Morning Wrap: ASX 200 to rise, S&P 500 hits another all-time high + Woodside and City Chic M&A

The Morning Wrap was experiencing some data issues. They have since been resolved. Apologies for the late email.

S&P 500 SESSION CHART

S&P 500 rallies intraday to close at best levels (Source: TradingView)

MARKETS

• S&P 500 +0.76%, Dow +0.59%, Nasdaq +1.12%, Russell 2000 +1.67%

• S&P 500 rallied intraday to close at best levels

• S&P 500 has finished up 12 of the last 13 weeks

• Russell 2000 outperformed the large-cap index after a four-week streak of declines

• Fed interest rate decision on Thursday, where markets are pricing in near 100% likelihood of a hold at 5.25% to 5.50%

• Powell expected to maintain Fed is data dependent, with the possibility of offering dovish takeaways given disinflation momentum and soft-landing optimism  

• US corporate bond sales hit record US$176bn in January (Bloomberg)

• Global crypto funds see US$500m in outflows last week, most since spot Bitcoin ETF approval (Bloomberg)

• Investors see rally on long end as Fed starts easing cycle (Reuters)

STOCKS

• Microsoft expected to outpace Apple on AI lead (Reuters)

• Amazon pulls out of $1.45bn acquisition of iRobot on EU regulatory concerns (FT)

• IKEA to lower prices as it has cut costs and is seeing lower raw material costs (Reuters)

• Albemarle lays off 4% of total workforce amid lithium price slump (Reuters)

EARNINGS

According to Factset’s latest Earnings Insight:

• 25% of the S&P 500 has reported

• Q4 earnings set to fall 1.4% year-on-year

• 69% of earners have reported a positive EPS surprise, below the 5-year average of 77% but up from 62% a week ago

• Positive EPS surprises are seeking an average share price increase of 1.5%, up from a 0.6% decline a week ago

• Negative EPS surprises are seeing a share price fall of 0.1%, up from -2.5% a week ago

CENTRAL BANKS

• Fed could signal it can afford to take its time cutting rates (FT)

• ECB's de Guindos said progress on inflation encouraging, will be reflected in policy sooner or later (Bloomberg)

• BoE set to leave interest rates unchanged at Thursday's policy meeting as markets look for signs for a rate cut ((Bloomberg, London Times)

GEOPOLITICS

• US weighs response to deadly drone attack, three US soldiers killed ( Bloomberg)

• Trump plans massive trade war with China if re-elected, privately discussing 60% tariff on China imports (Washington Post)

• Washington plans to announce large grants for chip plants by end of Q1 (Bloomberg)

• Hungary vows to defy EU pressure to approve €50B Ukraine aid package (FT)

CHINA

• China's Evergrande ordered to liquidate as unable to offer restructuring plan (Reuters)

• China's securities regulator said it will be suspending lending of restricted shares for short sales (Reuters)

• China's industrial profits show second consecutive annual fall (Reuters)

• Economists survey expects China GDP deflator to decline until at least Q3, marking longest stretch of price declines since 1999 (Bloomberg)

ECONOMY

• UK job market report showed vacancies fall, adding to signs that the labor market cooling rapidly as activity slows (Bloomberg)

Two Headlines to Watch

City Chic Collective (ASX: CCX) has offshore suitors circling, receiving several informal approaches for its North American business, according to the AFR.

Woodside (ASX: WDS) is close to finalising due diligence on Santos, according to The Australian. The article notes that the premium offered may be as low as 10%.

Bapcor Earnings – Sometimes It Makes No Sense

I know a lot of traders that got rinsed trying to short Bapcor (ASX: BAP) at the open on Monday. The company reported a fairly poor 1H24 trading update, validating the short thesis.

• Revenue: Preliminary 1H24 revenue of $1.0 billion, up 2% year-on-year. Below Morgan Stanley estimates of $1.04 billion

• Net profit: Preliminary 1H24 net profit of $53-54 million, down 13-15% year-on-year. Below Morgan Stanley estimates of $59.4 million

• Management commentary: "The results were disappointing due to general macroeconomic headwinds which have impacted our Retail business, as well as increased cost of doing business inflation and higher interest rates."

A double miss, sharp year-on-year decline in net profit and downbeat commentary from management – It sounds like a recipe for a 'trending lower' kind of day. Instead, Bapcor opened 2.9% lower and rallied intraday to close 5.9% higher.

Bapcor intraday price chart on Monday, 29 January 2024 (Source: TradingView)

What were some of the potential catalysts to drive such an abnormal rally?

On the same day, the AFR reported Bapcor emerging as a "prime candidate for private equity firms" given its recent share price weakness. It's quite possible that the takeover speculation superseded the underwhelming result.

Sierra Rutile – Another Marginal Miner Bites the Dust

Sierra Rutile (ASX: SRX) is the world's largest producer of natural rutile, a mineral used in the production of titanium dioxide, which is a key ingredient in white pigments for paints, plastics and paper. The company also produces smaller quantities of ilmenite and zircon.

On Monday, Sierra suspended its Area 1 Operations (four main deposit areas and processing hub) after the Government of Sierra Leone advised the removal of tax concessions including:

• Withholding taxes of 0.5% rather than 5.5%

• Fuel duty of 1.0% rather than 12.0%

• Royalty of 0.5% rather than 4.0%

• Minimum corporate tax rate of 0.5% of revenue rather than 3.5%

This goes to show that the business was uneconomic without government concessions. It's also worth noting that the company's December quarter was equally as uneconomic, with realised rutile prices of $1,258 a tonne vs. cash production costs of $1,268 a tonne.

The resource space is a tough gig right now and plenty of 'meh' projects are entering care and maintenance amid a slump in underlying commodity prices.

ASX corporate actions occurring today:

• Trading ex-div: Diverger (DVR) – $0.02

• Dividends paid: A2B Australia (A2B) – $0.60, Metcash (MTS) – $0.11 

• Listing: None

Economic calendar (AEDT):

• 11:30 am: Australia Retail Sales (Dec)

• 5:30 pm: France GDP (Q4)

• 8:00 pm: Germany GDP (Q4)

• 9:00 pm: Eurozone GDP (Q4)

• 2:00 am: US JOLTs Job Openings  (Dec)