Evening Wrap: ASX 200 tumbles to 2 month low + Australia's inflation unexpectedly hits 6.8% in April

 The S&P/ASX 200 closed 118 points lower, down 1.64%. 

A hotter-than-expected inflation print triggers a sharp selloff, China's manufacturing PMI falls into deeper contraction and makes the case for more urgent stimulus, two microcaps double thanks to some spicy announcements and a few Macquarie notes of interest.

Let's dive in.

ASX 200 Session Chart

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

Markets

What a rough one. The ASX 200 was down around 0.8% in the first thirty minutes of trade. But things only got worse after the hotter-than-expected inflation print and weaker-than-expected Chinese economic data. Distribution and volatility has been increasing in the past few weeks and now the data has come to match it. We're now tumbling into no man's land (away from key moving averages and price levels). The more the market falls, the more its due for an oversold bounce. But then again, momentum has taken a turn for worse.

Economy

Australia’s inflation accelerated to 6.8% in April from 6.3% in the previous month.

• Well-above consensus expectations of 6.4%

• Core inflation eased to 6.5% in April from 6.9% in the previous month

• “It’s important to note that a significant contributor to the increase in the annual movement in April was automotive fuel. The halving of the fuel excise tax in April 2022, which was fully unwound in October 2022, is impacting the annual movement for April 2023.” – Michelle Marquardt, ABS Head of Price Statistics

China’s manufacturing PMI unexpectedly fell to 48.8 in May from 49.2 in the previous month.

• Well-below consensus expectations of a rise to 49.4

• The 50-point mark separates expansion from contraction

• Steel sector PMIs fell 9.8 points month-on-month to 35.2 in May

China’s services PMI eased to 54.5 in May from 56.6 in the previous month.

• Marks the slowest pace of service sector activity expansion in the past four months

Latest news

Market Insights: Big Pumps

Zelira has better drugs than Pfizer

Microcap medical cannabinoid developer Zelira Therapeutics (ASX: ZLD) shares rallied 224% on Wednesday after revealing that its ZLT-L-007 diabetic nerve pain drag delivered results superior to that of Pfizer's Lyrica.

"Topline results demonstrate that ZLT-L-007 outperformed Lyrica, achieving a significant reduction in NRS pain scores, indicating a decrease in symptom severity," the company said in a statement.

This announcement came out at 10:22 am AEST and the stock was placed in a trading halt until 10:43 am. When it resumed trading ... let's just say it would've paid to watch the open.

• 10:43 am: +25.5% to $1.18

• 11:00 am: +48.9% to $1.40

• 11:38 am: +256.4% to $3.25

Zelira intraday chart (Source: Market Index)

Solis rallies on lithium acquisition

Solis Minerals (ASX: SLM) shares doubled on Thursday after announcing the acquisition of the Jaguar lithium project in Brazil. But the stock likely got an extra kick from Next Investors, which revealed a stake of 2.5 million shares.

Next Investors makes investments in the small cap space. They share their trades via a newsletter. Their emails used to have a much 'pumper' impact on shares (aka the stock rallies the minute the email hits your inbox). But I guess as markets have become more challenging, they've lost their 'pump'.

The most crazy event I've observed with them was with Province Resources (ASX: PRL) on 17 February 2021. It was the same combo as today (company acquires a new project plus Next Investors email). The stock rallied 458% to 14.5 cents on the day. (But it's now trading at 4.1 cents)

Interesting news and movers

Trading higher

• +20.0% Betmakers (BET) – Cost base reduction update

• +20.0% Audio Pixel (AKP) – Continuation rally, up 41% in last three

• +12.9% Appen (APX) – Continuation rally 

• +7.8% Thorn Group (TGA) – Earnings

• +6.7% EcoGraf (EGR) – POSCO supply agreement

Trading lower

• -17.1% Hastings (HAS) – Project Review

• -5.4% Bank of Queensland (BOQ) – AUSTRAC and APRA undertakings

• -7.4% Aora Biosurgery (ARX) – Earnings

• -1.6% Champion Iron (CIA) – Earnings 

• Coal sector move: Whitehaven (-6.5%), Terracom (-4.9%), Yancoal (-4.2%)

• Retail sector move: Premier (-4.4%), Wesfarmers (-3.3%), JB Hi-Fi (-2.1%)

Broker notes

Macquarie notes of interest:

Aeris Resources (AIS) – Outperform with $0.70 target price

• “We recently initiated on AIS with an OP and A$0.70 target price. We forecast group copper production of 29.4kt (55.5kt copper equivalent) in FY23e growing to 34.2kt (63.1kt copper equivalent) in FY24e representing one year growth of 14%.”

• “Upcoming catalysts are Constellation PFS during 4QFY23.”

Sayona Mining (SYA) – Outperform with $0.25 target price

• “The capital raising was a surprise, given SYA was on the cusp of first production and cash flow at Sayona Québec. The transformation from developer to producer could see SYA start to generate strong cash flow in FY24, despite the onerous offtake agreement with Piedmont Lithium.”

• “We have increased our working capital build and ramp up capex assumptions for Sayona Québec to reflect guidance released with the uses of funds from the placement.”

IDP Education (IEL) – Neutral with $22.00 target price

• “Market share losses expected but hard to quantify. We estimate a 10% market share loss in Canada is 2% impact to EPS (100% = 24%).”

• “Downgrade to Neutral (prior: Outperform). The moat surrounding IELTS appears to be eroding both in Canada and in India. This is the key risk for the business. The student placement business remains intact and a key source of upside if market share gains continue.”

Wesfarmers (WES) – Neutral with $52.80 target price

• “WES annual strategy day focused on productivity gains to offset rising inflation to drive value to end users. The group's balance sheet remains robust and cash generation from its Lithium assets will provide medium term cashflow support.”

• “Consumer headwinds are clearly building in Australia … but WES's retail value focus appears to be winning new customers to offset declining items per basket.”

• “We see the next six months as a key risk period for Australian consumers as fixed rate mortgages reset. The FY23 results due on the 25th August 2023 are the next scheduled update from the company.”

Scans