Citi's top ASX resources stocks (and why they are avoiding Woodside and Santos)

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

RBA WRAP

The RBA didn't rock the boat, and the equity market reacted in relief. The RBA hiked the cash rate target by 25 basis points to 2.85%. While the rate itself is a nine-year high, there were subtle changes to its economic forecasts. The changes also come ahead of Friday's Statement on Monetary Policy where we'll also get fresh economic forecasts.

Inflation is now expected to peak at "around" 8% this year before petering off through 2023 and 2024. As a result, the GDP forecast for FY2023 and FY2024 has also been revised downward. But here is the part that gets the economists' attention:

There's been a question on some economists' minds on how the RBA can see inflation coming down without raising the unemployment rate significantly (given wages can't rise too far otherwise there will be a wage-price spiral). I'll leave that debate to the professionals.

THE CHARTS

If you believe China is uninvestable, this chart will probably go some way to validating your case. Since the National People's Congress wrapped up in Beijing, Chinese stocks have sunk with dramatic moves across the board. With Xi Jinping getting (read: giving himself) a third term, all eyes were on whether there would be any changes to its standing policies (i.e. COVID zero, technology regulation, and/or property remedies). None of those three things were resolved, hence the falls.

But even that chart couldn't top this chart. In US Dollar terms, the MSCI China Index has now returned zero (and less) since inception. Talk about a fall from grace.

STOCKS TO WATCH

In keeping with our China theme, Citi has released its hot-or-not list for the ASX resources sector. Actually, the report is just one of a range of sectors that Citi has analysed following new economic forecasts from its global macro team. 

In short, the big three iron ore miners may not be in for a bad time ahead provided the global economy has a soft landing. The same would apply to the oil and gas sectors. If you believe Australia can avoid a recession, both sectors are presenting value.

In a soft landing scenario, Citi likes South32 (ASX: S32), Fortescue (ASX: FMG), 29Metals (ASX: 29M), Newcrest (ASX: NCM), and Mineral Resources (ASX: MIN). Their avoids are (interestingly enough) Woodside (ASX: WDS) and Santos (ASX: STO).

The catch comes when and if Australia sees a hard landing. The big three iron ore miners would struggle but the energy sector actually benefits from a downside scenario as well given how the Ukraine conflict has impacted regional energy supplies.

If this happens, the inverse of the soft landing scenario would be most attractive (i.e. WDS and STO are the most attractive, while S32 and FMG would be the least attractive). 

For now, while we still don't know which scenario will likely play out, their take is to buy large-cap miners. The exception to this rule are the coal miners which have run hard (i.e. ASX: WHC, ASX: NHC, and ASX: PLS)

THE QUOTE

"I cannot possibly describe what a tragedy and catastrophe I think this is." - Jonathan Pain, The Pain Report

In keeping with the China theme, veteran investor Jonathan Pain had this to write in his weekend note. And it's not great reading for those who are holding on and hoping for a recovery in some time or form. 

Hans Lee wrote today's report.

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