Wall St slides, UBS’ take on iron ore, FMG & Rio rated as a sell: ASX to fall

Mixed markets around the globe as Wall St climbs the wall of worries. Iron ore prices pushed miners lower in Europe and locally while Asian markets rallied after China’s central bank injects liquidity on mounting concerns on Evergrande.

The Australian sharemarket is set to drop with the SPI futures pointing to a fall of 0.9 per cent.

U.S. stocks slump ending the week lower

Wall St slumped on Friday as uncertainty continued to weigh ahead of the Fed’s meeting this week. Investors mulled on how the economy will manage against less stimulus while Covid-19 cases continue to climb. Talks of a tax hike to fund President Biden’s infrastructure, jobs and clean energy plan left investors on tenterhooks. Mounting concerns on the moves in China as the economy shows signs of slowdown. The expiration of several options contracts also sparked a broad selloff. No wonder investors are restless as they ponder if a correction is near. Bond yields surged as they attempted to piece the puzzle to find their footing.

Attempting to buck the trend was the weak consumer sentiment reading that came in at 71.0, slightly up from 70.3 in August. The reading remains close to a near-decade low according to the University of Michigan. Buying conditions deteriorated to their worst since 1980 due to elevated prices.

At the close, the Dow Jones lost 0.5 per cent to close at 34,585, the S&P 500 fell 0.9 per cent to 4,433 and the Nasdaq closed 0.9 per cent lower at 15,044. Over the week, the Dow fell 0.1 per cent, the S&P 500 dropped 0.6 per cent and the Nasdaq closed 0.5 per cent lower.

Across the S&P 500 sectors, healthcare was the outlier closing with a fractional gain of 0.07 per cent. Utilities declined the most at 1.6 per cent followed by technology at 1.5 per cent and communication services. The other sectors closed in the red.

The yield on the 10-year treasury note surged to 1.36 per cent while gold sunk.

Tech titans along with Moderna & Pfizer falls

Shares in Facebook and Apple shed over 2 per cent while Microsoft declined 1.8 per cent.

Shares in Moderna fell 2.4 per cent and Pfizer, down 1.3 per cent after an independent panel advised the F.D.A. to recommend Covid-19 booster shots to people aged 65 years and over. As for those under this age, the panel said it wasn’t clear if it would be needed.

European markets tracked Wall St lower

Across the Atlantic, European markets closed lower. Paris fell 0.8 per cent, Frankfurt lost over 1.0 per cent and London’s FTSE dropped 0.9 per cent.

U.K. retail sales unexpectedly dropped 0.9 per cent in August compared to the month before, against an expectation of a rise of 0.5 per adding further worries to the economic recovery.

Shares in mining giant Anglo American sunk 8.1 per cent after Morgan Stanley and UBS slashed their target prices due to the fall in the iron ore price. Shares in BHP slumped 4.8 per cent while Rio Tinto fell 3.6 per cent.

On a rosier note, travel and leisure stocks rose again by 1.2 per cent as investor’s enthusiasm continued, as the U.K. pondered on easing travel restrictions. 

Asian markets slurps liquidity injection lifts indexes higher

Asian markets rallied after China’s central bank injected 90 billion yuan ($19.1 billion) into the economy to help soothe worries around the property giant Evergrande’s debt crisis.

Tokyo’s Nikkei added 0.6 per cent, Hong Kong’s Hang Seng gained over 1 per cent and China’s Shanghai Composite closed 0.2 per cent higher on Friday.

ASX 200 falls for 2nd week in a row

On Friday, the Australian sharemarket closed in the red for the second week, down 0.8 per cent at 7,404. The price of iron ore tumbled over 20 per cent with analysts forecasting a continued free fall in the commodity price. China’s curbed steel production amid a cooling property market has put the local bourse under pressure.

The nation’s largest export earner dived into a bear market, while ASX-listed miners saw an accelerated slide in their share price.

Materials were the worst performing sector, plunged over 4.0 per cent followed by utilities, down 1.9 per cent and energy, down 1.3 per cent. Technology fared well as the best performer, up 2.1 per cent followed by industrials adding 0.9 per cent and healthcare, marginally higher at 0.3 per cent.

