Three of Morgan Stanley’s Top Materials Picks – Graphics and Caffeine

Welcome to Charts and Caffeine – Livewire’s pre-market news and analysis digest. We’ll take you through the session overnight and share our best ideas to better prepare you for the day of investing ahead.

MARKET ENVELOPMENT

  • DOW-30962 (-0.56%)
  • S&P 500 – 3901 (-1.13%)
  • NASDAQ-11,552 (-1.43%)
  • CBOE VIX – 26.27 (0.42%)
  • United States 10 years – 3.453%
  • USD INDEX – 109.72
  • FTSE 100 – 7,282 (+0.07%)
  • STOXX 600 – 414.78 (-0.65%)
  • United Kingdom 10 years – 3.165%
  • GOLD – US$1,677/oz (-1.9%)
  • WTI CRUDE – US$85.10/bbl (-3.8%)
  • DALIAN IRON ORE – US$100.58/T (-0.1%)

MAJOR TITLES

  • The Dow Jones loses more than 170 points as investors react to rising Treasury yields
  • US inflation is less and less linked to the pandemic and geopolitics and more to a tight labor market

  • Survey of CEOs shows dwindling hiring and capital investment plans

  • Some of China’s largest state-owned banks cut deposit rates for the first time since 2015

  • PBOC pauses monetary easing, partially cancels policy borrowing, keeps rate unchanged

  • China is aiming for around 5.5% growth in 2022, but economists no longer think even 3% is achievable

  • Chinese exporters warn of tough times ahead as slowing overseas markets force job cuts and lower-value goods

  • UK consumer confidence fell into negative territory for the first time since 2020

  • Narrowing CPI-PPI gap may offer some optimism for equities

  • Dividends/buybacks and gas boom lift US energy stocks amid falling crude prices

CALENDAR

There’s a lot on the docket for next week, so I’ll stick to the most important things.

AU: RBA meeting minutes, Tuesday 11:30 a.m. AEST – the market will be on the lookout for any clues as to the likely pace and quantum of rate hikes

United States: Fed decision, Thursday at 4:00 a.m. AEST – this is the most important for the markets. How has the recent hot inflation print changed Fed thinking, if at all? We’ll find out, while the press conference should also be interesting to read. The last time Powell spoke in Jackson Hole, he knocked over the basket of apples. We also get Flash Services PMI on Fridays at 23:45 AEST

Everyone else: We also get interest rate decisions and policy statements from the BOJ, Swiss National Bank and Bank of England – all on Thursday. We also get the European and German manufacturing and services PMI numbers on Friday.

TECHNICALLY

Short and sweet this week on the ASX 200 chart. When I covered it last week the price was at 6836. As of yesterday’s close it was at 6843. Huge seven point move in one week. So there is nothing new to add compared to last week. The path of least resistance remains on the downside and a visit to the 6600 and 6400 levels is the highest probability. The only silver lining is that the longer the price action swings in the 6800-7000 range and consolidates, the less likely the market is to go down. For now though, the market is in no man’s land.

Given how brief the ASX 200 coverage is, I thought we could play a game of “name that action”. The chart below is one of the best looking charts in the market right now – a nice clean and well supported uptrend. If you think you know what it is, share your guess in the comments below.

Staying in the technical realm, I wanted to share with you the following chart from an article on MarketWatch with the title “Why the stock market sell could get ugly if the S&P 500 falls below 3,900”. And it’s not hard to see why. The 3900 level has acted as support and resistance several times over the past two years, this is clearly an important turning point in the market. If it gives way, the next supports are around 3700, then 3650.

TABLE

In the United States, one of the burning questions among analysts is whether or not the odds of a recession have already been priced into the market. To help you, Oxford Economics has created the following graph. It shows that, historically, the 24% drop from the mid-June peak of the S&P 500 is consistent with “moderate” recessions in the United States over the past 15 years. For context, the average decline for a mild recession was 34%, while severe recessions like 1973 and 2001 saw declines of 43%.

STOCKS TO MONITOR

This morning’s stocks to watch are brought to you by Morgan Stanley’s research department that led the materials sector. They continue to like space, which they believe will benefit from inflation, while valuations are cheap. The breakdown for a few different products is as follows;

THERMAL COAL – Favorite stock in space is Whitehaven (ASX: WHC) after an outstanding report in August, with a 30% rise from the target price of $11.20

ALUMINUM – South32 (ASX: S32) and Rio Tinto (ASX: RIO). Aluminum is trading in the 50% percentile of the cost curve, which is a historically significant rebound point according to Morgan Stanley. There is also pressure on EU supply as stocks are low.

GOLD – MS doesn’t think gold is ready for its day in the sun yet, with rising rates in mind. There’s a certain value that’s starting to emerge, with Newcrest (ASX:NCM) and North Star (ASX: NST) at the top of the list.

Somewhere else, Fortescue (ASX:FMG) it looks expensive, while Mineral Resources (ASX: MIN) was downgraded to EQUAL-WEIGHT following its strong performance – up almost 50% since March.

FRIDAY PLEASURE

Keep it in your back pocket the next time you sit down with the kids to play a “friendly” game of Monopoly (as if there was such a thing). Besides being a banker, it might be the best thing to give you an edge.

Today’s report was written by Chris Conway.


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