Evening Wrap: ASX 200 gives back all of its gains + How does the market perform in July?

The ASX 200 finished the week down 2.1%, energy stocks led to the downside as oil prices tumbled on rate hike concerns, Australia's manufacturing PMI remained in contraction in June but price pressures are easing rapidly while the services PMI eased significantly, Morgan Stanley gives its rundown of the resource sector and three ASX charts of interest (technicals and seasonality).

Let's dive in.

ASX 200 Session Chart

ASX 200 tumbles intraday and finishes at worst levels (Source: Market Index)

Markets

Wow. The ASX 200 was clobbered again. Even though we had a decent lead from Wall Street. It took only three days to wipe out the gains from the previous eight day winning streak. From a short-term perspective, this is where the market is getting a little oversold. But the way in which we got here has been a little too fast and volatile.

Energy stocks led to the downside on Friday after WTI prices tumbled almost 4% overnight to US$68.8 a barrel. While defensive sectors including Utilities, Staples and Telcos outperformed on a relative basis.

Economy

Australia's Manufacturing PMI was stable at 48.6 in June from 48.4 in the previous month.

• "New orders remained in contraction, which led to lower input acquisitions among Australian manufacturers and also affected business confidence."

• "Price pressured abated within the manufacturing sector. Input costs rose at the slowest pace since July 2020, while selling price inflation eased to a 33-month low."

Australia's Services PMI eased to 50.7 in June from 52.1 in the previous month.

• Remains in contraction territory for a third consecutive month

• "Amid higher demand, inflationary pressures intensified within the services sector."

• "Input cost inflation climbed with panel members linking rising prices to higher interest rates, wages and energy costs. In turn, charges were lifted at an accelerated pace."

Plus a few general comments about the above PMIs from Warren Hogan, Chief Economic Advisor at Judo Bank:

• "The loss of momentum in recent months will probably give the RBA some comfort that economic activity is slowing down across the economy in 2023 ..."

• "The survey suggests that the RBA has time on their side and does not necessarily need to hike rates again in July."

Japan's inflation eased to 3.2% in May from 3.5% in the previous month.

• Cooler than analyst expectations of 4.1%

• Core inflation eased to 3.2% in May but above analyst expectations of 3.1%

Latest news

Market Insights

The selling has been relentless. The ASX 200 has snapped below a key trendline. Do we see a bounce next week or do we plummet further towards no man's land?

ASX 200 daily chart (Source: TradingView)

From a seasonality perspective (based on ASX 200 performance between June 1992 and March 2023) the market still has a little bit of work cut out for it. Do we see some more selling in the final week of FY23? And perhaps more importantly, does the historical June low kick in?

ASX 200 seasonal performance (Source: Market Index)

July has historically been the third best month of the year for equities. But there's certainly a lot of worries to climb this time round.

ASX 200 seasonal performance (Source: Market Index)

Interesting news and movers

Trading higher

• +29.5% Delta Lithium (DLI) - Drilling results

• +8.3% Bubs Australia (BUB) – Continuation rally, up 20% in last three

• +6.3% Cettire (CTT) – Continuation rally, up 14.8% in last three

• +5.1% Talga Group (TLG)

• +4.4% Adriatic Metals (ADT)

• +4.1% Magnetic Resources (MAU) – Drill results

• +2.7% Leo Lithium (LLL)

• +2.6% Tyro Payments (TYR)

• +1.7% Austal (ASB) – $46m US Navy contract

• +1.95%  Endeavour Group (EDV) – Eyes acquisitions (AFR)

Trading lower

• -10.95% Boart Longyear (BLY)

• -7.6% Regional Express (REX)

• -7.4% Whispir (WSP)

• -5.3% Gold Road Resources (GOR) – Downgrade by Barrenjoey

• -4.2% Jervois Global (JRV) – Awarded 12m euro grant

• -3.9% Virgin Money UK (VUK) – UK rate hike

• -2.7% Allkem (AKE) – Downgraded by HSBC

• Oil and gas sector move: Woodside (-4.7%), Santos (-4.6%), Karoon (-3.2%)

Broker notes

Morgan Stanley’s take on the mining sector:

• Gold: “While we see gold prices steady at current levels for 2H (rise in real yields/USD + central bank buying), we expect 1H24 to be supportive of prices (MSe: 1H24 US$2,100/oz) on softening yields + supportive USD.”

• Gold: Evolution Mining remains their top pick

• Gold: Upgraded  Regis Resources to Overweight from Equal-weight on strong FY24 free cash flows

• Gold: Downgraded Northern Star to Equal-weight from Overweight due to valuation and KCGM mill expansion already priced in

• Lithium: “Chinese stimulus will likely support Li in the 2H given CY23 YTD BEV sales are up 36% YoY vs. MSe CY23:5% but we remain cautious of African supply in CY24.”

• Lithium: Upgraded IGO to Equal-weight from Underweight due to strong free cash flow yield support 

• Lithium: Underweight on Pilbara Minerals due to its premium valuation, low downstream integration and low free cash flow yield relative to IGO

• Copper: “Cu should also be supported by stimulus but by 1Q24 we see prices abating on oversupply”

• Copper: Equal-weight rated on both Sandfire and 29Metals

• Iron Ore: “For IO, we see stimulus having lagged impacts and see the recent bounce being overdone in light of steel cuts (MSe 2H23: $90/t). Potential for upside risk on MSe 1H24 IO price US$90/t.”

Plus a few Citi ‘s take on Johns Lyng Group (JLG) 

• Buy with $6.50 target price (from $9.65)

• “At first glance, this appears to be a guidance upgrade that we have been expecting, but BAU growth of 23% yoy fell short of expectations, a main culprit for share price reaction.”

• “We trim our FY24 and FY25 EBITDA forecasts by 5% and 7%, respectively due to our expectation of more gradual ramp-up in BAU with margin improvement accelerating into FY25.”

Scans