ASX Slips as Oil Prices Surge and Bunnings Faces Supplier Inquiry
Oil prices rose sharply as investors reacted to escalating Middle East tensions, while the Australian Stock Exchange (ASX) stumbled. ASX-listed Bunnings defended its supplier relations and homebrand pricing in a Senate inquiry submission, which is expected to come under greater scrutiny later this year.
Key Market Movements
The S&P/ASX 200 index dropped by 67.6 points, or 0.82%, to 8,137.6 as of 04 Oct, 1:49 pm AEST. The ASX has seen a 0.91% decline over the past five days, placing it nearly 1.8% below its 52-week high. Champion Iron Ltd and Fletcher Building Ltd led the losses, dropping 4.66% and 4.15% respectively.
Sector Analysis: Resources Surge, Financials Falter
Nine of the eleven ASX sectors saw declines. Energy (+1.92%) and Health Care (+0.11%) were the only sectors gaining ground. Financials performed the worst, falling 1.19%, followed by Materials at 1.43%. The ASX 200 Resources Index (XJR) fell by 0.99%, mirroring the broader decline but seeing support from rising commodity prices.
Top Sectors:
- Energy: +1.92%
- Health Care: +0.11%
Declining Sectors:
- Financials: -1.19%
- Materials: -1.43%
Top Gainers and Losers
Mesoblast Ltd rose 12.96% to $1.525, leading gains as biotechnology stocks rallied. Electro Optic Systems Holdings Ltd and Horizon Oil Ltd also posted substantial gains, with energy stocks buoyed by oil price jumps. In contrast, Schaffer Corporation Ltd suffered a 6.17% loss, with Aurelia Metals Ltd and Vulcan Steel Ltd trailing closely behind as sector-wide shifts affected key metals and materials players.
Top Gainers:
- Mesoblast Ltd: +12.96% ($1.525)
- Electro Optic Systems Holdings Ltd: +9.52% ($1.61)
- Horizon Oil Ltd: +7.50% ($0.215)
Top Losers:
- Schaffer Corporation Ltd: -6.17% ($21.00)
- Aurelia Metals Ltd: -5.26% ($0.18)
- Vulcan Steel Ltd: -5.10% ($7.535)
Foreign Market Comparisons
Overseas, US markets closed lower with the Dow Jones down 0.44%, while the Nasdaq saw a minor 0.04% dip. Chinese stimulus measures pushed the Shanghai Composite index up by 8.06%, underscoring optimism around China’s economic recovery.
Broker Insights: “Time to Rotate” from Banks to Resources
Morgan Stanley issued a report encouraging clients to shift focus from banking stocks to resources. The report, titled “Time to Rotate,” suggests the ASX’s bank-heavy financial sector is overvalued. The broker expects recent Chinese stimulus announcements to further lift commodity markets, increasing opportunities within the resources sector.
Rationale for Rotation
Morgan Stanley highlighted three factors influencing the shift from banking to resources:
- China’s Stimulus: Government stimulus in China is anticipated to drive demand for resources.
- Interest Rate Pressures: The US rate-cutting cycle is affecting banks’ appeal, with a potential shift to support commodity prices.
- Overvaluation of Banks: ASX-listed banks, particularly Commonwealth Bank, remain overvalued by historic metrics.
The report identifies Commonwealth Bank (ASX: CBA) as the most overvalued among the banks, despite its recent price drop. Morgan Stanley rated NAB as the only “overweight” bank stock, with a price target of $38. In contrast, it advised an “underweight” position on ANZ, suggesting a further 8.6% downside.
Resource Stocks Poised for Gains
Morgan Stanley’s second report, “China and the Miners,” singles out resource companies poised to benefit from China’s economic actions. It highlights three sectors:
- Metallurgical Coal: Whitehaven Coal (ASX: WHC) is favored for its potential in the Chinese steel market.
- Iron Ore: Mineral Resources (ASX: MIN) and Rio Tinto (ASX: RIO) top the list for iron ore production, with Rio’s growing copper output also seen as advantageous.
- Broad Resource Base: BHP Group (ASX: BHP) is favored due to its diversified asset base and lower capital expenditure requirements.
Broader Market Implications of Sector Rotation
The rotation signifies a broader shift among institutional investors, who are reallocating from sectors seen as overvalued to those likely to benefit from commodity price gains. Resources stocks are now positioned to attract capital as fund managers adjust portfolios to align with macroeconomic trends, especially China’s renewed industrial ambitions.
Outlook for the ASX
The outlook remains mixed as the ASX continues to navigate global uncertainties. With geopolitical tensions rising and investors monitoring China’s recovery, resource stocks could provide resilience against broader market volatility. As global economies recalibrate, sector rotation strategies will play a critical role in shaping investor sentiment and market momentum.
Conclusion
While the ASX grapples with volatility, shifting sector dynamics suggest a prolonged preference for resources over financials. For investors, Morgan Stanley’s call to diversify may serve as a hedge against global economic uncertainties. As markets evolve, strategic sector allocation will remain essential in capturing growth and managing risk.