Morgan Stanley: Iron ore is presenting a "premium" opportunity

Welcome to Charts and Caffeine - Livewire's pre-market open news and analysis wrap. We'll get you across the overnight session and share our best insights to get you better set for the investing day ahead.

MARKETS WRAP

S&P 500 TECHNICALS

MAJOR HEADLINES

• ‘Hard decisions’: Tax, spending battle to come
• Federal Budget paints bleak picture for Australians contending with soaring living costs
• RBNZ chief economist expects inflation pressures to ease going forward
• VIX uncharacteristically moving in tandem with equities as rallies prompt rush to acquire to bullish options
• Wealthy Chinese increasingly formulating exit plans amid concerns about Xi's consolidation of power
• Japan 2Y yield on cusp of turning positive, putting era of negative-yielding debt close to an end

On US earnings, Alphabet missed its EPS forecasts, weighed by lower-than-expected YouTube revenues and in spite of a smaller-than-expected loss on its cloud business. In contrast, MIcrosoft just beat its EPS and revenue forecasts. No doubt the strong US Dollar weighed heavily on both earnings results. 

YOUR GUIDE TO AUSTRALIAN INFLATION

Here is your cheat sheet for Australia's Q3 inflation print, which hits the wires at 11:30am AEDT. This is by no means an exhaustive list, but the disparity sure is interesting. According to Trading Economics, the inflation print in Australia averaged 4.87% from 1951 until 2022. Oh, and the RBA's goal is 2-3%.

• Citi: 6.4%
• Westpac: 6.5%
• NAB: 6.7%
• CBA, Morgan Stanley, ANZ: 7%
• UBS: 7.3%

THE CHARTS

Today, the report is mostly devoted to China - and more specifically, the market impact of the National People's Congress which has just wrapped up in Beijing. And if you don't think markets are arrested by Xi Jinping's words and actions, just look at this.

Ouch: Chinese tech stocks listed in the US have fallen a long, long way

And while we're on Chinese tech, the Chinese internet ETF has fallen even further in recent months than this chart. It's now down 81% from its peak in February 2021, and the chart is as ugly as you'll find.

This is not a 404 Error

For context, here is the closest thing to that ETF we can access in Australia - the BetaShares Asia Technology Tigers ETF:

But just because it's a panic selling kind of moment doesn't mean everyone is running for the exits. Cue JP Morgan's Marko Kolanovic (aka Wall Street's most stubborn equity market bull). Recently, he argued the Chinese stock sell-off is a good opportunity to buy said stocks. And that's despite the fact the offshore Chinese Yuan is now at a new record high against the US Dollar. In fact, the only thing that is going up is Chinese equity put options. What a time to be alive, huh!

Bloomberg: Put options are going through the roof

SECTOR TO WATCH

And speaking of China, our sector to watch is iron ore. We'll start with this quote from Morgan Stanley's Marius van Straaten in London:

"Compressed iron-grade spreads could recover as early as 1H23. We prefer high-grade ore and pellets over regular iron ore in the medium/longer term, as we expect demand from this subset of the market to continue to grow."

The iron ore story in itself is absolutely fascinating. The price has been in the US$90-105 range for some time, and MS strategists put that down to Chinese steel output. But the disparity is really in the price of different kinds of steel. 

Lower quality iron ore has received a lot of attention over the last few months due to the drop in demand for construction in mainland China. That, in part, explains why van Straaten argues high-grade iron ore is due for a rebound.

Not all iron ore is created equal

So what does that mean for the Australian miners? Well - the best iron ore tends to come from two operations. They are Vale and Anglo-American. Which two Aussie miners share ownership of those mines? BHP (ASX: BHP), which is an equal-weight, and Rio Tinto (ASX: RIO), which is rated overweight. Fortescue (ASX: FMG) is the only iron ore stock with an underweight rating. And after the explanation I've just given you, you now know why.

THE STAT

98%: In just three years, Australian wine exports to China have collapsed from their peak of $1.3 billion to just $21 million. (Source: Wine Australia)

GET THE WRAP

Don't miss Australia's most informative and most entertaining morning markets report each weekday from 7 am AEDT. Hit follow on this profile to know when we post new content and click the like button so we know what you enjoy reading.

If you have a chart and/or a stat that you would like to see featured in a future edition of the newsletter, drop us a note at content@livewiremarkets.com.