The Match Out: Markets knocked ~2% as China fears build, Iron Ore off ~10%

James Gerrish

Market Matters

The ASX was hit ~2% today on concerns largely stemming from China, firstly towards the rout in Iron Ore prices which were down another ~10% today in Singapore if we look at shorter dated contracts (more on this below) while the Evergrande fiasco is also making people nervous. Today (and over the weekend) the linkages to a Lehman Brothers type moment have been everywhere and that’s clearly created some trepidation.

  • The ASX 200 finished down -155pts / -2.10% to 7248
  • Utilities the only sector to close higher than a bid for Ausnet Services (AST) from Brookfield
  • 185 companies in the ASX 200 closed lower so clearly the sell-off was broad based as you’d expect when we’re down 2% on the day
  • Futures in the US were lower throughout our session however the sell-off has just kicked in after our close – DOW futures down ~500pts, they were down less than ~300 points at our close
  • Hong Kong market was also hit today, down over ~4% at the worst
  • In addition to the broker calls below, UBS downgraded their Iron Ore price forecasts this morning and cut Fortescue Metals (FMG) & Vale’ (VALE US) to sells. They say rising supply, falling demand will see Iron Prices at US$89/$80/t in CY22/CY23 (from US$101/$85/t previously) and that leads to about a 30% reduction in earnings for FMG. They put a $15 PT on it down from $18
  • We expect others to follow suit as the crowd moves against Iron Ore, arguably (or not), a long time after the horse has bolted. Important to note that broker earnings downgrades follow rather than lead commodity prices, there is very little that is predictive about them generally. Fortescue (FMG) closed down -3.73% today at $14.70, although the worst of the session was seen early with the stock down ~6% on open.
  • Again, the team and I talked this morning about buying FMG on open however we feel hamstrung with our existing weighting towards BHP. If we held a smaller position here we would certainly be stepping up to the plate into current weakness – broker downgrades have an uncanny ability of creating the blow-off style low. We covered FMG this morning here
  • Uranium stocks all lower today – the hot money that went in there quickly came out – Paladin (PDN) down ~16.5% to 86c. Spot Uranium traded above $US50/lb at the end of last week however we’re starting to see the stocks come off the boil both here and overseas. If you want to watch what the sector is doing overseas, keep an eye on the Global X Uranium ETF (URA US) – it fell ~8% Friday
  • Gold was flat during Asian trade today ~$US1752 at our close, though the Gold stocks took another hit and many now trading at 52 week lows – Regis Resources (RRL) sub $2 – it hasn’t been there since 2015
  • In Asia, Hong Kong fell ~3.5% while the Nikkei was +0.58%
  • US Futures down around 1% now

Chart: ASX200

Iron Ore

Lots being written about Iron Ore falling 10% today which is a big move – the table below looks at the various Iron Ore contracts and current pricing. Worth noting that UBS downgrade (and no doubt others to follow) is catching up with market pricing so that downgrade in itself is not a reason to get bearish now – the market is already largely there.

Image: Iron Ore price contracts – source Bloomberg

Ausnet Services (AST)

AST 19.19%: electricity & gas grid operator Ausnet Services was the latest ASX listed company to be in the sights of international money. Canada’s Brookfield is offering $2.50/sh in cash for the Victorian based company, a 26% premium to last close, valuing Ausnet at over $17b when including their debt. The bidders have been granted exclusive due diligence in a sign Ausnet would be interested sellers. Around 50% of AST is already owned by foreign parties including Singapore Power & State Grid of China so it’s unlikely FIRB will be all that concerned. Another big deal highlights the amount of money looking for quality assets globally, plenty of corporate interest around at the moment. Shares closed at a ~6% discount to the bid today.

Chart: Ausnet (ASX:AST)

Broker Moves

  • Orocobre Reinstated Hold at Bell Potter; PT A$9.30
  • Clarity Pharmaceuticals Rated New Speculative Buy at Bell Potter
  • Orocobre Cut to Hold at HSBC; PT A$10
  • Iress Cut to Sell at Shaw and Partners; PT A$11.65
  • Incitec Cut to Neutral at Credit Suisse; PT A$2.98

Major Movers Today

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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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