Bell Potter's two contrarian upgrades

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 - 3,955 (-0.78%)
• NASDAQ - 11,816 (-0.56%)
• CBOE VIX - 25.87

The S&P 500 sank more than 4% in August, the NASDAQ sank more than 5% on the month.

• FTSE 100 - 7,284 (-1.05%)
• STOXX 600 - 415.56 (-1.01%)

The British Pound had its worst month in August since the Brexit referendum in 2016. And of course, the Euro is hovering at around parity with the US Dollar. 

• SPI FUTURES - 6,836 (-1.04%)
• US 10YR - 3.192%
• USD INDEX - 108.69
• GOLD - US$1,722/oz
• WTI CRUDE - US$88.92/bbl
• DALIAN IRON ORE FUTURES - US$104.92/T

THE CALENDAR

A quieter day and night today as Chinese PMIs are done and dusted, plus the bulk of the employment data stateside comes on Friday. Having said this, there's still a lot to recap.

Consumer confidence is improving in the US, up to 103.2 from 95.3. Its sub-indices on present conditions and short-term outlook are also looking rosier as well. But for how long? There are 70 days until the US mid-term elections and the fact is that inflation is still soaring, there are still more than two jobs for every unemployed American (see JOLTS data), and a wage-price spiral is still a real possibility.

Finally, Eurozone CPI topped all expectations - clocking 9.1% at the headline level. Even more amazing, energy prices are up more than 38% year-on-year in this flash read. Just a reminder that this war's effects will linger on for a long time to come.

THE CHARTS

It's again time to remount our central bank high horse. Today, I look at two central banks where outsized rate hikes are now very real possibilities. One is well known for doing "whatever it takes" while the other is in catch-up mode - a catch-up mode that it may have very well left too late. 

First, the US. Following Jerome Powell's speech, rate hike bets ratcheted up and this chart shows just how quickly bets can change in this environment where every word matters. I like this particular chart because it shows how those rate hike bets changed second by second. As Jerome Powell began to speak and traders started looking more closely at his words, the bets started to change dramatically.

It's changed so dramatically that a 50 basis point hike is now being considered - get this - unwelcome by the market. Why? Because markets don't like surprises. And apparently, good surprises are no longer going to cut it.

Then, there's the European Central Bank. For many months, the ECB claimed that its stimulus program could be unwound at the right time. In September 2021, the ECB finally began to unwind its emergency stimulus program... only for the said stimulus program to be replaced by the PEPP scheme which kept money cheap. Indeed, at that now famous press conference, President Christine Lagarde said she was "not for tapering". 

That was 12 months ago. Fast forward a year and the whole world has changed for the ECB. Rates are still near zero, the lady did eventually taper (although it took a war in Ukraine for that to happen), and inflation is expected to top 10% by October on the continent.

All this is creating a scenario that would be incredibly rare for the ECB - a 75 basis point hike of its own. How rare, you ask? It's only been done once before in the bank's history - right at the very beginning of its lifetime in 1999.

And now, it may have to do it again. As of this past Monday, Eurozone bond traders priced in as much as 67 basis points of rate hikes at the bank's Sept. 8 policy meeting, meaning they fully priced in a 50 basis-point move and a 67% chance of a 75 basis-point move. And as this chart from The Daily Shot shows - all roads lead north for now.

STOCKS TO WATCH

For today's stocks to watch, I thought I'd take a look at two relatively contrarian calls from Bell Potter. Both are post-reporting season and both got my attention because they don't align with some of their peers. 

For one, in spite of the following headlines: 

• lower iron ore prices (and a readjusted iron ore price forecast from at least one of its rivals),
• higher operating costs and CAPEX (both flagged in its earnings report),
• and a strong US dollar (which crimps its margins)

Bell Potter has upgraded Fortescue Metals ASX: FMG to a hold from a sell rating. The upgrade is all the more interesting because, in the reasoning, they also cut the company's dividend forecast for next year and recognised that Elizabeth Gaines' transition away from CEO is still a risk. 

Their other upgrade belongs to Bubs Australia ASX: BUB, which is now a buy instead of a hold. The catch is that this upgrade is a "speculative" one. Unlike the reasons for the Fortescue upgrade, this one makes a lot of sense - if it can be pulled off.

The rapid conscious shift in A2M’s sales mix towards China direct (PRC + CBEC) in our view creates a void in the supply of infant formula product to large domestic Daigou buyers in a similar vein to when Danone undertook a similar strategy in 2HCY18. We expect BUB to be a beneficiary of this move given its domestic channel partners. Longer-term we see BUB as a high ceiling IMF play, with the scope to be a >$400m gross revenue business by FY26e if successful in executing its US and China growth strategies. 

If. That's the catch.

THE TWEET

TODAY'S TOP READ

Xi’s Tech Crackdown Fuels Another Crisis: Out-of-Work Youth (Bloomberg): In researching for a future feature I'll be publishing on the website, I ran into this piece on the state of Chinese youth unemployment. If you thought the property insolvency saga was a problem, and drought was a crisis, take a read of this. This might be the other great quandary facing Beijing that the West hasn't caught onto yet (in great detail). 

Today's report was written by Hans Lee.

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