Punters disappear down a Jackson Hole ahead of key US interest rate statement

Commodity and share prices edged higher this week as investors waited nervously for interest rate news from a gathering of central bankers in a U.S. ski resort.

Global Market

The annual Jackson Hole Economic Symposium in Wyoming is always an important event for financial markets and especially so this year as an all-out effort is made to kill inflation with higher rates.

Key event at the three-day meeting will be a speech by the chairman of the U.S. central bank, Jerome Powell, who will probably not reveal the size of the next rate rise but will outline policy proposals for the next 12-months.

In terms of a markets scene-setter, Powell’s annual performance is about as good as it gets in determining future market moves, with added difficulty this year as he tries to engineer a soft landing for the U.S. economy in the aftermath of the Covid pandemic.

War in Ukraine and China’s recent slide towards a rare recession will weigh heavily on Powell and other central bankers at Jackson Hole, which could mean sticking with a slow ratcheting up of rates at 0.5% per move, not with the big bang of 1% which rate hawks are calling for.

What the Jackson Hole conference means for Australian investors is that what you saw this week will be quickly forgotten when markets open next week, though the 1.5% decline in the all-ordinaries index over the past five trading days could be a pointer to the general direction of the market, down.

Gold, always a useful guide in times of uncertainty, was itself very uncertain this week, opening and closing at roughly the same price of US$1755 an ounce, a flat result reflected in gold company share prices with most moves a few cents either way.

Not even good discovery news could inject much enthusiasm for gold (bullion or equities) ahead of the Jackson Hole meeting, as shown in these examples:

  • Black Cat Syndicate reported 29.43 grams of gold a tonne (almost an ounce) over three metres from a depth of 82m at its Coyote mine in WA for a rise of 1.5c to 38c.
  • OreCorp released a positive definitive feasibility study into its Nyanzaga project in Tanzania which is targeting 250,000oz of gold a year over 10.7 years at an all-in cost of US$954/oz only to see no movement in its share price which remained stuck at 42c, and
  • De Grey Mining slipped 1.5c lower to 99c even as a pre-feasibility study into its Mallina project in WA nears and Bell Potter published a fresh buy tip with a price target of $1.80.

Gold, perhaps more than any other commodity, is being challenged by rising interest rates with the bond market in the U.S. and Australia signalling the potential for a fresh round of rate increases after the bankers leave Jackson Hole.

Macquarie Bank noted in a research report released yesterday that gold has been “on the back foot” ahead of the Wyoming conference, with “the price struggling in the face of a stronger U.S. dollar and rising Treasury yields”.

In the U.S., the 10-year Treasury Note rose this week by a sharp 0.3% to 3.1% (it was 1.2% at this time last year), while the Australian 10-year note hit 3.71% (it was 1.13% at this time last year).

The increase in interest rates is starting flow into the broader economy with U.S. housing starts down 20% and the even more important, the Chinese property market showing signs of distress, forcing that country’s central bank to cut mortgage rates for the second time this year.

Bad news from the U.S., China, and Europe, which is sliding into a recession under the weight of high energy prices, is not a good sign for commodity prices, adding to a warning from Citi, an investment bank, that the threat of falling commodity prices “is not a head fake” – slang for the downward trend being real and not imagined.

Macquarie had an even more pointed warning when it came to analysing iron ore, Australia’s most important export industry, telling clients that very weak Chinese property data and a slowing global economy meant the iron ore market is “flashing red” with the price likely to slip to US$85 a tonne in the December quarter, down US$21/t on latest trades at US$106/t.

The biggest miners, BHP and Rio Tinto will be hit hard if iron ore falls to US$85/t, but smaller miners of the steel-making material will be hit harder and, as if on cue, the newest and smallest Australia iron ore producer, Strike Resources, shipped out its maiden cargo this week and closed its Paulsens East mine on the same day.

Macquarie has downgraded Rio Tinto to neutral, while sticking with a sell recommendation on Fortescue, which reports next week, with the bank expecting Fortescue’s share price to fall by 25% to $14.50.

“We believe subdued steel demand in China, particularly in the property market, and a slower recovery over the remainder of the year will push the iron ore market into a surplus,” Macquarie said.

Lithium stocks continued to show the benefits of an elevated price for the battery metal in China thanks to a combination of strong demand and stretched supply.

Star lithium performer this week was Patriot Battery Metals, a Canadian stock soon to be headed by Ken Brinsden, the former chief executive of Australia’s Pilbara Minerals.

On the Toronto stock exchange, Patriot rose by 21% to C$5.66, outstripping Brinsden’s old firm, which was up a 11% (37c) to $3.49 after reporting a $561.8 million profit for the year to June 30 – with Citi tipping earnings this financial year of $1.49 billion.

Despite Pilbara’s exceptional result and the high level of demand for lithium, a number of banks believe we’re approaching a peak. Citi has Pilbara as a buy but the price forecast is $3.60 (11c to go) and Canaccord has downgraded its price tip from $4.50 to $4.30.

Another commodity said to be nearing its cyclical high is coal which has been the real star of the embargo on Russian energy exports with thermal quality, material at US$412/t, a whopping 725% higher than the US$50/t of two years ago.

Goldman Sachs, an investment bank, thinks coal miners such as New Hope have entered sell territory with the company’s share price likely to fall by 28% to $3.60, while Citi goes further with a price tip of $3 and a sell recommendation.

Other news and market moves on note included:

  • Magmatic Resources up 9.3c (110%) to 18c after reporting an eye-catching 740 metres of core showing strong copper, gold and molybdenum readings from a depth of 134.5m at its Corvette project near the Northparkes mine in NSW.
  • Parenti Global added 5.8c to 75c after reporting a strong annual profit of $176 million thanks to demand for its drilling services.
  • 92 Energy reported encouraging uranium assays from drilling at its GMZ project in Canada with a best hit of 43m at 0.62% uranium. Within that section was an enriched zone of 2.17% uranium over 6m. On the market, the stock added 12c to 52c.
  • Hot Chili encountered more high-grade copper during drilling at its Valetina project in Chile with a best hit of 3m assaying 11.8% copper and 53 grams a tonne of silver, helping the stock added 4c to 82c.
  • Iluka Resources added 79c to $10.60 after reporting a 186% increase in net profit to $369 million with management noting that its customers were preferring security of supply over chasing cheap prices, and
  • Rare earth stocks were marked down sharply after Macquarie said the sector faced “near-term headwinds” as supply rose and demand faltered. Lynas lost 88c to $8.99 and Hastings was down 12c to $4.27.

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