Evening Wrap: ASX up 3.2% this week, Fortescue rallies 4% and how does the market perform in April?

 The S&P/ASX 200 closed 55.5 points higher, up 0.78%. 

The ASX 200 finishes the week on a five-day winning streak, iron ore stocks lead the market as spot prices return to US$125 a tonne, China's services PMI jumps to the highest level since May 2011, Spanish headline inflation tumbles but core remains sticky and how does the ASX 200 perform in April?

Let's dive in.

ASX 200 Session Chart

ASX 200 gapped up and closed around session highs (Source: Market Index)

Markets

The ASX 200 finishes the week with a perfect win streak, up 3.2%. Global markets are experiencing a strong relief rally as the banking situation stabilises but its probably worth chucking in this quote that goes something along the lines of "the strongest rallies occur in bear markets". Does this rally have more legs to run or will we see another destabilising event?

• Materials outperformed, led by Fortescue (+4.1%), Rio Tinto (+2.5%) and BHP (+2.5%)

• Healthcare higher thanks to broad-based gains, Cochlear (+2.4%) and Ramsay (+2.0%)

• Energy underperformed after Woodside (-1.9%) fell despite higher oil prices overnight

Economy

China’s Manufacturing PMI eased to 51.9 in March from 52.6 in the previous month.

• Of note, China’s March steel PMI fell back into contraction territory (down 1.7 to 48.4) due to significant drops in inventories for both finished goods and raw materials

China’s Non-manufacturing PMI jumped to 58.2 from 56.3 in the previous month.

• Service PMIs are now up for a third straight month to the highest level since May 2011

Latest news

Market Insights

Headline vs. Core Inflation

Headline inflation fell sharply across Europe in March. Data from Thursday night showed that:

• Spain inflation 3.3% year-on-year in March from 6.0% in February

• German inflation was 7.4% from 8.7% in the previous month

Spain inflation was well-below analyst expectations of 3.8% while Germany was a slight miss against expectations of 7.3%.

However, when you look at core inflation:

• Spain core inflation was 7.5% in March from 7.6% in February

Generally speaking, when headline inflation falls, core is soon to follow. However, is this time different?

"The fact that there are still no signs of any disinflationary process, discounting energy and commodity prices, as well as the fact that inflation has increasingly become demand-driven, will keep the ECB in tightening mode," warned ING Economics.

Of interest, is how food inflation was up 22.3% in Germany, to a fresh high.

The ASX 200 in April

I recently compiled the average daily performance for the ASX 200 between June 1992 and March 2023. So how does the market perform in the month of April?

• April and December are the strongest seasonal months of the year. Both netting an average gain of 0.11%.

• As the average daily performance table below shows, the ASX 200 has historically been green in 7 of the first 8 days of April

• I should probably put in a disclaimer that past performance is not an indicator of future returns

Source: Market Index

Talking Technicals: ASX 200

The ASX 200 is rallying into the 50-day and trendline. So let's see if the rally shows any signs of fatigue as it pushes these key levels.

What would be really interesting is if we see a bit of a lockout rally. As the name suggests, this is where the market V-shapes in such a powerful fashion it makes it really hard for investors and traders to get in (since there's no pullback).

ASX 200 chart (Source: TradingView)

Interesting news and movers

Trading higher

• +30.9% EML Payments (EML) – Earnings guidance

• +25.0% Aurelia Metals (AMI) – Federation project update

• +12.0% Jupiter Mines (JMS) – Earnings and strategy update

• +11.9% Jervois Global (JRV) – Bounce after -50.8% in last three

• +8.6% Novonix (NVX) – JV with TAQAT

• Gold sector move: Gold Road (+5.6%), Bellevue Gold (+4.5%), Ramelius (+3.3%), Evolution (+3.0%), Northern Star (+2.3%)

Trading lower

• -7.2% Appen (APX)

• -6.3% HealthCo Healthcare & Wellness REIT (HCW) – Capital raising

• -4.8% Lake Resources (LKE)

Broker updates

Morgan Stanley’s Q2 commodity strategy:

Base metals

• “Base metals: global growth concerns cause uncertain outlook: We continue to favour aluminium driven by additional smelter cuts in Yunnan and see Chinese capacity less likely to return this summer, providing cost support.”

• “South 32 remains our key pick, with 16% upside to our PT of $4.90 per share, generating healthy free cash flow yield of 5%/8% on base/spot in FY24e.”

• “Alumina remains overweight as tight alumina market provides support.”

• “For copper, we see 2Q support (MSe: US$4.20/lb, MSe 2H US$2.67/lb; Spot US$4.07/lb) but forecast a 140,000 tonne/240,000 tonne surplus for 2023-24. We take profits here, with Sandfire Resources to Equal-weight (from Overweight) as it trades near our new price target and we monitor the updates to MASTA)”

• “29 Metals to Equal-weight (from Underweight) with price target $1.30 following a ~50% fall since December 2022.”

Iron ore

• “We remain tactically bullish on iron ore, as the recovery in China continues and producing regions face weather disruptions.”

• “However, by 2H we see iron ore being well supplied with China’s steel production tapering off to maintain flat year-on-year production and scrap use rising (displacing iron ore)”

• “Preferred iron ore name remains Rio Tinto Overweight with ~10% upside to price target.”

• “Fortescue Underweight is least preferred, lacking valuation support and risk of FFI spend chewing into future dividends.” 

Lithium

• “Cautious on demand, focus on volume and valuation.”

• “We continue to see heightened risk of inventory de-stocking in the downstream battery market.”

• “In our view, lithium remains a volume game, with volume expansions rather than price driving EPS growth in the medium term.”

• “We upgrade Allkem to Overweight (from Underweight) given its market lading FY23-26 LCE growth of 331%.” 

Scans