Why UBS’s bullish view on lithium stocks has become more bullish – Charts and Caffeine

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

  • S&P 500 – 3,986 (-1.10%)
  • NASDAQ-11,883 (-1.12%)
  • CBOE VIX – 26.21
  • FTSE 100 – 7,362 (-0.88%)
  • STOXX 600 – 419.57 (-0.73%)
  • SPI FUTURE – 6,858 (-0.87%)
  • United States 10 years – 3.117%
  • USD INDEX – 108.79
  • GOLD – US$1,736/oz
  • CRUDE WTI – US$92.25/barrel
  • DALIAN IRON ORE FUTURES – US$105.28/T

(THE LAST) BENEFITS WRAP

So let’s go. The very last earnings season of the month – and what a month it was too. For our exclusive analysis of some of the best ASX companies, click here:

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How the Broker Reporting Season’s Top Stocks Stacked Up

In the meantime, here are the latest results. Woodside Energy (ASX:WDS) increased its dividend and announced a 400% increase in profits and an increase in revenue. But you would expect that after the year Crude Oil was right? So is it still a purchase for Hendrik Bothma? Find out here. IGO (ASX:IGO) meanwhile posted a 34% rise in full-year revenue to nearly $1 billion, but saw profits plummet. The final dividend was also halved but Mathan Somasundaram says that’s no excuse not to wait for a good entry point. Meanwhile, the infant formula shortage has, as expected, done wonders for Bubs Australia (ASX: BUB) after it saw revenues double and net losses shrink. Finally, Healius (ASX:HLS) cut its final dividend despite a more than 600% increase in net profits. What a way to send August.

And now that it’s over, we can all have a break.

SPOTLIGHT SECTOR

Today, the stock to watch is an entire sector. UBS has written an industry note on the ASX lithium space. And to say they have a bullish view is probably a disservice.

The team analyzed over 100 projects in the ASX space and as a result, they raised their lithium price forecast by up to 38%. As supply continues to struggle to meet demand, they believe battery-grade lithium could cost as much as $15,000 a ton in the not-too-distant future. Here are analysts Levi Spry and Lachlan Shaw:

We expect supply growth to come from both brownfield expansion and greenfield development, but at higher cost and risk, which underpins our higher long-term prices. Therefore, we are increasing our prices in the long term.

China is, of course, the elephant in the lithium debate room. The country dominates the global lithium-ion battery supply chain. An estimate from BloombergNEF suggests that figure could be as high as 80%. Not to mention the fact that 6 of the top 10 battery producers in the world are based in the tiger economy.

But the problem with this kind of domination is that producing in ex-China makes life more difficult and costs a lot more. Therefore, if companies try to source from elsewhere, the time and effort required to do so will only add to the cost curve.

That’s why these predictions are so important now.

So what does all of this mean for lithium stocks? Buy them all, say UBS! Allkem (ASX: AKE), IGO (ASX: IGO) and Mineral Resources (ASX: MIN) are all a buy. And before you ask, Pilbara Minerals (ASX:PLS) and smaller Australian space players are not covered by the broker.

THE QUOTE

The European energy crisis is Europe’s subprime moment.

This quote from Jonathan Pain from The Pain Report really puts the sting in the tail. And he’s not wrong either. Think of the ramifications this war has had on the Eurozone economy. The euro is below a 20-year low against the US dollar. Gas prices are through the roof across the continent. Anecdotal evidence suggests electricity prices are skyrocketing in the UK, including at this humble cafe in Leicester:

Now, again, this war has been dismissed as a short-term conflict. It quickly became a continental nightmare where the noise can no longer be ignored.

THE CALENDAR

And speaking of Europe, it’s Eurozone CPI night tonight. The headline inflation forecast is – get it – 9%. Even core inflation is over 4%, so base effects are also feeling the heat. How serious will be the prolonged effects of this war on European households and businesses?

The Canadian GDP and US ADP employment report also rolls out tonight. The latter is only interesting because, in the past, it has been a clue as to the general direction of the US labor market. Recently it has been less reliable (particularly on the base figure for the number of jobs actually created per month).

GRAPHS

Two charts to consider today – and both are the bond market after Jerome Powell’s speech in Jackson Hole. If you think the bond market isn’t sending signals or doesn’t matter, I have news for you. Let’s first look at the US 2-year yield over the past year:

It’s hardly a peak when the ramp-up has been so strong. (Source: Bloomberg)

If you know anything about the US yield curve this year, it’s been defined by huge runs at the short end of the curve. Now consider the following chart, which discusses historical reversals and their proximity to recessions:

You might have to squint for this chart, but all you need to know is that the yield curve has inverted at each point before each red arrow on the chart.

This, in itself, is not really remarkable. I’ve talked about yield curve inversions in this package and on Signal or Noise. But what’s interesting is that the inversion we see now is actually worse than before the global financial crisis of 2007/08. Conclusion? The bears are right to roar again.

THE TWEET

Is it too early for a drink?
Is it too early for a drink?

Today’s report was written by Hans Lee.

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