Morning Wrap: Nasdaq rallies to 10-month high, Allkem set for US$10bn merger, ASX futures lower

The Nasdaq breaks out to levels not seen since August 2022, US inflation comes in with a 4-handle for the first time in two years, shelter inflation eases for the first time after 25 consecutive increases, Allkem and US-listed Livent has announced a US$10.6bn merger and set to emerge as the world's third largest lithium producer by 2027.

Let's dive in.

S&P 500 SESSION CHART

Choppy but positive post-CPI day (Source: TradingView)

MARKETS

• S&P 500 higher, up from session lows of -0.5% but off session highs of 0.85%

• Nasdaq marks its highest close since 26 August 

• Inflation print was the highlight of the day – Headline and core PCI both up 0.4% month-on-month in April, largely in-line with expectations

• WTI crude lower, snaps four-day rally

STOCKS

• US banks post record first quarter profit despite turmoil (FT)

• Google announces AI product updates: $1,799 folding phone, AI in search (CNBC)

• Occidental Petroleum earnings down 48%, misses estimates (Reuters)

• EA beats earnings expectations with big Q4 bookings boost, raises guidance (Barron’s)

• Disney shares slip as company loses streaming subscribers (Reuters)

ECONOMY

• US inflation shows signs of moderating, giving Fed room to pause (Bloomberg)

• US debt ceiling meeting sees little progress, parties agree to continue talks (NY Times)

Deeper Dive

US inflation: Below 5%

• US inflation decelerated to 0.4% month-on-month and 4.9% year-on-year in April, below consensus expectations of 5.0%

• This marks the first inflation reading below 5.0% in around two years and marks the tenth consecutive decline

• Core inflation was unchanged at 0.4% month-on-month and 5.5% year-on-year, inline with expectations

A few interesting takeaways:

• Inflation has never declined on a year-on-year basis for ten straight months, dating back to the 1930s

• "... 40% of the CPI basket (by weight) is in outright deflation. This is a huge development ... Housing and Food are not 'deflating' even though real-time measures show this. That would add another 50% or so when they do ..." - CNBC

• Year-on-year shelter CPI eased from 8.2% to 8.1%, the first fall after 25 consecutive increases. Shelter represents more than a third of the index

• Fed funds futures now pricing in a 93.9% probability of a pause, up from 78.8% a day ago

• "We view today's CPI report as supportive of our call for a pause at the June FOMC meeting, because the shelter stepdown looks increasingly durable, inflation breadth softened somewhat further and the strength in used car prices is likely temporary." - Goldman Sachs

And some data-oriented takeaways from Bespoke Invest:

• "... By June, year-on-year CPI is very likely to be down over five percentage points from its peak of 9.1%."

• Every time that's happened since 1940, "the S&P 500 was up by at least 13% at some point in the next year."

Source: Bespoke

Sectors to Watch

A relatively positive overnight session that was led by more growth-y sectors such as tech and discretionary. As well as the rate sensitive real estate sector.

• Lithium: The VanEck Rare Earths/Strategic Metals ETF rose 2.0%. But what was more interesting was the news about the merger between Allkem and Livent. (More details below) Does this drive more positive flow through for lithium names today?

• Uranium: Uranium has appeared in the last 2-3 Wraps as the Global X Uranium ETF is breaking out of 2-month base. It extended gains overnight, up 1.2%.

• Nickel: Nickel futures fell 4.1% overnight and down almost 10% in the last two.

Lithium M&A heats up: Allkem and Livent

Wow. A little over two years ago, Galaxy Resources and Orocobre merged to create Allkem.

Now, Allkem and US-listed Livent have announced a US$10.6bn merger of equals to create the world's third largest lithium producer by 2027. Here are a few takeaways from TD Securities:

• The merger seeks to achieve $125m pa in synergies, capital savings and the benefits of listing in the US

• Livent trades at almost double the 2024e EBITDA of Allkem

• Allkem shareholders will receive the right to one share of the new company, while Livent shareholders will receive 2.406 new shares

• Allkem shareholders will own approximately 56% of the new co

• The combined Group seeks to grow their lithium carbonate equivalent capacity from 60ktpa in 2022 to 248ktpa by 2027

• "We see compelling combination rationale in listing the pro forma Newco in the US given AKE's discount valuation ..."

The Budget's Financial State

This week, I wrote a piece on the kinds of companies and sectors that could benefit from Budget 2023. But this part of the wrap is going to focus on the financial state of the Budget. And despite the rosy headlines of a surplus, there are a few things to watch out for.

• A $4.2 billion projected surplus this year will likely be short-lived. The deficit could return as soon as next year.

• Economic growth is likely to remain below 2% until 2025, above the US, UK and Eurozone but well below the growth of regional neighbours like China and India. And if there is more financial stress in the pipeline, then the chart below could come into play.

Source: Australian Government Treasury

Source: Australian Government Treasury

• Finally, although it's not the most investable theme of all time, Australia has had a chronic and multi-decade problem with debt. And that debt-to-GDP ratio is continuing to go up despite the savings measures announced by Treasurer Chalmers.

So what does it all mean for equities?

Once again, we have a version of this on our website but I thought of passing along two extra quotes from UBS and Macquarie analysts.

UBS notes the help for low-income households could be a big help to companies like Coles (ASX: COL), Kmart owner Wesfarmers (ASX: WES), Super Retail Group (ASX: SUL), and even Dominos Pizza (ASX: DMP).

More help for the property sector is always good news for companies like Mirvac (ASX: MGR), Stockland (ASX: SGP), and LendLease (ASX: LLC) as well as the giants of Domain (ASX: DHG) and REA Group (ASX: REA). Needless to say, subsidies for the construction industry also benefit those companies.

Macquarie, bearish as ever, noted that the Budget hasn't really changed their medium-term forecast for equities. But in the short-term, there is some history worth noting:

"In the short term, we note Australian equities tend to rise more in the month after a mid-term (+1.4%) than post-election (0.7% fall) or pre-election budget (1.8% fall)... and the rise after an ALP mid-term is higher (+1.7%)."

ASX corporate actions occurring today:

• Trading ex-div: Westpac (WBC) – $0.70

• Dividends paid: Myer (MYR) – $0.04 

• Listing: None

Economic calendar (AEST):

• 10:30 am: Westpac Consumer Confidence

• 11:30 am: China Inflation 

• 9:00 pm: UK Interest Rate Decision

• 10:30 pm: US Producer Price Index