Evening Wrap: ASX 200 sneaks gain as BHP, RIO, and FMG rise on strengthening iron ore price

The S&P/ASX 200 closed 14.5 points higher, up 0.17%.

A seemingly quiet session based on the net end result on the ASX 200, but there was plenty going on under the surface. From both a fundamental and technical standpoint, the Australian share market is at a critical fork in the road.

On a sector level, the most interesting move today came in the iron ore and base metals areas of the market as copper and iron ore producers logged healthy gains on strengthening copper and iron ore prices. Sandfire Resources (SFR) (+2.1%) was the best in copper, while Rio Tinto (RIO) (+1.7%) led the iron ore majors.

Be sure to click/scroll through for the usual reporting of the major sector and stock-specific moves, the broker responses to them, as well as all the key economic data in tonight's Evening Wrap.

Also, I have detailed technical analysis on the S&P/ASX 200 in today's ChartWatch.

Let's dive in!

Markets

ASX 200 Session Chart

The S&P/ASX 200 (XJO) finished 14.5 points higher at 8,579.7, 0.27% from its session high and 0.17% from its low. In the broader-based S&P/ASX 300 (XKO) advancers beat decliners by a slender 144 to 129.

Fund flows: Economics 101 – How the risk-free rate impacts ASX sectors

Hey, it wasn’t pretty today – 11 of the toughest points the ASX 200, a.k.a. the Old Tin Pot, has ever stamped out – but at least it was consistent!

Best sectors: Energy (XEJ) (+1.1%) and Resources (XJR) (+0.8%).

Worst sectors: Communication Services (XTJ) (-0.1%), Consumer Discretionary (XDJ) (-0.3%), and Information Technology (XIJ) (-1.6%).

I note that Financials (XFJ) (+0.0%) and Health Care (XHJ) (+0.0%) were far from inspiring…

One of the reasons high P/E stocks in those underperforming sectors have been under so much pressure over the last couple of months is that risk-free rates have ratcheted higher. It started back in July as markets began to doubt the RBA’s resolve to keep cutting rates, and it jolted violently higher in October when worse-than-expected September-quarter CPI data put the final nail in the coffin.

High P/E stocks tend to rely more on debt funding to grow their businesses (it’s the earnings growth that proponents argue justifies their lofty valuations), and higher risk-free rates generally flow through to higher costs of capital – which can hurt profits.

Also, because their earnings are skewed further out into the future, high P/E stocks more punitively impacted when those future earnings are discounted back to present value. The discount rate is pegged to risk-free benchmarks like government bond yields: the higher the discount rate, the greater the diminishment in the value of future earnings.

Anyway, company valuation lesson aside, when the chart above is going up – MOTN – it means the chart below (and its high-P/E buddies) is probably going down…

As for high-yield names like banks and insurers in the XFJ, plus Real Estate (XPJ) (+0.4%) and Utilities (XUJ) (-0.4%): these are “bond proxies.” They have bond-like properties (regular yield), but they’re not bond-like in terms of being guaranteed to give you your money back at maturity. So when risk-free bond yields rise, the relative yields on bond proxies look less attractive – and they tend to be sold off in favour of owning actual bonds.

Commodity stocks, on the other hand tend to fare better in a rising risk-free rate environment because their earnings are driven primarily by spot and forward commodity prices rather than long-duration cash flows. In other words, markets value them on near-term realised margins instead of distant earnings projections that must be heavily discounted when yields rise.

Importantly, resource producers usually carry lower balance-sheet leverage relative to high P/E growth stocks, meaning their valuations are less sensitive to increases in the cost of capital.

Finally, commodities themselves are widely viewed as an inflation hedge, meaning capital often rotates towards the sector when bond yields rise, not away from it.

I hope this helps explain some of the major themes that have been driving stock prices across the ASX over the last few months – as highlighted here daily 💪.

It’s a delicate dance that’s been going on as long as markets, and one we’ve discussed here many times! It could swing back tomorrow if risk-free yields suddenly reverse, but for now, the trend in the Australian 2-year Bond Yield chart above looks pretty sound.

Today's best blue chip gainers

Today's worst blue chip losers

ChartWatch

S&P/ASX 200 (XJO)

Analysis

Another subdued performance from the ASX 200 a.k.a. the Old Tin Pot today. This is what happens when mediocrity meets obscurity – at a time when most global fund managers are eying summer vacation…

Still, it WAS NOT a follow through of yesterday’s selling – and given that many of us would have pegged that scenario as a MOTN (More Often Than Not) proposition – let’s call it a win!

