Markets bounce as traders bet on rates peak

It’s a bold prediction but this might be the week when financial markets passed an inflection point as positive news, such as peaking U.S. interest rates, overpowered negative events, laying the foundation for a strong recovery next year.

By Tim Treadgold.

Global Markets 2

Hurdles remain, including ongoing wars in Ukraine and Gaza, but the case for optimism is getting hard to ignore with Australia shaping as a significant beneficiary from a more amenable China even if it is slow to follow U.S. and U.K. interest rate reductions.

Whether China has changed remains to be seen, but it is significant that after a visit to Beijing by the Prime Minister, Anthony Albanese, the share price of Fortescue Metals, an iron ore miner heavily exposed to China, traded up to a 12-month high of $25.38.

Fortescue has since slipped back slightly, and it is a stock which is hard to value because of its adventures in hydrogen and other forms of green energy, but the company’s engine room remains iron ore and that’s a material China needs as it digs its way out of an economic hole.

At US$133 a tonne, iron ore is also approaching a 12-month high, fuelled by reports of China unleashing a US$137 billion boost to aid its stuttering housing market, and by confident comments from the San Francisco presidential summit which has soothed relations between the U.S. and China.

Zinc, which rarely hits the headlines, was another commodity to benefit from an outbreak of China’s “smile diplomacy”. Rising by 2% this week to US$2636 a tonne, taking its increase over the past month to 7.8%. The primary market for zinc is the galvanized coating added to steel.

A turn in investor sentiment could be seen clearly early in the week as the all-ordinaries rose by 2.5% over two days (Monday and Tuesday) easing later but still ahead for the week as was the mining index which benefited from a sharp price increase by BHP, another big China beneficiary. It added $1.35 (3%) to $46.64.

A critical mid-week development was news that the U.S. inflation rate fell to an annualised 3.2% in October, a level which the Wall Street Journal said could indicate that “the elusive soft landing is coming into view” with the target inflation rate of 2%-to-3% “within spitting distance”.

Bill Adams, chief economist at Texas-based Comerica Bank, neatly summed up the situation with a comment that “inflation fever has broken”.

Martin Wolf, a columnist with London’s Financial Times newspaper, took the inflation/rates debate a step further with a pointed observation that central banks will be keen to act quickly with rate cuts after being caught out waiting too long to raise rates last year.

“While loss of credibility is damaging when inflation gets too high, it is also so when it gets too low,” Wolf wrote.

Reaction in Australia to falling inflation and an expectation that interest rates will follow has been reflected in a steep fall in the 10-year bond rate which has dropped from 4.96% two weeks ago to 4.57%. The 10-year rates in the U.S. and U.K. have posted similar falls.

The Australian dollar is also on the move as global markets adjust to a new set of circumstances, rising by a remarkable 2% on Wednesday to be trading US65c, a rise which rubbed A$42 an ounce off the local gold price even as the U.S. gold price rose by US$16/oz.

Gold stocks held up well despite the rising Aussie dollar, possibly aided by a pair of updated research notes from UBS and ANZ Bank.

UBS said gold was becoming more attractive as U.S. interest rate easing moved into sight along with “falling real rates”. It sees gold rising to US$2150/oz by this time next year.

ANZ is more cautious with a gold price forecast of trading between US$1930, and-US$2000/oz.

Local gold stocks performed well thanks to the growing prospect of a fall in U.S. interest rates which should also, in theory, take the U.S. dollar down as well.

De Grey, thanks to a fresh set of encouraging drill results from its Hemi project in WA, added 5.5c to $1.20. Red5 added 1c to 33c after reporting solid drill results from its Darlot mine while Bellevue rose by 3c to $1.43.

Lithium retained its status as the commodity of greatest interest to Australian investors with a series of corporate developments driving prices this week, including:

  • Atlantic Lithium receiving (and rejecting) a 63c per share takeover offer from its major shareholder Assore. Atlantic, which is developing a lithium project in Ghana added 12c on the market to trade at 53c but Wilsons, a stockbroking firm, reckons the stock could go all the way to 95c.
  • Galan Lithium added 18c (28%) to 78c after announcing an offtake and pre-payment deal for material from its Hombre Muerto West brine project in Argentina with global commodity trader Glencore.
  • Azure Minerals continued its rocket run with the addition of another 13c to its share price, lifting the stock to $4.05 after reporting encouraging drill results from the TA3 target at its Andover project in WA. The Chinese battery market CATL is also reported to be building a stake in Azure which was trading at 22c in January.
  • Allkem rose by 5c to $9.30 as interest grows ahead of a vote next month to merge with U.S. based Livent.
  • Vulcan Energy added 27c to $2.73 after reporting that it had trimmed the capital cost estimated for its German lithium and geothermal energy project to $2.3 billion.
  • Delta Lithium slipped 2c lower to 53c after launching a $70 million capital raising, and
  • ExxonMobil served notice on the lithium industry that it planned to become a global force in the metal through a brine extraction project in the southern U.S. State of Arkansas, perhaps opening the way for other oil companies to make a return to mining.

Copper, another commodity which could be a winner from a revitalised Chinese economy, added US10 cents a pound to US$3.70/lb but could go a lot higher if a fresh study of the copper market by Citi is correct.

The big U.S. bank reckons that U.S. and Chinese support for a tripling in the global capacity of renewable energy could supercharge copper, adding 2.5 million tonnes to demand by 2030, dragging the price up to US$6.80/lb.

Local copper stocks started the week with a bang, led by Sandfire which added 35c to $6.38 before sliding back to $6.13 for a 4c gain. Other copper moves included:

  • Havilah adding 1.5c to 26c after reporting encouraging drill result from its joint exploration program with BHP at the North Dome prospect in South Australia with a best hit of 60 metres at 0.56 grams of copper per tonne.
  • Hot Chili rose by 6c to $1.12 after reporting an expansion in the footprint of its Costa Fuego copper hub in Chile, and
  • Caravel added 1.5c after releasing an update mineral resource estimate for its namesake copper project in WA. CG Capital Markets reckons Caravel is heading up to 65c.

Nickel stocks had another rough weeks as the problem of Indonesian over-production continued weight on the market, sending the price down to US$17,184 a tonne, alarmingly close to half the $31,000/t in January.

Panoramic was the latest victim of the nickel slide, suspending trading while it conducts a strategic review of its Savannah project in WA’s Kimberley.

IGO was also hit by bad nickel news, slipping 22c lower to $8.94 after a report from Canaccord Genuity questioned the long-term fate of the problem plagued Cosmos mine.

Other nickel moves included Chalice, down 10c to $1.62 and Alliance Nickel down 0.5c to 5.3c.

Other news and market moves of interest included:

  • Conrad Asia, a low-profile oil and gas explorer chaired by former Oil Search boss Peter Botten added 1c to $1.29 after reported a prospective resource of 11 trillion cubic feet of gas in its Indonesian exploration targets.
  • Bryah Resources rose by 0.5c to 2.1c after reporting encouraging drill results at its West Brumby and Redrum prospects in WA.
  • Deep Yellow lost 8c to $1.08 as the heat seeped out of the uranium sector. CG Capital Markets is sticking with a price target of $1.44.
  • Boss Energy slipped 20c lower to $4.05 despite reporting progress exploring the Jason satellite deposit near its Honeymoon project in South Australia, and
  • Ark Mines added 1c to 24c after reporting that a second drilling rig was heading to its Sandy Mitchell rare earth prospect in North Queensland.

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