Evening Wrap: ASX 200 lower, energy stocks outperform + Is it time to get bullish on China?

The Index finished the week up 2.3%, Energy stocks including uranium, coal and oil bucked the trend on Friday, China's manufacturing PMI unexpectedly picks up in August, things are starting to look up for markets (amid the seasonally worst performing month that is September) and Citi's take on China.

Let's dive in.

ASX 200 Session Chart

ASX 200 lower on Friday (Source: Market Index)

Markets

The ASX 200 finished lower and snapped a four-day winning streak after a weak lead from Wall Street. Sector performance was largely in-line with US markets, with Defensives such as Healthcare, Utilities and Real Estate leading to the downside. After such a V-shaped move from last week's lows, you can't complain about a little bit of weakness!

Policy momentum in China is seeing strength carry over to our Resource sector.

• Woodside (+1.6%) is trading near all-time highs (on a dividend adjusted basis)

• Rio Tinto (+1.2%) rose for sixth straight session

• BHP (-0.3%) recovered from session lows of -1.4%

• Sandfire Resources (+2.1%) closed near a four month high

US nonfarm payrolls and unemployment data is due tonight, where consensus expects payrolls to ease to 170,000 in August from 187,000 in July and unemployment to remain unchanged at 3.5%. Could further softening (but not falling off a cliff) data support soft landing expectations? Which would in turn weaken bond yields and drive further optimism for equities?

Economy

New borrower-accepted finance for housing in Australia fell 1.2% month-on-month in July to $24.2 bn.

• Loans for housing is down 14.1% year-on-year to levels not seen since November 2020

• The value of external refinancing rose 5.4% month-on-month to a record high of $21.5bn

China’s Caixin Manufacturing PMI rose to 51 in August from 49.2 in July.

• Well-above analyst expectations of a rise to 49.3

• The Caixin surveys around 650 private and state-owned manufacturers as opposed to the official NBS PMI which surveys 3,200 companies across China 

Latest news

Market Insights: Things are Looking Up

It's a bit of a wild market that requires investors to be rather nimble as we constantly shift from "this is the end of the world" to "this is the beginning of a new bull market."

After a rather sharp pullback in August, markets are beginning to pick up the pieces. Some interesting commentary I've come across include:

• TD Securities: "The nearing Fed pivot away from a restrictive stance should...go a long way to support crude oil, as traders extend long positions and cover their outsized shorts."

• Morgan Stanley: "As we get closer to the end of the year, the pain of being underweight equities and the resultant lack of performance is going to intensify ... forcing positive fund flows."

• Goldman Sachs: CTA equity demand has flipped back to buy with large demand in a flat, up or even down tape in next five days.

At the same time:

• It's September: The historically worst performing month of the year. Since 1992, the ASX 200 has on average dropped 1.2% in September.

Interesting news and movers

Trading higher

• +8.9% Ainsworth Game Technology (AGI) – Earnings

• +8.2% Paradigm Biopharma (PAR) 

• +7.8% Talga Group (TLG) – Permitting update

• +7.5% OFX Group (OFX)

• +5.3% WA1 Resources (WA1) – Placement

• +3.8% MMA Offshore (MRM) – Contract awards

• +3.7% Pointsbet (PBH) – Sale of US business

• +3.7% NRW (NWH) – Reaffirms guidance

• +2.5% Nickel Industries (NIC) – Upgraded by Cannacord

• +2.2% Myer (MYR) – Premier Investments raises stake

• +1.5% Atlas Arteria (ALX) – Upgraded by multiple brokers

• Coal sector move: Terracom (+6.3%), Yancoal (+4.5%), Whitehaven Coal (+3.9%), Coronado Global (+3.8%), New Hope (+3.0%), Stanmore (+2.1%)

Trading lower

• -8.8% Carbon Revolution (CBR) – Earnings

• -8.2% Mayne Pharma (MYX) – Continuation selloff

• -7.3% Chalice Mining (CHN) – Continuation selloff

• -5.7% Polynovo (PNV)

• -5.3% Fortescue (FMG) – CFO resignation

• -5.1% 29Metals (29M) – Pullback after +28% in last three

• -4.4% Austral (ASB) – Downgraded by Macquarie

Broker notes

Citi’s take on China:

• “Policy momentum is clearly picking up with multiple measures announced today to support the property sector.”

• “With accelerating delivery of pro-growth efforts, the focus is shifting to their subsequent impacts. The favourable policy shift and the (nearly confirmed) cyclical bottom of the economy could be supportive for China assets.”

• “Now with gathering policy momentum and the (nearly confirmed) cyclical bottom of the economy, we could see synchronized upbeat of both if not disrupted by new shocks.”

Citi’s take on recent results:

Appen (APX) – Sell with $1.35 target ($1.59 at 31 Aug close)

• “While Appen is making progress on winning LLM/Gen AI work and we see Appen’s scale as a strength, we remain Sell related given i) there is risk that the existing Deep Learning work continues to decline; ii) customers are still evaluating their approach to LLM; and iii) competition for LLM work seems to be intense."

Harvey Norman (HVN) – Upgrade to Buy with $4.60 target ($4.04 at 31 Aug close)

• “Harvey Norman reported FY23 EBIT (ex revals) of $722m, ~3% above Citi. The comps for Australia will get significantly easier from November. We see numerous tailwinds including a house price recovery, a warmer summer enabling sell-through of excess seasonal inventory.”

• “While we recognise the stock has rallied hard off its lows, it has still significantly underperformed the likes of JB Hi-Fi and Super Retail this year.”

IGO (IGO) – Neutral with $15.50 target ($13.20 at 30 Aug close)

• Key things to watch: Train 2 Kwinana FEED due 1HCY24 with FID to follow, downstream battery metals facility precam partner expected to be annouced this CY and update for Cosmos still expected DecQ.

Sandfire Resources (SFR) – Neutral with $6.90 target ($6.69 at 31 Aug)

• “After the result we lift our EBITDA 3% on lower-than-expected opex vs Citi for FY24. Overall, the bottom up SFR story looks better now vs 6 months ago with a clear strategy to focus on delivering value from existing operations.”

• “While SFR has growth potential at both Motheo and MATSA, it will take time for value accretion to become clear.”

Scans