The Match Out: ASX hit 2.5%, Energy stocks feel the heat, Zip Co confirms interest in Sezzle

James Gerrish

Market Matters

It was a tough day for the ASX with a negative lead from the futures market putting pressure on stocks early before a hotter than expected inflation read at 11.30 am saw bond yields up, the Aussie Dollar up just after the release (although it tapered off later on) and stocks down on the expectation of tighter monetary policy from the RBA. 

Throw in a public holiday tomorrow, weakness again in US futures during our time zone after what was a very spectacular recovery from the overnight lows (Dow was +1100pts), not to mention escalating tensions between Russia and Ukraine and we’re starting to see why equities struggled today. It was broad-based selling, with all sectors finishing lower. Energy stocks were hit the hardest followed by the IT sector while on the flipside, relative performers came from the Consumer Staples and Consumer Discretionary sectors.

  • The S&P/ASX 200 fell -177points / -2.49% to close at 6961.
  • Energy stocks (-1.08%) led the line on the downside, Consumer Staples (-1.09%) were relative performers.
  • It seems the market will remain choppy until we see some clarity from the US Fed later in the week. If the central bank is less hawkish than is currently priced in, stocks will recover. If not, this level of volatility may persist.

  • Locally, inflation data was hotter than expected this morning printing +3.5% YoY versus 3.2% YoY – see below for more on that. But it was a catalyst to see the local market trade sharply lower.

  • Fortescue Metals (ASX: FMG) -4.97% was out with December quarter production numbers today confirming it is on track to beat export targets, however, price realisation was low and costs were also rising.

  • Zip Co (ASX: Z1P) -2.13% confirmed it was in early talks to buy Sezzle (ASX: SZL), pushing that stock up +9%.

  • A2 Milk (ASX: A2M) +7.07% was also higher on more takeover speculation.

  • Some of the risk-off stocks that fell hard today, that we own, include: Calix (ASX: CXL) -10%, Paladin (ASX: PDN) -7.38%, Standline (ASX: STA) -12.5%, Praemium (ASX: PPS) -5.04% while some of the more defensive positions across portfolios included Resmed (ASX: RMD) -0.21%, AGL Energy (ASX: AGL) –0.85%, Smart Group (ASX: SIQ) -0.71%, APA Group (ASX: APA) -1.36% while BHP Group (ASX: BHP) was a relative performer down just -1.25%.

  • Iron Ore was flat in Asia while Coal prices remain strong.

  • Gold was up US$6 at US$1841 at our close.
  • Asian markets fell, Japan off -2.1%, Hong Kong -1.55% & China -1.36% - the ASX the relative underperformer from a regional perspective.
  • US Futures are pricing a lower open, down around -0.72% for the Dow and -1.08% for the Nasdaq
  • A reminder that it’s a public holiday in Australia tomorrow, with no ASX and no Market Matters notes. We’ll be back Thursday with our usual Wednesday Portfolio Positioning report.

ASX 200 chart

Inflation data today

The CPI data out at 11.30am this morning was hotter than the market expected and that prompted a more aggressive sell-off than was already underway. The headline figure printed 3.5%, with the trimmed mean coming in at 2.6%, both exceeding expectations. This means the RBA is more likely to tighten policy in the year ahead. While the market is well and truly pricing in four rate hikes this year, with the first now quite likely to come in May, consensus is now expecting a wind-up QE in the RBA’s first meeting of the year in February. All but one of 17 analysts polled by Bloomberg expect that to happen, HSBC’s Paul Bloxham the only outlier, although he still expects a taper to purchases of $1 billion from the current $4 billion weekly pace and the program concluding in May. Whatever the case, today’s data was another reason for the RBA to pull back support and align with our current thinking – that 2021 was ‘peak policy’ support.

Today’s economic data (Source: Bloomberg)

Fortecue Metals (ASX: FMG) $19.50

FMG -4.97%: Out with December quarter production numbers today confirming they were on track to beat shipping targets however price realisation was low and costs were also on the up. FMG achieved ~68% of the benchmark Iron Ore price given it has lower quality Ore which was down from ~91% at the same time last year. Higher Coking Coal prices incentivise steel mills to run as efficiently as possible which makes higher quality Iron Ore more sort after. There is also an increase of ore from lower quality suppliers which makes it a more competitive space. They had guided to shipments to June 2022 of 185m tonnes however should ship just over that if current run rates hold.

MM is neutral FMG around $19.50.

Fortescue Metals

Zip Co (ASX: Z1P) $3.21

Z1P -2.13%: the rumours swirling overnight about a potential merger between Zip and Sezzle (SZL) were confirmed before market today. Zip said discussions were in very early stages between the two BNPL companies with news reports suggesting an all-stock offer was being explored to create the third-largest US BNPL company. Scale is key here, and the deal would bring plenty of it with a combined annualised transaction volume of $14.5b & $1b in revenue across 13.5m customers with early back-of-the-envelope figures suggesting the business would be breakeven in Australia and the US. The news helped Zip higher early in the session before eventually surrendering to the broad weakness. Sezzle added +9.81% on the news.

MM believes Z1P is at or near a low.

Zip Co

Broker moves

  • Regis Resources Cut to Hold at Morgans Financial Limited; PT A$2

  • Dexus Raised to Neutral at Citi

  • Abacus Property Raised to Buy at Citi

  • REA Group Cut to Neutral at Macquarie; PT A$162

  • SGR AU Raised to Positive at Evans & Partners Pty Ltd; PT A$4.52

  • Crown Resorts Raised to Positive at Evans & Partners Pty Ltd

  • Peninsula Energy Rated New Buy at Mackie Research Capital

  • Brambles Reinstated Outperform at RBC; PT A$12.70

  • Charter Hall Group Cut to Equal-Weight at Morgan Stanley

  • ResMed GDRs Raised to Overweight at JPMorgan

  • 29Metals Cut to Neutral at Credit Suisse; PT A$2.75

  • PointsBet Cut to Underweight at JPMorgan; PT A$5

  • Cochlear Raised to Outperform at Credit Suisse; PT A$235

  • 29Metals Cut to Hold at Jefferies; PT A$3

  • ioneer Cut to Hold at Canaccord; PT 85 Australian cents

  • Pilbara Minerals Cut to Hold at Canaccord; PT A$3.90

Major movers today

Enjoy your night,
The Market Matters Team

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James Gerrish
Portfolio Manager
Market Matters

James is Portfolio Manager & Primary Author at Market Matters, a daily investment report with over 2500 subscribers that offers real market insight. He is also Senior Portfolio Manager within Shaw and Partners heading up a team that manages...

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