The Match Out: ASX lower, Central banks & markets at odds on interest rates, and loose lips sink ships!

The choppy market action continued today as the ASX200 bounced along the bottom of its current trading range – for now at least – with a lot of indecision playing out in both equity and bond markets. Significant disparity between market pricing and central bank rhetoric is one element at play overlayed by lingering concerns around the financial sector, the huge volatility in bond markets is not helping!

• The ASX 200 finished down -47pts/ -0.67% at 6968
• The defensive Staples (+0.13%) & Telco’s (+0.08%) the only sectors to finish higher.
• Materials (-1.13%) and Energy (-0.82%) the weakest links.
• Aussie Bond yields lower today, 3-years off 7bps to 2.91% & 10-years down the same to 3.29%.
• The US Federal Reserve increased rates overnight by 0.25% as expected – the market was okay until comments from J Powell who retained his focus on inflation while Janet Yellen said broad-based deposit guarantees were not on the Government’s radar.
• We suspect some concern stems from the complete disconnect between where the market is pricing interest rates for the rest of the year (lower by Christmas) versus what JP is saying, essentially that he cannot see interest rate cuts this year – some charts on this below.
• Brickworks (ASX: BKW) +3.13% rallied on a solid 1H23 result, saying demand for prime industrial property remained strong, while they’ve taken moves to reduce gearing across their property trusts.
• Weebit Nano (ASX: WBT) Trading halt says their proposed capital raise announced this morning had not leaked, despite the stock falling over 20% yesterday (ahead of the announcement this morning), and -36% this week. Loose lips sink ships! They’re raising $45m at $5, a steep 30.2% discount to their 5-day VWAP. A bit of extra dilution there!
• United Malt (ASX: UMG) +5.52% had two wins today, confirming the new site in Scotland has produced high-quality malt as well as a broker upgrade on improving beer demand – you don’t need to tell me twice!
• Premier Investment (ASX: PMV) -3.29% downgraded to Neutral from UBS on valuation grounds – everything looks expensive versus their acquisition of CS! More on their rationale below.
• Polynovo (ASX: PNV) -3.29% took a hammering after shareholders followed the Chairman out the door. David Williams has picked up some property in the US, and sold around 20% of his holding (worth ~$10m) in the healthcare company he chairs to part-fund the purchase – must be a nice pad!
• Newcrest (ASX: NCM) +1.06% had a lacklustre session given gold was +$US40 overnight & Newmont confirmed they are in the data room again. Other gold stocks did better with Evolution (ASX: EVN) +2.14% & Northern Star (NST) +1.96%.
• Iron Ore was ~0.5% lower in Asia today weighting on Fortescue (FMG) -3.33% & RIO -1.1%%
• Gold was up overnight and continued to edge higher in Asia, trading $US1977 at our close.
• Asian stocks were solid Hong Kong up +0.86%, Japan lost -0.33% while China added +0.12%
• US Futures are all up, around +0.40%  

ASX 200 Chart

ASX 200 Chart

Interest Rate Expectations

The US Federal Reserve raised rates last night by 0.25% as expected, however, the market is very much of the opinion that they’ll be cutting later in the year as things toughen up. The below chart looks at how Futures pricing has evolved over time – if this provides correct, the target rate will be 4.26% by December 2023, which flies in the face of current Fed rhetoric.

US Interest Rate Futures

In Australia, rates have already peaked if futures prove correct, and there is a growing chance we’ll also see a cut this side of Christmas.

Australian Interest Rate Futures

Premier Investments (ASX: PMV) $24.95

PMV -3.29%: Hit hard today following a downgrade from UBS who moved to a NEUTRAL rating ahead of their 1H23 results on Monday, essentially the thesis being that it’s too expensive for the trends playing out across the sector meaning the risk/reward no longer stacks up. We hold PMV in our Emerging Companies Portfolio and are more positive than UBS, looking for ongoing strength in margins and a continuation of their strong Christmas period. As we’ve seen with other retailers like Myer & Super Retail, some are still performing well against a market that is very bearish on the consumer overall i.e. consensus expectations for consumer stocks sales are to be down -5% in 2H23 sector-wide (including PMV). While there is risk around results, we think owning PMV still stacks up, and hopefully, Mondays announcement supports that view.

Brickworks (ASX: BKW) $$23.76

BKW +3.13%%: the building products and investment company reported 1H numbers today which were stronger than expected while outlook comments appeared better than feared. Revenue was up 13% yoy, while Underlying profit added 24% to $410m. The Building Products division saw revenue growth in both Australia & Northern America despite signs the construction market has started to taper off with interest rates. The company talked to a strong pipeline of work to support the 2H. The property & investments book is what ultimately drove the result with further positive revaluations, strong performance from WHSP (SOL) which Brickworks owns 26% of (and WHSP owns 40% of BKW strangely enough) and a new property coming online. They continue to see strong demand in key industrial property markets and expect rental increases to further boost income from here.

Broker Moves

• Sandfire Rated New Buy at Jarden Securities; PT A$7
• 29Metals Rated New Sell at Jarden Securities

Major Movers Today

Have a great night

The Market Matters Team

Make informed investment decisions

At Market Matters, we write a straight-talking, concise, twice daily note about our experiences, the stocks we like, the stocks we don’t, the themes that you should be across and the risks as we see them. Click here for your free trial.

The Match Out will be available each day after the market close. Follow my profile to be notified when the latest report is live.