Graphics and caffeine: why UBS says gold and lithium are better than iron ore – Hans Lee

Welcome to Charts and Caffeine – Livewire’s pre-market news and analysis digest. We’ll take you through the session overnight and share our best ideas to better prepare you for the day of investing ahead.

MARKET ENVELOPMENT

THE CALENDAR

The most important data point today will be US jobs (payrolls). The easy part is knowing what the unemployment rate will be (below 4%, indicating a very tight job market). The hard part is how a tight labor market will influence what people get paid.

You’ll see it in the “average hourly earnings” metric. Still, the consensus estimate for the month-to-month change is 275,000. While that doesn’t sound like a lot, you have to remember that the United States has consistently added jobs throughout the post-pandemic era.

This makes finding those extra jobs a feat.

GRAPHS

Jurrien Timmer is the macro manager of Fidelity International. This chart from him really speaks to what analysts and funds are probably both concerned about – earnings downgrades.

More S&P 500 companies are seeing their estimates fall than rise. The pendulum rarely stops halfway, so there is a good chance that further downgrades will occur.

The big question now, according to Jurrien, is whether earnings growth will turn negative. This is how we will know if we are in a bear market with a recession or a bear market without a recession. Either way, whatever happens in the US will likely affect the August earnings season in Australia. If only for the changing feeling.

Speaking of sentiment, ETF feeds are a great way to get a sense of what retail traders are thinking. This graph, from Citi’s US team, suggests that the risk of a recession is not only undervalued, but the consequences of said recession could also be undervalued.

How do they know this? Find out the cumulative flows (and the pace of those flows) into growth-oriented ETFs.

Speaking of which, the brilliant Ally Selby hosted our latest ETFs edition of Buy Hold Sell – you can watch this episode here:

Funds

Buy Hold Sell: 5 bargain-priced ETFs to refresh portfolios in FY23

STOCKS TO MONITOR

Away from ETFs and our stocks to watch today is the ASX materials sector. Namely iron ore miners, gold fields and lithium miners.

UBS wrote a memo yesterday which was widely circulated. Analyst Lachlan Shaw thinks it’s too early to buy the dip in the materials space. Why? I’ll let him explain.

We’re not convinced they still have enough value to encourage industry-wide purchases. For example, all prices are above or in line with UBS’s mid-cycle/long rates. [targets]as well as marginal cost, not below or inside the cost curves. [It’s] All [the more] reason to be careful and selective when buying.

Strong near-term earnings should support returns in August – but as we pointed out in the charts to watch, it all depends on how costs can alter these balance sheet profiles.

For now… here is their list:

• Neutral on the big three iron ore miners
• Buy ratings on most ASX gold stocks (NST, EVN, GOR, DEG, SSR)
• Even higher conviction buys on ASX lithium stocks (IGO, MIN, AKE)

THE STAT

Australian coal exports were worth more in May than iron ore exports (Source: Deutsche Bank, ABS)

Exports of coal, iron ore and gas have also increased by 250% since the peak of the mining boom 10 years ago! That’s about another $300 billion in the nation’s coffers.

Talk about a surplus of bad (or good, if you’re not ESG oriented).

THE TWEET

GET THE ENVELOPE

We’re trying something new here – a daily market overview with a smart twist. If you enjoyed this edition, click on follow on my profile to know when I post new content and click on the As button so we know what you like to read.

If you have a graph and/or statistic that you would like to see featured in a future edition of the newsletter, send us a note at [email protected].