The best performing stock in the ASX 200 was Redbubble (ASX:RBL) bouncing back from many days of declines, jumping 6.3 per cent at $4.05, followed by Pointsbet (ASX:PBH) and Atlas Arteria (ASX:ALX).

The worst performing stock was pure-play iron ore player Fortescue Metals (ASX:FMG) plummeting 11.5 per cent at $15.27, hitting a new one year low. This was followed by Iress (ASX:IRE) and Iluka Resources (ASX:ILU).

UBS forecasts iron ore to plunge

The fresh dive in iron ore prices have come sooner than expected. According to the Office of the Chief Economist as covered last month, they forecasted prices to ease but not fall below US$100 per tonne until late in 2022 with an average of US$90 per tonne in 2023. The price of iron ore on Friday was sitting US$7.00 away at US$107.21.

UBS expects the iron ore price to fall to US$65 per tonne in the long term, however for the rest of this year, they expect the price to fall to US$89 per tonne and in 2023 to US$80 per tonne. On that note, let’s take a look at broker moves.

Broker moves

UBS downgrades Fortescue Metals (ASX:FMG) to a sell with a price target of $15. Iron ore fundamentals have accelerated faster than the broker expected with the share price tumbling over 38 per cent over the year. The miner is still generating free cash flow yield of 11 per cent but this falls to 5.4 per cent at US$90 per tonne, the broker estimates. The rating downgrades from a neutral to a sell with a price of $15 from $18.

Shares in Fortescue Metals (ASX:FMG) closed 11.5 per cent at $15.27 on Friday.

UBS rates Rio Tinto (ASX:RIO) as a sell with a price target of $86. The broker has cut the miner’s 2021/22 earnings by 15 to 20 per cent. The broker’s 2022 earnings forecast is now 36 per cent below consensus. Driving the broker’s caution is the medium-term supply increases, with Guinea set to add 100 to 200 million tonnes in 2025 to 2030, while steel scrap in China is expected to see the iron ore demand decelerate at a fast pace. The sell rating is unchanged but their target price is lowered to $86 from $102.

Shares in Rio Tinto (ASX:RIO) closed 4.7 per cent lower at $98.80 on Friday.

Local & international economic outlook

The Reserve Bank meeting minutes are in focus this week which is slated to be released tomorrow. The minutes come after Governor Philip Lowe’s speech last week. Dr Lowe said that he could not understand why financial markets were pricing in the lift in the cash rate for next year along with his views on the property market and the economy.

A big day on Thursday with the business conditions purchasing managers indexes for September slated. Readings are expected to slightly lift reflecting optimism on the re-opening play. The Australian Bureau of Statistics is set to release payroll jobs and June quarter household wealth data also on that day.

Looking at these flags. There are a number of overseas central banks meeting including the Federal Reserve, Bank of England and Bank of Japan.

There are flash PMI surveys for the US, UK, Eurozone and Japan also slated.

Japanese inflation data is pencilled in on Friday which is expected to stay weak.

Company news

Fuel and service station players Waypoint REIT (ASX:WPR) upgraded their profit guidance for the rest of the year. Their earnings per share has bumped to a range of $0.1572 to $0.1580 cents, this is around 3.75 to 4.25 per cent higher from the year before. The news followed the issuance of medium term notes that was oversubscribed by five.

Shares in Waypoint REIT (ASX:WPR) closed 1.1 per cent lower at $2.75 on Friday.

Ex-dividend

Briscoe Group (ASX:BGP) is paying 11.1208 cents unfranked.
Duratec (ASX:DUR) is paying 1.5 cents fully franked.
Fenix Resources Ltd (ASX:FEX) is paying 5.25 cents fully franked.

Commodities

Iron ore sunk 4.9 per cent to a 14-month low of US$101.95 a tonne. Their futures point to a 6.9 per cent fall. Over the week, the price tumbled 21.7 per cent

Gold lost $5.30 or 0.3 per cent to US$1,751 an ounce while silver fell $0.46 or 2 per cent US$22.34 an ounce.

Oil has lost $0.64 or 0.9 per cent to US$71.97 a barrel.

Currencies

One Australian Dollar at 7:10 AM has weakened from Friday buying 72.64 US cents, 52.88 Pence Sterling, 79.91 Yen and 61.95 Euro cents.

Investor event

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