Red October fears continue to mount amid ongoing worries about inflation and rate rises

Global Market 2

BHP’s monster US$21.3 billion profit and record cash return was the highlight of the Australian market this week but it wasn’t enough to drown ongoing concern about inflation and more central bank interest rate hikes which could deliver an “October surprise”.

Britain’s inflation leap over the 10% mark sent a shudder across the Atlantic, re-inforcing calls for the U.S. central bank to unleash a “shock and awe” rate increase as a pre-emptive strike against a similar economy-damaging inflation reading in the U.S.

Henry Kaufman, who earned the title of Dr Doom in the 1980s for correct market forecasts when chief economist at Salomon Brothers, said it was time for the Federal Reserve to “act boldly, to shock the market”.

The 94-year-old said Fed chairman Jay Powell had waited too long before raising U.S. rates saying that “if you want to change someone’s actions, you can’t slap them on the hand, you have to hit them in the face”.

Kaufman’s tough advice was followed by a warning from Citi, a leading investment bank, that a “global recession was still a clear and present danger”.

The bank said that “even as financial markets have shifted to a more constructive tone, we remain concerned about the underlying fundamentals of the global economy”.

The cautious views of Kaufman and analysts at Citi will have been influenced by the remarkable repetition of major market corrections occurring in October (or sometimes a few weeks earlier in September), including the 1929 crash (October 24), the 1987 crash (October 19) and Black Wednesday, the 1992 crash of the pound in London (September 16).

The latest bout of conflicting signals in financial and commodity markets, plus the Ukraine war and China’s threats against Taiwan, have set the scene for a rocky ride to the end of the year, not least in the demand for Australia’s most valuable export, iron ore, which is struggling to stay above US$100 a tonne.

According to Fastmarkets high grade iron ore dropped 4% on Wednesday to US$100.19/t after electricity rationing in parts of China forced at least 20 steel mills to suspend operations.

That fall takes iron ore back to a level last seen 12-months ago and will weigh on investment sentiment when the biggest pure-play iron ore producer, Fortescue Metals Group, reports at the end of the month.

Macquarie Bank, normally the biggest bull in the market, has joined every other bank in hanging a sell notice on Fortescue setting a $16 share price target, down 17% on last sales at $19.08. Morgan Stanley is the biggest Fortescue bear with a sell tip and price target of $14.20.

The battle for Fortescue in some ways reflects a broader struggle in the market which is pitting hard-headed professionals worried about the darkening economic skies against cashed up amateurs continuing to buy with funds squirreled away during the Covid pandemic.

Macquarie reckons Fortescue will report a profit on August 29 of $6 billion, down 41.7% on last year’s $10.3 billion. The decline is expected to continue with Macquarie tipping earnings of $4.5 billion in the current year and $3.4 billion next financial year with the dividend sliding from last year’s record payout of $2.75 per share to $1.32 and then down to 71c in ’24.

If right, the scene is set for a debate about what Fortescue should be doing with its profits, pay dividends or reinvest in the hydrogen and other low-pollution energy plans brewing inside Fortescue Future Industries.

 

Other iron ore news this week included:

  • BHP warning in its profit statement that there were “near-term uncertainties” about steel demand in China.
  • Mount Gibson suffering another setback at its Koolan Island mine off the WA coast with a fire following the 2014 flood. On the market, the stock lost 8.5c (16%) over the week to close at 44c, and
  • Mineral Resources starting early site works on its Onslow iron ore project (formerly the Ashburton project). MinRes crept up by 33c to $59.32.

The prospect of a showdown between central banks keen to drive inflation down and enthusiastic consumers driving inflation up triggered a return of gold bugs who revived their predictions of a gold-price break out.

The most outspoken of the bugs, Swiss-based Egon von Greyerz, led this week’s claims that gold is poised to reclaim the US$2000 an ounce market with a report that started with the forecast of “an epic autumn collapse in stocks, debt and currencies” all blamed on rising inflation – an October surprise if ever there was (if correct).

Unfortunately for Egon, gold refused to obey his command, slipping US39/oz to US$1764/oz. The local gold price, aided by a fall in the exchange rate to US70c, did better, rising A$17/oz to $2545/oz,

News from the gold sector was topped by Gascoyne Resources jumping 8.5c (31.5%) to 36c after reporting a high-grade discovery at its Dalgaranga project in WA with a best hit of 59 metres assaying 12.5 grams of gold per tonnes from a depth of 139m with a 13m zone grading 51.1g/t.

 

Other gold sector developments included:

  • Evolution Mining slipping 11c to $2.61 after a poorly-received annual profit of $274.7 million, down 22.4% on the previous year’s earnings of $354.3 million.
  • Regis Resources fell by 19c (10.5%) to $1.62 after warning that it expected to report a profit of between $10 million and $20 million, a hefty fall from the previous year’s $146 million, and
  • Kin Mining led another capital raising rush, hauling in up to $20.4 million to underpin the next phase of work at its Cardinia project near Leonora in WA. On the market Kin lost 1.7c to 7.8c.

 

Capital raisings which have been a feature of the market for the past six weeks continued at a brisk pace as companies shored up their finances. The latest deals included:

  • Kalium Lakes rising $22 million for its flagship Beyondie potash project in WA after it became the latest potash developer to experience a cash shortfall. On the market, Kalium traded at 5.5c, up 0.5c for the week, but down 70% on this time last year.
  • DevEx raised $17.2 million to expand drilling on its promising Nabarlek uranium project in the Northern Territory. New shares were issued at 34c while the stock traded at 39c.
  • Other capital raisings included Firebird ($3.5 million). American Rare Earths ($14 million) and Mallee Resources, which is seeking up to $70 million at 70c a share for work on its Avebury nickel project in Tasmania.

 

OZ Minerals ran out of steam this week, slipping 2c to $25.78 as investors wait for BHP to top up its $25 a share takeover bid or for a rival to enter the ring.

BHP chief executive, Mike Henry, said he was disappointed by the rejection from OZ, adding that the target would be “nice to have, but it’s not a must have”.

 

Other news and market moves this week included:

  • Galileo Mining adding 9.5c over the week to $1.09 as it prepares to start diamond drilling at its promising Callisto palladium discovery in WA. At one stage on Tuesday, the stock was trading at $1.22.
  • Black Canyon releasing an upbeat scoping study into its Flanagan Bore project in WA, pointing to the potential for a 20-year mine producing 1.8 million tonnes of manganese a year. On the market, the stock added 4.5c to 27c.
  • Astron Corporation jumping 21c (36%) to 80c after releasing an update on its Donald mineral sands and rare earth project in Victoria, and
  • Dateline Resources adding 2.9c to 12c after reporting that gravity surveys had revealed multiple rare earth targets at its Colosseum project near the Mountain Pass rare earth mine in California.

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