Powell hits pause on rate cut but market up-trend is a friend

Two steps forward. One step back. That’s the story of financial markets this week as an underlying recovery was derailed by a warning from U.S. central bank boss, Jay Powell, that investors waiting for interest rates to fall should “be patient”.

By Tim Treadgold.

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Overall, the Australian market followed the U.S, slipping 1.1% lower yesterday as measured by the all ordinaries but remained up 3% when looked at over the past two weeks, and up 12.5% on the cyclical low reached in early November.

Another important stock market index, the ASX 200, which tracks the biggest listed companies, reached an all-time high on Tuesday, before losing 1.1% like the all-ordinaries to remain within touching distance of the record.

Locally, hopes that the worst of the economic downturn has passed were raised by a fall in the annual inflation rate to 4.1% with the December quarter consumer price index up just 0.6%, the smallest increase in almost two years.

Luci Ellis, a former assistant governor at the Reserve Bank and now chief economist at Westpac, said the latest CPI news was the “final piece of the puzzle” with Australia’s central bank likely to keep rates on hold next week and not raise them again in the current cycle.

Gold, the go-to commodity/currency in the interest rate tug-of-war, performed well over the week with a US$25 an ounce rise to US$2046/oz, with a brief peak about US$2050/oz, moving closer to its all-time high of US$2078/oz reached just before Christmas.

The World Gold Council, an industry lobby group, is forecasting a strong year for the metal as interest rates eventually start retreating with central banks likely to be the major buyers.

Chinese investors, who have been hammered by consecutive property and stock market collapses, are also powering into gold, according to the WGC, which reported a 28% increase in Chinese investment demand in the December quarter to a record 280 tonnes.

Australian gold leaders had a solid week with Northern Star up 35c to $13.30. Evolution up 2c to $3.18 and Genesis up 3c to $1.60.

Other gold news and market moves included:

  • Spartan Resources rose by 7c to 47c after reporting high grade gold intersections from the latest drilling at its Dalgaranga mine in WA, including 16.65 metres at 10.29 grams a tonne from a depth of 625.83m.
  • Westgold, up 19c to $2.23 after reporting increased gold production in the December quarter.
  • Warriedar Resources rose by 0.5c to 4.4c after reporting encouraging assays from drilling at its Ricciardo project in WA with a best hit of 20m at 4.78g/t.
  • Bellevue lost 6c to $1.28 as commissioning of its namesake mine in WA nears an end. Banks remain keen on the stock; UBS sees it heading up to $1.45. Barrenjoey has $1.60 as the price target, and
  • Gold Road fall by 24c to $1.48 after filing a disappointing December quarter production.

Battery metals, especially lithium and nickel, remained in the sin bin but several optimistic reports could be pointing to an end of the fall if not an outright recovery.

Barrenjoey, the well-connected boutique investment bank, said the signs were pointing to an end of the lithium crash, telling clients during the week that “the market may balance sooner than expected”.

Production cuts by top lithium producers such as the Greenbushes partners were already starting to have an effect on supply with Barrenjoey forecast a flip from the current glut conditions to a modest shortfall in three years and a whopping deficit thereafter.

Other leading banks, including Goldman Sachs, are seeing the same trend with the only divergence being the time of the recovery.

Goldman Sachs reckons the lithium carbonate will rise from today’s US$13,000 a tonne to US$18,000/t in 2028. Barrenjoey has US$18,000 as the price for next year, three years sooner than Goldman.

Morgans, a local stockbroker, sees both Pilbara Minerals and Mineral Resources as buying opportunities with Pilbara tipped to gain $1.12 to $4.60 (the broker’s previous target price was $5), and MinRes to add $14 to $72 (the previous price tip was $83).

Other battery metals news included:

  • Rio Tinto reported to be working with the Serbian Government to restart work on its mothballed Jadar project.
  • Commodities research firm Wood Mackenzie warning that a global slowdown in the growth rate of electric vehicle (EV) sales was a warning of further lithium production cutbacks and project delays.
  • Macquarie Bank warning that early-stage lithium stocks are facing funding headwinds, and
  • Magnis Energy slipping closer to a crisis when it reported a cash balance of just $532,000, enough for two quarters of operations.

Price moves of interest included Patriot Battery Metals slipping 8c lower to 74c despite reporting high grade drill hits at its CV13 pegmatite in Canada. The stock was trading at $1.67 six months ago. Galan fell by 11c to 43c after raising $19.5 million at 46c a share for work at its Hombre Muerto West project in Argentina.

If it’s tough in lithium, its far tougher in nickel where London’s Financial Times described the situation as a “Darwinian battle for survival”, though if you look hard there was a silver lining forming around the price which crept up US$650 a tonne to US$16,248, a rise which needs to be seen against the metal’s price of US$30,000/t at this time last year.

IGO was the loss leader in nickel as it announced the mothballing of its Cosmos mine in WA though the 7c fall to $7.28 was a modest move when seen against the 50% drop from $14.70 at this time last year. Lithium exposure is also a problem for IGO.

Goldman Sachs reckons the IGO sell-off has gone far enough. The bank has the stock as a buy with a price target of $8.85. Citi sees IGO rising to $8.60. Macquarie is the most optimistic bull with a price forecast of $9.20.

The nickel bulls are battling gross over-supply from Indonesia and plans by the French Government to bail out the loss making nickel mines of New Caledonia while Benchmark Mineral Intelligence nickel expert, Harry Fisher, is forecasting a “four-year winter” for the metal.

Nickel Industries was the nickel winner of the week with a share price rise of 18c to 78c, a move boosted by news of an increased dividend courtesy of the company’s low-cost Indonesian operations.

Iron ore continues to surprise on the upside with the price clinging to US$133 a tonne and perhaps heading back up to US$150/t, according to Citi, which sees government support triggering another steel-hungry building boom.

Fortescue, the local iron ore leader, added 43c to $29.51, but did hit a 12-month high on Wednesday of $29.88. Most banks are sticking with sell tips because they believe the share price is running well ahead of earnings. Barrenjoey circulated a fresh report price target of $23.

Other news and market moves of interest this week included:

  • BCI Minerals raising $315 million through an underwritten share issue priced at 25c to help fund the “salt first” phase of its troubled Mardie salt and potash project. BCI slipped 3c lower to 28c.
  • Burgundy Diamond Mines adding 1.5c to 19c after reporting solid production results from its Ekati mine in Canada. Bell Potter reckons the stock is heading to 45c (though that price is down 5c on an earlier tip of 50c).
  • Boss Energy rose by 13c to $5.63 as interest grows in an imminent start of uranium production at the Honeymoon project in South Australia. Bell Potter has a $6.41 target price (up from an earlier $5.69). Macquarie sees $6 as the 12-month target.
  • Sierra Rutile continues to struggle, this time over a dispute with the government of Sierra Leone over the Area One mineral sands project. Operations have been suspended and the stock is down 2.7c at 6.3c.
  • Chalice slipped 4c lower to $1.04 despite releasing an upbeat quarterly report which emphasised the comfort of having $112 million in the bank to fund ongoing work at its Gonneville polymetallic project in WA.
  • Syrah lost 6c to 39c after reporting reduced graphite sales and low graphite prices/ UBS said production was in line with what it expected but the graphite market remained a concern. The bank is sticking with a buy tip and share-price target of $1, and
  • Sandfire Resources rose by 24c to $7.18 after releasing a solid December quarter report, sliding past Citi’s price forecast of $6.90 and on track to hit the UBS target of $7.60.

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