawkish message because investors know the Fed isn’t omniscient nor is it dogmatic. Economic conditions are in charge when the Fed is in data-dependent mode."

• Morgan Stanley: “The disinflationary process is underway and combined with a weaker labor market, .. we think the incoming data and forecast revisions to the March SEP will lead the Fed to pause at its next meeting.”

• New Edge Wealth: “... the more the Fed leans against rate cuts, the more markets will price in rate cuts as a scenario that the Fed must catch up on the other side of much lower inflation ... as that process goes on, ... equities can rally ... the January rally shouldn’t be faded.”

Interesting news and movers

Trading higher

• +8.0% Centuria Office REIT (COF) – 1H result, reaffirms FY23 guidance

• +7.0% Zip (ZIP)

• +6.3% Judo Capital (JDO) – Overweight rated by Morgan Stanley

• +6.0% Credit Corp (CCP) – 1H report (Wednesday)

• +5.9% Sayona Mining (SYA)

• +5.9% Deep Yellow (DYL) – Tumas Project DFS

• +5.3% Argosy Minerals (AGY) Rincon Lithium Project update

Also note:

• Gold sector move with most names up 3-7%

• Tech sector move with most larger cap names up 6-7%

Trading lower 

• -4.8% QBE Insurance (QBE)

• -2.7% Pinnacle Investment Management (PNI) – 1H result

Broker updates 

The Reject Shop – “1H23 ahead of expectations”

• Goldman Sachs: $5.30 target price; Retains Neutral 

• Notes: Like-for-like sales momentum in the 1H23 update was ahead of Goldman expectations. EBIT was also stronger, reflecting stronger margin recovery and suggests the business is “executing well on cost out”. 

Credit Corp – “US PDL and Lending contribution to increase”

• Macquarie: $24.90 target price; Retains Outperform

• Notes: 1H23 result missed expectations due to higher provisions due to loan book growth, but FY23 net profit guidance was unchanged. Macquarie expects an improved 2H23 supported by upgraded ledger purchases and net lending investment.

Endeavour Group – “It’s beer o’clock”

• Macquarie: $7.40 target price; Retains Outperform

• Notes: “return to normal trading to benefit high margin Hotels business but drag on high volume Retail business … As we move into second year of listing, expect less volatility in earnings and more predictable cashflows going forward.” 

Qantas – Bullish on outlook

• UBS: $7.50 target price; Retains Buy

• Notes: UBS expects 1H23 underlying profit before tax of $1.37bn vs. the company’s guidance of $1.35-1.45bn and an update for the full-year. UBS believes the result “should be a positive event for Qantas, confirming a strong 1H23 and resilient demand to start 2H23.” 

Scans