Morning Wrap: ASX 200 to fall, US markets closed + Understanding Pilbara Minerals' offtake deal

The US market was closed for the Martin Luther King Jr. holiday, European stocks finished lower as policymakers pushed back against aggressive rate cut expectations, Taiwan votes have elected the presidential candidate most despised by Beijing, China unexpectedly leaves key rates on hold and understanding Pilbara Minerals' expanded offtake agreement with Ganfeng.

Let's dive in.

STOXX 600 SESSION CHART

The pan-European STOXX 600 trended lower and finished at worst levels (Source: TradingView)

MARKETS

Note: The US market was closed for Martin Luther King Jr. Day. US-related data (S&P 500, Nasdaq, Dow and US Treasury yields) in the above table will reflect yesterday’s data. 

• European markets finished lower overnight and near worst levels

• Pan-European STOXX 600 Index fell 0.54%, down from session highs of 0.18%

• European yields rallied after the ECB’s Chief Economist said cutting rates too fast could fuel a new wave of inflation

• Futures for major US benchmarks are currently down around 0.05%

CENTRAL BANKS

• Fed's Bostic believes rates need to stay on hold until at least summer to prevent prices from rising again (FT)

• ECB's Lane says recalibrating rates too fast self defeating (Bloomberg)

• ECB forecast to cut interest rates four times this year (Bloomberg)

GEOPOLITICS

• Taiwan elects US-friendly president, defying China warnings (Bloomberg)

• US delivers message to Iran regarding Houthis in Yemen after second airstrike (BBC)

• Yemen Houthi rebels fire missile at US warship in Red Sea in first attack after American-led strikes (ABC)

• Red Sea air strikes and what it means for energy, inflation and retail (London Times)

• Ukraine peace plan talks in Davos end with no clear path forward (Bloomberg)

• Qatar pauses gas shipments via Red Sea after US airstrikes (Bloomberg)

CHINA

• PBOC maintains MLF rate at 2.5% vs. analyst expectations for a rate cut but keeping yuan supported (Bloomberg)

• Former PBOC official says China's property downturn may continue for two more years before gaining stability (Bloomberg)

• China domestic demand recovery expected to be slow and bumpy as targeted stimulus proceeds at snail-like pace (Bloomberg)

ECONOMY

• UK housing market gains momentum at start of 2024 (Reuters)

• Germany escapes recession by razor-thin margin as demand slumps (Bloomberg)

Super Retail Stocks

That's not a crypto chart. It's JB Hi-Fi (ASX: JBH).

JB Hi-Fi price chart (Source: TradingView)

The charts from peers such Premier Investments (ASX: PMV) and Super Retail Group (ASX: SUL) aren't too shabby either. But why?

• Solid earnings: On Monday, Super Retail Group reported preliminary unaudited results for the first half of FY24. The company expects first half revenue to be $2.0 billion, up 3% year-on-year and in-line with analyst expectations. Gross margins is expected to be higher than a year ago but the cost of doing business (as a percentage of sales) has increased as a result of inflation in wages, rent and electricity.

• P/E expansion: Earnings have remained relatively sound while the share price rallies – This is known as P/E expansion. Super Retail's P/E ratio has rallied to 12.1 from 7.6 back in June 2023.

• Shares bottom before earnings: In almost every case, the market has bottomed out 2-3 quarters before the end of a recession. But as the saying suggests, earnings might need to do the heavy lifting from here.

But here come the broker downgrades. Super Retail has been hit by a number of downgrades overnight including:

• CLSA downgraded to Underperform from Buy but raised target price to $16.50 from $15.25

• Morgans downgraded to Hold from Add but raised target price to $17.50 from $17.0

• Bank of America downgraded to Underperform from Neutral but raised target price to $14.60 from $13.40

Why are brokers raising target prices but downgrading their ratings?

• The 1H24 earnings from SUL are solid (all things considered) and in-line with consensus expectations

• The stock has rallied almost 70% since late June 2023

• The rating likely calls for investors to be cautious after such an outsized rally

Pilbara Minerals and Ganfeng

Pilbara Minerals (ASX: PLS) expanded its offtake agreement with China's Ganfeng on Monday. As the company notes, this "materially increases short and medium term supply of spodumene concentrate to one of the world's leading lithium chemical converters."

In summary (calendar year):

• 2024: Supply an additional 150,000 tonnes of spodumene concentrate

• 2025: Supply an additional 100,000 tonnes of spodumene concentrate (plus an option to increase to 150,000)

• 2026: Supply an additional 100,000 tonnes of spodumene concentrate (plus an option to increase to 150,000)

Here's an interesting perspective from one of my favourite lithium commentators Dwayne Sparkes.

• China is suppressing lithium prices with low grade internal sources (aka lepiodlite) to bide time to build stakes in overseas, high quality lithium plays

• China is also seeking to gain more buying power to get access to cheaper material

• This is taking place right now as they're locking in large amounts of spodumene concentrate

• The move seeks to soak up current supply while prices are low, effectively building a stockpile

Just how long can China suppress the market for? The above, coupled with recent developments such as further Tesla price cuts and Hertz selling EVs for gasoline vehicles, reiterates the bearish near-term narrative for lithium. And as we all know, a lot of developers and producers are hanging on to dear life at current prices. Cough Core Lithium (ASX: CXO).

ASX corporate actions occurring today:

• Trading ex-div: None

• Dividends paid: None

• Listing: None

Economic calendar (AEDT):

• 10:30 am: Westpac Consumer Confidence (Jan)

• 6:00 pm: UK Unemployment (Nov)

• 9:00 pm: Germany ZEW Economic Sentiment Index (Jan)

• 12:30 am: Canada Inflation (Dec)