Global markets sold off on Friday (S&P 500 Index -0.6%) in a pre-weekend selloff as investors grew anxious about rising tensions with China and a potential stalling of the economic recovery
Markets across Asia fell on Friday after Beijing said it would retaliate against a US order that China close its consulate in Houston, Texas, raising fears that a trade deal between the world's two biggest economies could be spiked. China’s foreign ministry ordered the US to close its consulate in Chengdu, the capital of the southwestern Sichuan province.
Australian/China relations also continue to deteriorate with the Chinese government mouthpiece, The Global Times, noting: “The relationship between China and Australia has now deteriorated to a very bad point, and the chance for a turnaround is slim in the near future”. The media also suggests possible trade sanctions against Australian beef and wine.
Looking ahead for the week, investors will be digesting another big week of quarterly earnings, and the US Federal Reserve makes an interest rate decision. The market is also wary of the expiration of enhanced US unemployment benefits this Friday, which will hit US incomes and likely accentuate the recent slowdown in the US economic recovery, unless it is extended in some form – which is expected to be the case.
Lynas (LYC:ASX)
Since recovering from March lows, shares in rare earth miner Lynas Corporation (LYC) slipped after delivering an update for the fourth quarter of the 2020 financial year (ending June).
This was largely due to the six-week shutdown in production at its Malaysian processing plant, in compliance with the Malaysian governments covid-19 movement control order – which was announced earlier. Due to the global pandemic, demand for NdPr is still weak, and accordingly Lynas is operating at lower operational levels with demand likely to pick back up towards the end of the year, as the global economy slowly transitions back to business as usual.
In our view, Lynas provides an attractive investment for those wanting to gain indirect exposure to electric vehicle theme. We maintain our High-Risk Buy rating given the risks associated with commodity pricing and the hazardous nature of mining rare earths, while remaining optimistic on the long-term market dynamics supported by the forecast growing demand for rare earths. Covid-19 has created a temporary setback, but with a sound balance sheet and fairly minimal cash burn Lynas has managed to weathered the worst of a challenging quarter. In our view the long-term growth story remains intact with electric vehicles providing a powerful multi-year tailwind.
Australia & New Zealand Market Movers
The Australian market sold off on Friday (ASX 200 Index -1.2%) continuing its see-saw action for a 12th straight session, following a slide on Wall Street as US deaths topped 1,100 for a third straight day.
Major shopping mall owner Vicinity Centres has warned the ongoing economic downturn sparked by COVID-19 has forced it to devalue the worth of its property portfolio – which has declined by -11.3% at June 30, reflecting the financial woes caused by the pandemic that have changed the retail landscape.
Insurance Australia Group shares dropped -8% after announcing it would scrap a final dividend payout amid rising uncertainty about the fallout from the COVID-19 pandemic. The company said it had booked $100 million of extra provisions for COVID-19 impacts across its entire portfolio comprising $7 billion of insurance liabilities.
The New Zealand market was lower on Friday (NZX 50 Index -0.5%) Following a weak lead from US markets. Outside of the top 50 index, Pacific Edge rose 19% after ANZ New Zealand Investments bought $22 million of new shares at a 14% premium. The stock is up 475% year-to-date and may be next in line to join the index.
3 Things Markets Will be Watching this Week
- Covid-19 newsflow around a second wave and re-opening of economies remains top of mind
- Reporting season continues with a bumper round of earnings this week with 193 S&P 500 companies reporting including Apple, Amazon, Facebook, Exxon Mobil, Chevron and GE. US 2nd quarter GDP and the latest Federal Reserve rate decision are also due.
- Trade tensions with China look to be escalating once again.