“Hangs in the balance” is a phrase that comes to mind here. Things could get very, very ugly for the OTP indeed if we do see a decent continuation of yesterday’s supply-side twitch. A close below 8383 ends the bull market by my model’s reckoning – putting us in a bona fide long term downtrend.

Alternatively, consider the close proximity of the short term downtrend ribbon, and consider that the pullback from 8650 is still relatively shallow compared to the rally from 8383 that preceded it. If we see a strong demand-side push, it wouldn’t take much to log a higher trough to 8383 and close back above the short term trend ribbon – nullifying the short term downtrend and solidifying 8383 as a major point of demand.

Hangs in the balance… ⚖️

What might swing the balance is the time of the year… i.e., our proximity to the fabled Santa Claus Rally. I have some intriguing research on how November’s performance impacts the SCR, as well as the broader New Year rally that often runs into February. The article is scheduled to go live at 11am AEDT on our News page tomorrow – so stay tuned!

View

I remain comfortable at 1/3RP 🪣 (i.e., my personal allowable capital allocation limit (Risk Position) for my investments in Australian stocks is 33%).

Key levels

8383 is the closest point of demand. A close below this price would confirm the new long term downtrend (i.e., that the bull market in ASX stocks is over! 🤯). The short and long term trend ribbons are the closest zone of supply (presently 8545-8710). In the absence of other confirming demand-side control signals, the ASX 200 must close back above this zone to demonstrate the demand-side is back in control.

ChartWatch Markets: Copper smashes to new all-time high as iron ore threatens major breakout – here's what the charts say 📈

In today's edition of ChartWatch Markets, we explore the possibilities of London Metals Exchange (LME) copper's break to new all-time highs, as well as ask "What now?" given iron ore has done so much heavy lifting to reach its critical "wall of supply". Plus, the usual detailed analysis of the Nasdaq Composite – can the V-shaped rally continue!?

Economy

Today

• AUS October Building Approvals

  • -6.4% m/m vs -4.3% m/m forecast and +11.1% in September

Later this week

Tuesday

• 21:00 EUR November Flash Core Consumer Price Index (CPI) (+2.4% p.a. forecast vs +2.4% p.a. in October)

Wednesday

• 09:00 AUS Reserve Bank of Australia Governor Michelle Bullock speaks

• 11:30 AUS September Quarter Gross Domestic Product (GDP) (+0.7% q/q forecast vs +0.6% q/q in June)

Thursday

• 02:00 USA November ISM Services PMI (52.0 forecast vs 52.4 in October)

• 11:30 AUS November Household Spending (+0.6% m/m forecast vs +0.2% m/m in October)

Friday

• No major economic data releases scheduled for Friday.

Saturday

• 02:00 USA November Core PCE Price Index (+0.2% m/m forecast vs +0.2% m/m in October)

  • Personal Income: (+0.3% m/m forecast vs +0.4% m/m in October)

  • Personal Spending: (+0.3% m/m forecast vs +0.6% m/m in October)

• 02:00 USA November Prelim UoM Consumer Sentiment (52.0 forecast vs 51.0 in October)

• 02:00 USA November Prelim UoM Inflation Expectations

Latest News

Interesting Movers

Trading higher

• +66.7% African Gold (A1G) – No news.

• +10.3% Mayfield Group Holdings (MYG) – Result of SPP and Becoming a substantial holder from WAA/WMI, rise is consistent with prevailing short and long term uptrends, a regular in ChartWatch ASX Scans Uptrends list 🔎📈

• +7.4% Turaco Gold (TCG) – Drilling at Woulo Woulo & Herman Shows Higher Grade Growth, rise is consistent with prevailing short and long term uptrends, a recent regular in ChartWatch ASX Scans Uptrends list 🔎📈

• +7.1% Coronado Global Resources (CRN) – No news, general strength across the broader Coal sector today.

• +6.8% Energy One (EOL) – Director Sale of Shares Intention - Ian Ferrier.

• +5.6% Viridis Mining and Minerals (VMM) – Colossus Environmental Licensing Update and Ceasing to be a substantial holder.

• +4.8% Kingsgate Consolidated (KCN) – No news, rise is consistent with prevailing short and long term uptrends, a regular in ChartWatch ASX Scans Uptrends list 🔎📈

• +4.7% Elsight (ELS) – No news, rise is consistent with prevailing short and long term uptrends, a recent regular in ChartWatch ASX Scans Uptrends list 🔎📈

• +4.4% Select Harvests (SHV) – No news, rise is consistent with prevailing short term uptrend and long term trend is transitioning from down to up, a recent regular in ChartWatch ASX Scans Uptrends list 🔎📈

• +3.9% Stanmore Resources (SMR) – No news, general strength across the broader Coal sector today.

• +3.6% Meteoric Resources (MEI) – No news since 01-Dec Preliminary Environmental Licence Update.

