Morning Wrap: China's heatwave tightens lithium supply, UK inflation surges, ASX to fall

US stocks begin to turn after a massive rally, Target’s quarterly profits dip almost -90% compared to a year ago, energy rationing in China is taking a toll on industrial production and a few highlights from FOMC minutes. 

Let’s dive in.

MARKETS

Quick one from Citi’s Managing Director Scott Chronert:

• It is justified to sell into further strength

• We think the risk/reward becomes skewed to the downside as 1H23 recession risk means lower earnings

• 3,650 in case of a mild recession, 4,700 if Fed manages a soft landing (re S&P 500)

Also, an interesting point from Jurrien Timmer, the Director of Global Macro at Fidelity. “The S&P 500 has retraced 50% of its decline, but the leadership of the last bull market is no longer the leadership today.”

Source: Fidelity

"When we look at the different groups as a percentile of their 12-month range, we see that it’s the boring stuff like utilities, low-vol, and dividend-payers that are driving the bus now," he said.

Onto the usual stuff.

• 10 out of 11 US sectors lower

• Energy was the only green sector

• Defensives including Utilities, Staples and Real Estate were relative outperformers

• Communication Services and Materials led declines

• 71% of US stocks declined

• 46% of US stocks trade below their 200-day moving average (43% on Wednesday, 49% a week ago)

STOCKS

• Bed Bath & Beyond (+11.8%) continues to rally on abnormally high trading volume from retail investors. The stock briefly rallied 45% intraday but faded after reports that RC ventures sold 9.5m shares 

• Lowe’s (+0.5%) second quarter profits topped analyst expectations but sales unexpectedly declined amid lower demand for certain discretionary categories

  • CEO: "Our results in the first half were disproportionately impacted by our 75% DIY customer mix, which was partially offset by our double-digit Pro growth for the 9th consecutive quarter"

• Target (-2.7%) posted an almost -90% dip in quarterly profits compared to a year ago following steep markdowns of unwanted inventory. Target earnings missed analyst expectations by a long shot but reiterated its full-year guidance, expecting a rebound in the second half

  • Inventory remains high at US$15.3bn compared to US$15.1bn a quarter ago. Management said the inventory has pivoted towards a more favourable mix

  • CEO: “If we hadn’t dealt with our excess inventory head-on, we could have avoided some short-term pain on the profit line, but that would have hampered our longer-term potential.”

• Krispy Kreme (-12.1%) posted profit and revenue figures that missed Wall St expectations. Still, the total number of donuts sold during the quarter was up 7% globally from a year ago

  • CEO: "After the end of the second quarter, we took successful pricing actions in the U.S. and U.K. markets and we have seen a significant deceleration in key commodity costs for 2023 in recent weeks.”

EARNINGS

There are around 30 companies in the S&P 500 left to report - so we’ll probably say goodbye to this section next week. 

US corporate earnings we’re watching this week:

• Thur: Weibo, Estee Lauder

• Fri: John Deere, Footlocker 

ECONOMY

• UK inflation accelerated to 10.1% year-on-year in July from 9.4% in June

  • Above consensus expectations of a 9.8% increase

  • The Bank of England has been criticised for losing control over inflation and remains far behind the curve with interest rates at 1.75%

  • Food prices up 12.7% year-on-year and up 2.3% month-on-month

  • Fuel prices up 43.7% year-on-year and accelerated to 2.9% month-on-month

  • “Eyewatering increases in household energy bills between now and next April mean inflation is likely to head above 12% from October. But core inflation might have peaked or is close to peaking - now that goods price pressures are easing,” said ING

• US retail sales were flat month-on-month in July from 0.8% in June

  • Slightly below consensus expectations of a 0.1% gain

  • Falling gasoline prices resulted in a -0.5% decline in goods prices. This means that inflation-adjusted retail sales rose 0.6% for the month

  • Retail sales excluding autos was up 0.4% in July, ahead of expectations of a -0.1% fall

• Federal Reserve minutes highlights:

  • “Many participants re-marked that, in view of the constantly changing nature of the economic environment and the existence of long and variable lags in monetary policy’s effect on the economy, there was also a risk that the Committee could tighten the stance of policy by more than necessary to restore price stability.”

