The Match Out: Stocks down for 3rd day as growth concerns weigh, Downer (DOW) tanks

Another soft session for stocks today as the market latches on to the growth concerns permeating through the bond market – we talked about the front end of the yield curve inverting this morning – read here – and what it means for different stocks/sectors, however at a high level, it seems the often transient market is now latching onto softer economic data (GDP for example) and rhetoric implying that unemployment will be on the rise next year, in short, aggressive interest rate hikes are working and the economy is cooling, let’s hope they haven’t turned the screws too hard too fast.

• The ASX 200 finished down -53pts/ -0.75% at 7175, taking the pullback this week to ~200pts.
• Utilities (+0.82%) and Real-Estate (+0.46%) proved defensive while Staples (+0.23%) also made gains i.e. the sectors you’d expect to enjoy the risk-off sentiment.
• Energy (-2.73%) was hit on Crude weakness while Financials (-0.96%) & Materials (-0.90%) were also soft.
• A few questions across the desk today in relation to weakness in the banks, the key reason from MM’s perspective would be concern around weaker growth and rising unemployment.
• The shape of the yield curve also plays a part here while 2023 is going to be a competitive year for the banks with a lot of customers rolling off fixed rates, and looking for the best deal.
• I moved borrowing from Westpac 5 years ago and yesterday I got a call – no coincidence – with the rates being offered very aggressive and a positive surprise – margins well south of 2% v cash rate.
• ANZ -1.83% the hardest hit today while Com, Bank (ASX: CBA) -0.19% was the relative outperformer.
• Chalice Mining (ASX: CHN) +13.11% ripped today on promising results.
• Gold stocks were well supported, we like the sector here holding Evolution (ASX: EVN) +3.57%, Newcrest (ASX: NCM) +2.02% & St Barbara (ASX: SBM) +3.23%
• Dye & Durham has dropped its protracted pursuit of Link Group (ASX: LNK) -1.48% - clearly not a surprise to the market
• Air New Zealand (ASX: AIZ) +0.40% edged higher after saying profit would be better than expected on the back of rising ticket prices and strong travel demand – underlying earnings are now expected to be $NZ295-$NZ325m. They also talked about falling fuel prices which is clearly a good thing more broadly.
• Goldmans was busy today on Lithium, telling clients to buy Alkane (ASX: ALK) +1.61%, Hold Pilbara (ASX: PLS) -4.88%, IGO limited (ASX: IGO) -4.12% & Liontown (ASX: LTR) -7.49% while they called Core Lithium (ASX: CXO) -9.92% a sell.
• They think prices will be lower in FY23 so prefer the producers, although the composition of their calls clearly shows they are bearish the sector – a topic we flagged this morning .
• Positive news for Iron Ore prices overnight after Vale, previously the worlds largest producer, delivered lower-than-expected production guidance for next year and trimmed its longer-term outlook.
• Iron Ore was flat in Asia today, but still trading US$107/tonne.
• Gold was up overnight and flat in Asia, ~US$1784 at our close.
• Asian stocks were mixed Hong Kong rallied +2.86%, Japan fell -0.40% while China was up +0.12%
• US Futures are down a tough, ~0.10% across the board.

ASX 200 Chart

Downer EDI (ASX: DOW) $3.82

DOW -20.42%: The contractor came clean this morning about an accounting issue, having incorrectly recognised revenue from a long-term, maintenance contract to the tune of $40m. As a result, they cut FY earnings guidance by $8-10m and had to explain away issues with their internal systems that led to the embarrassing mess. While it will have no cash impact as it’s just early recognition of revenue that will eventually be completed and paid for, it’s a really bad look + it shows the chasm between reported profit and actual cash. In any case, the share price decline of ~30% was an overreaction this morning with the stock closing ~10% up from the lows.

Broker Moves

• Allkem Cut to Underweight at Morgan Stanley; PT A$12.40
• 29Metals Cut to Underweight at Morgan Stanley; PT A$2
• Beacon Lighting Raised to Overweight at Jarden Securities
• Allkem Rated New Buy at Goldman; PT A$15.20
• Pilbara Minerals Rated New Neutral at Goldman; PT A$4.50
• IGO Reinstated Neutral at Goldman; PT A$14.40
• Liontown Resources Rated New Neutral at Goldman; PT A$1.65
• Core Lithium Rated New Sell at Goldman; PT A$1
• Origin Energy Raised to Outperform at Credit Suisse; PT A$9
• EQ Resources Ltd Rated New Buy at PAC Partners
• APM Human Services Rated New Buy at Euroz; PT A$4.10

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