• +3.5% Healius (HLS) – Continued positive response to 01-Dec Healius wins contract for supply of services to ADF and Change in substantial holding (Superannuation and Investments HoldCo 5.14% to 6.15%).

Trading lower

• -11.9% Pantoro Gold (PNR) – Tulla Resources Share Sale and Change in substantial holding.

• -11.8% Resolution Minerals (RML) – Golden Gate Discovery Grows with Multiple Gold Intercepts.

• -10.8% Minerals 260 (MI6) – Pulled back after yesterday's Bullabulling Gold Project Mineral Resource Doubles to 4.5Moz.

• -10.6% Zip Co. (ZIP) – No news, fall is consistent with prevailing short term downtrend and long term trend is transitioning from up to down, a recent regular in ChartWatch ASX Scans Downtrends list 🔎📉

• -9.8% Chalice Mining (CHN) – No news.

• -9.1% Catapult Sports (CAT) – No news, general weakness across the broader Information Technology sector today, fall is consistent with prevailing short and long term downtrends, a recent regular in ChartWatch ASX Scans Downtrends list 🔎📉

• -6.7% Titan Minerals (TTM) – Investor Presentation - Mines and Money.

• -6.7% Southern Cross Electrical Engineering (SXE) – Arbitration update, Change in substantial holding from TOP and Change in substantial holding from Tiga Trading Pty Ltd (both 10.9% to 9.9%).

• -6.6% Mayne Pharma Group (MYX) – No news, today’s move is consistent with recent volatility.

• -6.5% Unico Silver (USL) – High-Grade Results from Infill Drilling at Joaquin.

• -5.5% Galan Lithium (GLN) – No news, general weakness across the broader Lithium sector today.

• -5.3% Brainchip Holdings (BRN) – No news, fall is consistent with prevailing short and long term downtrends, a regular in ChartWatch ASX Scans Downtrends list 🔎📉

• -4.3% Core Lithium (CXO) – General weakness across the broader Lithium sector today.

• -4.3% Guzman Y Gomez (GYG) – Change in substantial holding (First Sentier Group 8.1% to 6.5%) and Change in substantial holding from MUFG (8.1% to 6.5%), fall is consistent with prevailing short and long term downtrends, a regular in ChartWatch ASX Scans Downtrends list 🔎📉

• -4.3% Droneshield (DRO) – No news.

• -4.1% Audinate Group (AD8) – Ceasing to be a substantial holder and Ceasing to be a substantial holder, (Hyperion Asset Management and Pinnacle Investment Management!!!).

• -4.0% Telix Pharmaceuticals (TLX) – No news, fall is consistent with prevailing short term downtrend and long term trend is transitioning from up to down, a regular in ChartWatch ASX Scans Downtrends list 🔎📉

Broker Moves

Atlantic Lithium (A11)

• Retained at neutral at Macquarie; Price Target: $0.23

Amplitude Energy (AEL)

• Retained at outperform at Macquarie; Price Target: $3.90

APA Group (APA)

• Retained at neutral at Goldman Sachs; Price Target: $9.00

• Retained at overweight at Jarden; Price Target: $9.65 from $9.10

• Retained at outperform at Macquarie; Price Target: $9.23

• Retained at trim at Morgans; Price Target: $7.74 from $7.88

AUB Group (AUB)

• Retained at buy at Ord Minnett; Price Target: $35.71 from $42.17

Beach Energy (BPT)

• Retained at underperform at Macquarie; Price Target: $0.80

Breville Group (BRG)

• Retained at outperform at Macquarie; Price Target: $39.20

Big River Industries (BRI)

• Retained at buy at Ord Minnett; Price Target: $1.65 from $1.60

BlueScope Steel (BSL)

• Retained at buy at UBS; Price Target: $27.50 from $26.50

Collins Foods (CKF)

• Retained at buy at Citi; Price Target: $13.07

• Retained at outperform at RBC Capital Markets; Price Target: $11.70

Charter Hall Retail REIT (CQR)

• Retained at buy at Citi; Price Target: $4.50

Deep Yellow (DYL)

• Retained at speculative buy at Canaccord Genuity; Price Target: $1.98

Elevra Lithium (ELV)

• Retained at outperform at Macquarie; Price Target: $5.20

Energy One (EOL)

• Initiated at buy at Canaccord Genuity; Price Target: $22.94

Greatland Resources (GGP)

• Retained at buy at Canaccord Genuity; Price Target: $11.55 from $10.65

• Retained at neutral at Goldman Sachs; Price Target: $8.40 from $8.50

• Retained at neutral at Jarden; Price Target: $5.00 from $5.50

• Retained at outperform at Macquarie; Price Target: $10.50

• Retained at buy at Moelis Australia; Price Target: $8.50 from $8.10

• Retained at buy at Ord Minnett; Price Target: $12.00

Global Lithium Resources (GL1)

