ASX to rise, UBS and Macquarie's top February reporting season stock picks

MARKETS

• Growing expectations for a hawkish Powell to push back against easing financial conditions
• Wall Street strategists reject the early strength seen in stocks this year
• Seasonality and short covering is the reason for recent strength says Morgan Stanley
• Loosest financial conditions since last February gives Powell extra reason to reject pivot hopes (Bloomberg)
• Fed balance sheet drawdown should not cause liquidity issues (Reuters)

STOCKS

• GM to invest US$650m in a Nevada lithium mine (FT)
• Carvana now up more than 100% year-to-date, attracting highest short interest in the Russell 1,000 (Bloomberg)

EARNINGS

• General Motors (+7.9%) EPS and revenue beat; lifted FY EPS guidance; CFO said demand for EVs remains very strong and has no plans to cut prices
• McDonalds (-1.5%) EPS, revenue and same store sales beat; management said “we expect short-term inflationary pressures to continue in 2023”; operating margins forecast to be hampered in the near-term
• Caterpillar (-3.9%) beats revenue expectations but misses EPS – marking the company’s first miss since 2020; price hikes more than offset higher manufacturing costs; goodwill impairment dragged on earnings

ECONOMY

• US Q4 employment cost index fell 0.2 percentage points quarter-on-quarter to 1.0%, below consensus 1.1%, the slowest growth since 4Q21
• IMF upgrades global growth forecasts on China reopening (Bloomberg)
• China manufacturing sector returns to expansion in December (Bloomberg)
• French inflation accelerates but in line with expectations (Reuters)
• France GDP unexpectedly grows, calms recession fears (Bloomberg)
• Eurozone Q4 GDP surprises, economy on track to avoid recession (Bloomberg)
• Inflation stickiness and surprises outside of the US serve as a reminder that disinflation narrative may not be smooth (Bloomberg)
• RBA rate hike expectations ease after Australian retail sales plummet (Bloomberg)
  
  

Deeper Dive

Not so technical

There isn't too much to talk about from a technical perspective. The ASX 200 is starting to stall around the 7,500 level after a massive run up. The Fed rate hike and presser could drive some big moves for the market on Thursday.

Here's how the ASX 200 performed the day after Fed rate hikes last year:

• 17 Mar: +1.05%
• 4 May: +0.66%
• 15 Jun: -0.15% (-1.76% the next day)
• 27 Jul: +2.6%
• 21 Sep: -1.87% (-1.6% the next day)
• 2 Nov: -1.84% (recovers those losses over next four days)
• 14 Dec: -0.64% (-0.78% the next day)

Sectors to Watch

Tech: Tech names sold off in the previous session but bounced overnight. The strength was rather broad-based among tech names but it was those beaten up ones that led. The ARK Innovation ETF rallied 3.7%, recouping losses from the previous session. This could see some strength return to local tech names after a somewhat weaker day on Tuesday.

Copper: Copper spot prices staged a fairly large reversal overnight from session lows of -2.0% to close 0.5% higher.

Lithium: Local lithium stocks were sold off aggressively on Tuesday. If you looked at these names in isolation, you would have assumed the market was down north of -1.0%. After such a V-shaped bounce for heavyweight names like Pilbara Minerals and Allkem, the last thing you want to see is an abrupt day of high volatility and distribution. Can they bounce from here or is this a red flag telling us that the sector isn't out of the woods just yet?

Macro: All About Central Banks

Macro and Reporting Season Preview was written by Livewire's Hans Lee.

This week is dominated by central banks and the US jobs report.

Top of the docket is the US Federal Reserve meeting where Jerome Powell and co. are expected to raise the Fed funds target range by 25 basis points to 4.5 to 4.75%. But that’s the easy part, as every economist could tell you. The real question is whether the Federal Reserve will signal a pause at its press conference that follows the decision. This will all depend on whether central bankers believe inflation is finally trending in the right direction for good.

Somewhere where inflation is not looking like it’s plateaued yet is the Eurozone. The European Central Bank and the Bank of England both have decisions due on Thursday afternoon. Both are expected to raise their respective interest rates by 50 basis points each. In both cases, more rate hikes are likely needed but the language will also be key. Will each central bank signal more rate hikes - and for how much longer? They’ll say they are “data dependent” but that’s not easy when all the signals are so mixed.

Reporting Season Preview

It’s February 1st today and that means - all together now - Australian earnings season is back! Ahead of the numbers deluge, UBS and Macquarie have each released their top reporting season picks.

UBS is comparatively more optimistic than Macquarie, arguing earnings can still grow by 4% on the ASX 200. They also argue the concerns about economic slowdowns, powered by a weakening consumer, are overplayed. Last year’s headwinds (high input costs, labour shortages, a weak Australian dollar) have turned into tailwinds and that will make company-specific storylines more interesting than ever.

UBS’ top picks include:

• Earnings surprises: IGO (ASX: IGO), Beach Energy (ASX: BPT ), Goodman Group (ASX: GMG) and Macquarie Group (ASX: MQG) 

• Downside earnings surprises: AMP (ASX: AMP), Seek (ASX: SEK) and Harvey Norman (ASX: HVN) 

Macquarie expects 3.3% earnings growth but warns there is potential for downside as those global rate hikes continue to feed through to the system. They also warn that earnings guidance upgrades may be limited and EPS cuts cannot be ruled out beyond FY23.

Notable picks include:

• Top upside picks: Iluka (ASX: ILU), Metcash (ASX: MTS), JB Hi-Fi (ASX: JBH)  and Harvey Norman (ASX: HVN) 

• Downside projections: Seek (ASX: SEK), Star Entertainment Group (ASX: SGR), Sonic Healthcare (ASX: SHL) and Woolworths (ASX: WOW)

On a side note, almost three quarters of the ASX 200 (by market cap) will report results between the 13th and 28th of February.

Quick bites

China's commodity dominance: I've never seen a better chart showing China's dominance in key commodities.