Evening Wrap: ASX 200 snaps 4-day losing streak as all sectors finish green

The Index breaks a four-day losing streak thanks to a strong lead from Wall Street and higher commodity prices, Australia's consumer confidence bounces but remains near depressed levels, Macquarie's take on fuel companies heading into reporting season, UBS is bullish on private health insurance providers and tying together China's inflation, US CPI and the recent performance of risk assets (and what it means for markets).

Let's dive in.

ASX 200 Session Chart

ASX 200 rallies intraday and finishes at best levels (Source: Market Index)

Markets

Alas, the oversold bounce. The Index breaks a four-day losing streak where it fell 3.8% to a three month low. This was supported by a strong lead from Wall Street and the growing urgency for stimulus from China (after the country's producer price index fell 5.4% in June). Participation on Tuesday was broad-based but defensive sectors like Staples, Healthcare and Utilities underperformed the Index. The ASX 200 is beginning to pick up the pieces (while US markets continue to trend higher). Let's see how the rest of the week settles. US inflation data is also due tomorrow night at 10:30 pm AEST.

Economy

Australia’s consumer confidence index rose 2.7% to 81.3 in July. Here are the key takeaways from the Westpac report: 

• “The Index plunged 17% over the first half of 2022 and has barely budged since then, holding in the very weak 78-86 range.”

• “A significant reported fall in inflation looks to have boosted confidence.”

• “Consumers remain wary about the interest rate outlook despite RBA’s pause.”

• “Housing market sentiment lifts, albeit with buyer attitudes still very downbeat and price expectations rising at a slower pace.”

Australia’s business confidence increased to 0 in June from -3% in the previous month.

• Forward orders, a leading indicator of demand, rose three points to -2

• Labour costs jumped 2.6% quarter-on-quarter, reflecting minimum and award wage increases

• "We continue to see warning signs in the survey about the outlook for growth but as of June firms were yet to see a real deterioration.” – NAB Chief Economist Alan Oster 

Latest news

Market Insights: China, Risk Assets and US CPI

I'm going to mix a few pieces of macro and market-related data and perspectives together. This might end up being word vomit or something insightful.

China is on the brink of deflation after yesterday's June inflation print.

• Headline inflation was 0% year-on-year, the lowest rate in more than two years

• Producer prices were -5.4%, the worst since December 2015

This adds more urgency for stimulus efforts, which tends to give commodity prices a bit of a kick. As for the US the upcoming inflation data is expected to report:

• Headline inflation to fall from 4.0% in May to 3.1% in June

• Core inflation to ease from 5.3% in May to 5.0%

• Month-on-month headline inflation of 0.3% in June

A 3.1% print sounds pretty bullish for markets. But Bank of America says there's the risk of higher inflation heading into 2024, which might coincide with Chinese stimulus. The investment bank argues that unless month-on-month CPI stays below 0.2%, inflation will fail to reach the 2.0% target in the short-to-medium term.

Source: Bank of America Gold Investment Strategy

More recently, we are seeing higher rate expectations through the Fed's higher-for-longer messaging and the resurgence of bond yields (the US 2-Year Treasury yield briefly hit 5.0% last week). This should bother risk assets. But it's not.

Risk barometers like the Russell 2000, Russell 2000 Growth ETF, ARK Innovation ETF and Innovator IBD 50 ETF are all trying to take out recent/year-to-date highs.

Russell 2000 chart (Source: TradingView)

Is the market pricing in a different outcome that's not higher for longer or a hard landing?

What's interesting is that the Fed cannot afford to appear dovish due to the risks of de-anchoring inflation expectations. Powell reiterated this view at the recent FOMC minutes:

"We like the inflation data we are seeing but we want to make sure everyone knows and thinks we are serious about staying restrictive."

But what happens if inflation surprises to the downside? We've already seen mounting deflation in China as well as the US Manheim Car Index falling 10.3% in June, the second biggest year-on-year decline on record. Spicy times indeed.

Interesting news and movers

Trading higher

• +162.5% Mobilicom (MOB) – Commercial scale purchase order (Mon)

• +16.2% Race Oncology (RAC) – Global licence agreement

• +11.5% Bell Financial Group (BFG) – First-half guidance

• +9.75% RPMGlobal (RUL) – FY23 guidance

• +7.95% Patriot Battery Metals (PMT) – Responds to short seller report

• +5.6% Sayona Mining (SYA) – Drilling results

• +5.3% Austal (ASB) – Hanwha running ruler over Austal

• +4.4% Humm Group (HUM) – SMBC amended statement of claim

• +3.6% Cooper Energy (COE) – Exemption from gov’t gas code

• +2.5% Cobram Estate Olives (CBO) – Reports Australian harvest 

• Gold sector move: Bellevue Gold (+15.2%), West Gold (+6.3%), Ramelius (+4.8%), Evolution Mining (+4.6%), Gold Road (+4.3%), Northern Star (+3.1%)

Trading lower

• -4.95% Ardent Leisure (ALG) – Guidance (Mon)

• -1.1% Amcor (AMC) – Downgraded by BofA

Broker notes

Macquarie on Australian fuel companies:

• “While Ampol had a great 1Q, 2Q looks set to be weaker on lower refining margins and the Lytton FCCU outage — we cut 2023 EPS by 7%.”

• “Viva's 2Q should also be far weaker (vs 1Q), with what is likely a wipeout for Geelong, due to the ongoing platformer outage.”

• “We maintain Outperform ratings on Ampol & Viva Energy. Any weakness on messy 2Q results (Refining) may provide an opportunity to accumulate.”

UBS on Australian private health insurance (PHI): 

• “Our overwhelming conclusion is that consumer sentiment towards PHI policies has improved to multi-year highs. We expect this to underpin further increase in participation and policy numbers into FY24.”

• “We have a positive view of the PHI sector. We increase our policy growth forecasts and price targets in this report.”

• “Positive view of PHI stocks: MPL Buy rating, PT $4.20; NHF Buy rating, PT $9.70.”

UBS’ mining strategy:

• “In 2023, industrial metals/miners rallied on hope of China recovery/stimulus & sold-off on the reality of the data.”

• “Consensus on the near-term outlook is bearish, but value investors are engaged with a key focus on searching for the trough of the cycle in base metals (particularly copper).”

• “Despite better long-term fundamentals for base metals, more leverage to Europe/US slowdown and higher beta in base metals stocks make iron ore & BHP/RIO appear more defensive against a bearish view in the sector (although we remain Sell rated on both stocks).”

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