• Retained at neutral at Macquarie; Price Target: $0.50

Goodman Group (GMG)

• Retained at buy at Citi; Price Target: $40.00

Gentrack Group (GTK)

• Retained at neutral at UBS; Price Target: $9.65

Integral Diagnostics (IDX)

• Retained at outperform at Macquarie; Price Target: $3.40

IDP Education (IEL)

• Retained at neutral at Macquarie; Price Target: $6.00

IGO (IGO)

• Retained at outperform at Macquarie; Price Target: $5.75

Imdex (IMD)

• Retained at hold at Bell Potter; Price Target: $3.60 from $3.90

• Retained at buy at Canaccord Genuity; Price Target: $3.98

• Retained at buy at Citi; Price Target: $4.20

• Retained at sell at Jarden; Price Target: $2.90 from $2.75

• Retained at accumulate at Morgans; Price Target: $3.70 from $3.80

• Retained at neutral at UBS; Price Target: $3.50 from $3.30

IPH (IPH)

• Retained at outperform at Macquarie; Price Target: $4.04 from $5.55

Liontown Resources (LTR)

• Retained at underperform at Macquarie; Price Target: $0.65

Meteoric Resources NL (MEI)

• Retained at speculative buy at Bell Potter; Price Target: $0.25

• Retained at outperform at Macquarie; Price Target: $0.39

Mirvac Group (MGR)

• Downgraded to underperform from buy at Bank of America; Price Target: $2.15 from $2.45

Minerals 260 (MI6)

• Upgraded to buy from speculative buy at Morgans; Price Target: $1.10 from $0.55

Mineral Resources (MIN)

• Retained at underperform at Macquarie; Price Target: $47.00

Metcash (MTS)

• Retained at neutral at Citi; Price Target: $3.60 from $3.90

• Retained at outperform at CLSA; Price Target: $4.20 from $4.50

• Retained at neutral at E&P; Price Target: $3.87 from $4.07

• Upgraded to overweight from neutral at Jarden; Price Target: $3.80 from $4.00

• Retained at overweight at JPMorgan; Price Target: $3.90 from $4.50

• Retained at neutral at Macquarie; Price Target: $3.50 from $4.00

• Retained at equal-weight at Morgan Stanley; Price Target: $3.90

• Retained at buy at Ord Minnett; Price Target: $4.00 from $4.60

• Retained at buy at UBS; Price Target: $4.00 from $4.35

MyState (MYS)

• Retained at buy at Ord Minnett; Price Target: $4.98

NEXTDC (NXT)

• Retained at positive at E&P; Price Target: $28.89 from $28.66

• Retained at overweight at JPMorgan; Price Target: $19.50

• Upgraded to buy from accumulate at Morgans; Price Target: $19.00

• Retained at buy at UBS; Price Target: $21.85 from $21.45

Paragon Care (PGC)

• Retained at buy at Bell Potter; Price Target: $0.49

Pilbara Minerals (PLS)

• Retained at neutral at Macquarie; Price Target: $3.00

PMET Resources Inc (PMT)

• Retained at outperform at Macquarie; Price Target: $0.45

PEXA Group (PXA)

• Retained at outperform at Macquarie; Price Target: $19.10

Rio Tinto (RIO)

• Retained at neutral at Citi; Price Target: $140.00

Sims (SGM)

• Retained at neutral at UBS; Price Target: $17.15 from $15.00

Southern Cross Electrical Engineering (SXE)

• Downgraded to hold from buy at Bell Potter; Price Target: $2.35 from $2.50

The Lottery Corporation (TLC)

• Upgraded to outperform from hold at CLSA; Price Target: $5.90 from $6.00

Tuas (TUA)

• Retained at buy at Citi; Price Target: $9.95

• Retained at overweight at Morgan Stanley; Price Target: $9.50

Treasury Wine Estates (TWE)

• Retained at buy at Jefferies; Price Target: $8.00 from $8.50

• Retained at equal-weight at Morgan Stanley; Price Target: $6.45

• Retained at hold at Morgans; Price Target: $6.10 from $6.35

• Retained at outperform at RBC Capital Markets; Price Target: $8.70 from $9.80

• Retained at neutral at UBS; Price Target: $6.25 from $6.50

Unico Silver (USL)

• Retained at speculative buy at Canaccord Genuity; Price Target: $1.30

Vault Minerals (VAU)

• Retained at buy at UBS; Price Target: $6.60 from $6.50

Scans