  • “Declines in the prices of oil and some other commodities should not be relied on as providing a basis for sustained lower inflation, as these prices could quickly rebound.”

  • “With inflation remaining well above the committee’s objective, participants judged that moving to a restrictive stance of policy was required to meet the committee’s legislative mandate to promote maximum employment and price stability.”

COMMODITIES

• Iron ore futures fell -1.9% to US$104.6 a tonne. A few quick bites:

  • Chinese iron ore port inventories are rising quickly, up 2m tonnes last week and 12.2m tonnes since late June. It’s a V-shaped rebound back to 2-month highs

  • Port headland iron ore shipments are up 5.9% year-on-year in July

  • China’s heatwave is forcing some steel mills to slow and/or suspend operations, weighing on iron ore prices

• Oil is still struggling to rebound even after the EIA crude oil report posted an unexpectedly large 7.1m draw, well above consensus estimates of a 100,000 draw

• Gold continues to fade amid further strength from the US dollar and Treasury yields

An Evening Wrap should be out around 4:30 pm AEST today. Watch this space, hopefully its a banger.

#1 Tech

The Nasdaq and tech underperformed as volatility begins to pick up and the recent euphoria begins to moderate. The US 10 year Treasury yield jumped from 2.8% to 2.9%, which also weighed on growth-heavy sectors.

The overnight pullback for tech could see some negative flows for local tech stocks. The S&P/ASX 200 Tech Index is trying to consolidate its recent gains, resting along the 50-day (yellow). It's encouraging to see the 50-day begin to flatten but the 200-day remains in downward.

ASX 200 Tech Index chart (Source: TradingView, Annotations by Market Index)

#2 Uranium

The Global X Uranium ETF headlined the losses on the list of overnight ETFs we track, down -3.8%.

The weakness was more so to do with the market's risk-off attitude and an underperformance of materials stocks. Uranium spot prices managed to inch higher, up 0.3% to US$48.7/lb.

#3 Lithium

Likewise, the VanEck Rare Earth/Strategic Metals ETF is beginning to turn, down -3.2%. In some ways, it's a logical pullback after an almost 40% rally since mid July.

A name like Core Lithium (ASX: CXO) rallied right into April highs, now down around -11% from those levels.

Core Lithium price chart (Source: TradingView, Annotations by Market Index)

The question is - will it be an orderly pullback where it falls like 3-5% and consolidates, or do things get ugly?

On a side note, energy rationing in China is tightening lithium supply, according to Fastmarkets.

"Several major lithium producers in Sichuan have either suspended production or lowered their operating rates in response to the power crunch," sources told Fastmarkets. The region is responsible for 29% of the country's lithium salts production.

#4 Energy

Oil prices struggled to hold onto gains but the energy sector was still the best performing and only green sector on Wall Street.

"It looks like the global demand crude outlook is improving as global recession fears ease. This oil market is still very tight and since there is limited spare capacity and expectations of a revival of the Iran nuclear deal are dwindling, it looks like oil needs to head higher," said Oanda senior market analyst, Ed Moya.

"It was a bullish EIA report as US crude exports rose to a record as Europe scrambles for alternatives to Russian oil," he added.

Stocks going ex-dividend:

• Thur: GPT, IAG, KOV, MYS, QBE

• Fri: GWA, RYD, ZIM

• Mon: AZJ, MFG, SDF, STO, VCX

• Tue: ACL, DHG

• Wed: PGH, SGF, TLS

ASX corporate actions occurring today:

• Dividends paid: AIQ, CVC

• Listing: None

• Issued shares: AHQ, BIO, BYH, CNJ, CPM, CR9, FDV, FPH, FRS, FZO, HYT, IVZ, MIR, MRR, NAB, NBI, OPY, PH2, POL, RML, RUL, SLC, STK, TPD, WWI

Other things of interest (AEST): 

• Australia Unemployment Rate (July) at 11:30 am

• Eurozone Inflation Rate (July) at 7:00 pm

• US Existing Home Sales (July) at 12:00 am