Evening Wrap: ASX 200 tumbles, Woodside posts bumper US$5.2bn profit, US rates set to peak at 5.4%

The local sharemarket didn't stand a chance thanks to a weak lead from Wall Street, US interest rates are now expected to peak at 5.4% with little chance of a cut this year, materials experience a broad-based selloff and Macquarie's notes on recent earnings.

Let's dive in.

ASX 200 Session Chart

ASX 200 aggressively sold off in the first hour of trade and drifts lower into the close (Source: TradingView)

Markets

Another day, another dip. The ASX 200 has a lot of work cut out for it if it wants to avoid a fourth straight week of declines. Though, there isn't much to be positive about amid weak earnings, valuation and geopolitical risks, weakening disinflation tailwinds and higher peak rate expectations.

• Energy higher after Woodside (+1.5%) posted 233% profit growth to US$5.2bn, reflecting a full-year of BHP petroleum contributions

• Materials under heavy pressure after the US dollar rallied to a near three-month high last Friday and Yellen warning China of 'serious consequences' in helping Russia

• Real Estate experienced a broad-based selloff amid the ongoing breakout for bond yields

Economy

Some lessor (but still interesting) economic updates from the ABS:

• Company gross operating profits rose 10.6% QoQ for the December quarter 2022

• On a year-on-year basis, gross operating profits are up 16.0%

• Mineral exploration expenditure fell -1.3% QoQ for the December quarter 2022

• Follows a record $1.03bn in the September quarter 2022

Latest news

Market Insights

Yields, yields and yields

The 2-year US Treasury yield has moved up to 4.84% after a three month breather. The growing disinflation and soft landing narrative helped take some heat out of bond yields, which produced some headlines like the "ASX 200 had its best January since 1986."

Now, its V-shaped back up to the highest level since July 2007. Yields are aggressively being re-priced due to hot inflation data, which has seen peak Fed funds hit 5.4% with little chance of a cut this year.

US 2-year Treasury yield (Source: TradingView)

What does this mean for markets

Markets are now bleeding a slow and painful death as yields continue to push higher. The ASX 200 is down -4.4% from its peak on February 6th. This speaks an all too familiar experience from last year where:

• Are the markets oversold? Increasingly yes.

• Are the markets due for a bounce? As things get more oversold, yes.

• But where does momentum sit? Down.

Lithium stocks blasted

Chinese lithium carbonate prices continued to sell off aggressively after trading flat between 10-15 February. Prices are now down around 35% from November all-time highs.

The continued weakness has pulled many lithium stocks into key inflection points.

• Pilbara Minerals is down -7.3% and back at recent lows

• Allkem is close to December lows

• Core Lithium has hit a fresh year-to-date low

• Lake Resources is at July 2022 lows

Lithium carbonate prices (Source: TradingEconomics)

Interesting news and movers

Trading higher

• +19.5% CogState (CGS) – Bounce after -27% in last three

• +7.5% Praemium (PPS) – 1H earnings

• +5.6% Trajan (TRJ) – 1H earnings

• +2.5% Computershare (CPU) 

• +1.9% Michael Hill International (MHJ) – 1H earnings

• +1.4% Neuren Pharmaceuticals (NEU) – 1H earnings

• +1.3% Liberty Financial (LFG) – 1H earnings 

Trading lower 

• -23.7% Downer (DOW) – 1H earnings

• -14.2% Appen (APX) – 1H earnings

• -14.7% Clinuvel Pharma (CUV) – 1H earnings (Friday)

• -11.4% Hastings Tech (HAS) – Continuation selloff, -13.9% in previous three

• -10.9 InvoCare (IVC) – 1H earnings

• -9.2% Mincor Resources (MCR) – 1H earnings

• -7.3% Pilbara Minerals (PLS) – POSCO JV secures debt facility

• -6.4% Mineral Resources (MIN) – Downgraded to Underweight from Neutral at Jarden

• -1.9% BigTinCan (BTH) – 1H earnings

• Copper sector move: 29 Metals (-13.3%), Sandfire Resources (-6.75%)

• Lithium sector move: Patriot Battery Metals (-7.0%), Allkem (-6.1%), Lake Resources (-4.9%), Liontown Resources (-3.7%), Core Lithium (-3.6%)

• Iron ore sector move: Fortescue (-7.3% but also ex-div), Champion Iron (-6.5%), BHP (-3.0%), Rio Tinto (-2.9%)

Broker updates 

Macquarie’s take on recent earnings:

Woodside (WDS): Neutral with $36.00 target price

• Full-year underlying EBITDA was 8% below Macquarie estimates

• Miss was driven by “significantly higher royalties and slightly higher production costs”

• Underlying NPAT of US$5.2bn was broadly in-line

Allkem (AKE): Outperform with $19.00 target price

• “AKE’s 1HFY23 result was solid with earnings and operating cash flow coming in within 2% of our forecasts.”

• Guidance suggests that “strong lithium hydroxide demand should underpin spodumene prices.”

Brambles (BXB): Neutral with $12.90 target price

• “Brambles is a structurally better business following recent initiatives and this is showing through the ability to mitigate inflation through pricing and surcharges.”

• “With a view that the macro will slow in the near-term, in particular inflation, and with a destocking event upon us, we take some caution on the outlook for Brambles, particularly into FY24.”

Mincor (MCR): Neutral with $1.50 target price

• “MCR reported a messy 1H FY23 result with losses higher than we expected due to impacts from hedges.”

• Mincor did not reaffirm or provide an update for guidance. Macquarie sees increased downside risk to guidance as the onus is for production to pick up in the second half.

Mineral Resources (MIN): Outperform with $124.00 target price

• “MIN’s 1HFY23 result was mixed, with in line EBITDA and a stronger dividend offset by weaker earnings and cash flow.”

• “The miss in cash flow reflected a large working capital build which was attributable to timing on cash receipts from the lithium hydroxide tolling agreements.”

• Notes that lithium accounted for 80% of EBITDA in the first half of FY23

Zip Co (ZIP): Underperform with $0.50 target price

• “Risk of a heavily discounted capital raise remains elevated.”

• “Potentially delaying payments to merchants to manage cash balances.”

• Further cost cutting seems the likely option, which may pose a risk to future revenue growth

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