The ASX is set to rise this morning with ASX 200 Futures up 14 points.
Overnight US equity markets put in a mixed performance: the NASDAQ made gains for the seventh straight session, however, the blue-chip S&P500 and Dow Jones closed lower, snapping four-day winning streaks.
Tesla (NASDAQ:TSLA) gained 7.43% to help NASDAQ to its win ahead of its earnings report next week and Morgan Stanley (NYSE:NYSE:MS) rose 5.86% after its wealth management business boosted its earnings, however, Goldman was down 6.45% after a poor earnings report and weak M&A activity.
According to Citigroup (NYSE:C), this year’s rally (granted we are only a few weeks into 2023) has pushed the S&P 500 to valuation levels that make it difficult for it to climb much higher based on the current macroeconomic environment.
“For now, we suspect valuation could put a near-term cap on upside momentum,” Citi analysts said. “Based on our fair value framework, valuations much above current levels are unsustainable unless there is a significant change in the macro backdrop.”
Citi said the S&P 500 was likely to hit “a new, lower valuation regime” compared with the period seen since the global financial crisis of 2008.
“This implies index gains in this new environment will need to be ‘earned’ vis-à-vis near- and medium-term fundamental improvement, less so from macro tailwinds behind multiple re-rating triggered by lower interest rates,” Citi analysts wrote.
According to a Citi report, its fair value framework implies an S&P 500 price-to-earnings multiple of 18.5x. This is at the high end based on current rates, inflation and growth among other macro inputs,
“18-19x is pushing the fair value limits unless we get a more aggressive slowing in inflation, noticeably lower rates, coupled with other more sanguine macro readouts,” the analysts said.
“We are left with conviction in our ongoing view that rate-driven valuation headwinds may persist, implying greater importance on earnings trajectories,” the Citi analysts said.
“Sell-side consensus seems coalescing around a weak first half, strong second half narrative,” they wrote. “We are more constructive on the second half like many of our peers, but we do not see the same downside pressure to earnings, and upside lift from valuations that others expect.”
In Japan, treading was flat, ahead of its Bank of Japan (BoJ) meeting (no set time). The USD/JPY was trading at 128.34(0.49%), with traders poised for a follow-up adjustment to the BoJ’s Yield Curve Control (YCC). Any market surprise will be due to the BoJ abandoning YCC completely.
In Europe, shares closed mostly higher, ending at nine-month highs.
It was good news for the market, following a report the European Central Bank's (ECB) policymakers were considering a slower pace of interest rate hikes.
Mining shares led gains, up 1.1%. The continent-wide FTSEurofirst 300 index lifted 0.4%, but the UK FTSE 100 index dipped 0.1%.
Here’s what we saw (source Commsec):
- The Euro fell from highs near US$1.0867 to lows near US$1.0773 and was near US$1.0790 at the US close.
- The Aussie dollar rose from lows near US69.30 cents to highs near US69.96 cents and was near US69.85 cents at the US close.
- The Japanese yen firmed from near 129.11 yen per US dollar to around JPY128.01 and was near JPY128.25 at the US close.
- Global oil prices rose after China posted weak but market expectation-beating annual economic growth data and on hopes that a recent shift in its COVID policy will boost fuel demand.
- The Brent crude oil price rose US$1.46 or 1.7% to US$85.92 a barrel.
- The US Nymex crude oil price added US32 cents or 0.4% to US$80.18 a barrel. Base metal prices advanced, supported by a softer US dollar.
- The US copper futures price rose 0.3% to a 7-month high as traders bet Chinese demand will rise later in the year, but weak economic data underlined how low consumption remains in the near term.
- The US aluminium futures price rose by 1%.
- The gold futures price slid US$11.80 or 0.6% to US$1,909.90 an ounce. Spot gold was trading near US$1,908 an ounce at the US close.
- Iron ore futures dipped US$1.38 a tonne or 1.1% to US$120.95 a tonne, as weak economic data from top steel producer China dented demand sentiment.
Capital.com market specialist Justin Mcqueen gives his take on the gold outlook.
Since the start of the year, gold has been the beneficiary of a softer USD environment, lower yields as markets price in smaller rate hikes from the Federal Reserve, alongside an increase in central bank demand, most notably from the PBoC.
Add this to the fact that seasonal factors are supportive of the precious metal it is understandable why gold is currently on its longest weekly winning streak since August.
However, on the technical front, there are some reasons for caution where chasing gold higher from current levels is unattractive.
On the daily time frame, the RSI is in heavily overbought territory, meanwhile, on the weekly chart, the RSI is at the highest level since gold last traded above 2,000 (March 2022).
With this in mind, this does raise the short-term risk of a potential correction lower. As such, the first noteworthy area of support lies at 1,880 in which a break below opens the door towards 1830-35.
That being said, as the soft-landing narrative picks up with US (hard) data remaining robust, while growth prospects improve for the rest of the world amid the reopening of the Chinese economy.
There has been a lack of impetus to pushback against this rally in the precious metal. Although, there could be a potential surprise in store, should we see further normalisation steps by the Bank of Japan, which is this week’s key risk event.
After recent reports that the BoJ will discuss the side effects of stimulus at the January meeting, speculation over another tweak in policy has increased sharply. A further widening of the band is a distinct policy as rising yields have forced the bank to go on a record bond-buying spree in recent sessions, but a complete removal of yield curve control would be a shocking surprise. And one that would likely prompt a pullback in gold.
Rio’s 2023 prospects
eToro markets analyst Josh Gilbert outlines his view on Rio Tinto (ASX:RIO)'s Q4 performance.
Rio Tinto has enjoyed a strong six months, with shares gaining more than 30% value in this time - and China’s reopening may just help that strong run continue.
The world’s largest iron ore miner reported Q4 shipments rose by 4%, while Pilbara iron ore production rose 6%, but iron ore shipments for the year came in at the bottom end of its guidance at 322,000 tonnes.
Regardless, investors will be excited by Rio Tinto’s 2023 prospects given the rebounding demand for commodities in China as the nation looks to prop up its property market. This comes at a perfect time for Rio Tinto after its purchase of Turquoise Hill Resources, which looks set to boost output for copper this year.
In this latest update, Rio Tinto raised its copper output forecast to 650,000 to 710,000 tonnes, up from a fairly modest 500,000 to 575,000 tonnes last year – whilst iron ore (its biggest revenue driver) remains unchanged at 320,000-335,000 tonnes.
Miners have had a great start to the year, and the prospects of a weakening US Dollar, combined with the restocking of global metal inventories that remain at extreme lows, offer a strong tailwind for Rio Tinto in 2023.
What to expect this week
- Australia will release building activity data.
- The Bank of Japan will hand down its policy decision.
- US data on retail sales, producer prices, industrial production and business inventories are due with the NAHB housing market index and US Federal Reserve's Beige Book.