Jay Powell, chairman of the Federal Reserve, said tellingly: “there is no sense that inflation is coming down”.
Investors in the U.S. quickly retreated, forced to recognise that hopes of a fast end to the rate hiking cycle had been a case of premature speculation.
Some were also spooked by the latest negative comments from high-profile fund manager Paul Singer who warned that economic settings pointed to further falls ahead as the world stumbled towards what could be the worst crisis since 1945.
“Investors should not assume they have seen everything,” Singer said in a note to clients of his US56 billion fund, adding that a 50% drop from peak to trough would be “normal” which suggests there are further big falls to come.
Canadian investment bank TD Securities said it had revised up its rates forecast with the terminal rate expected to be 0.5% higher at 5.5%, to be achieved by a 0.5% increase next month, followed by another 0.5% in February and a series of 0.25% increases.
The Australian stock market followed the U.S. correction. A promising start to the week, which had seen an overall increase of 2.8%, as measured by the all ordinaries index, was all but wiped out yesterday.
The Fed’s latest 0.75% rate rise, and the promise of more to come, wasn’t the only costs warning this week with the Australian economy starting to feel the effects of a high inflation rate and botched energy transition which is driving up the cost of electricity and gas as well stifling investment.
Seasoned economics writer Judith Sloan nailed the issue in a column in The Australian newspaper when she asked whether anyone else had seen the “remarkable disconnection” in the budget speech of Treasurer Jim Chalmers who said he was delivering “cheaper and cleaner” energy but electricity prices would increase by 56% over the next two years.
As Kermit the Frog so famously sang in the children television series Sesame Street: “It’s not easy being green” – and nor is it cheap.
Small iron ore projects are the most obvious victims of a squeeze on margins caused by rising costs and falling revenue with small WA producer CuFe the latest to phase down operations after the price of its ore plunged from US$158 a tonne in March to US$82/t last week.
Two other examples of rampant cost inflation highlighted the economy-wide spread of the problem. They were:
- IGO, the diversified mid-tier miner, shocked the market when it reported that the cost of the Odysseus nickel project in WA had more than doubled from $339 million to $810 million, and
- Group 6 Metals said that the cost of its tungsten project on King Island in Bass Strait had risen by 30% to almost $93 million.
IGO paid a heavy price for the surprise cost explosion. Its shares fell by $1.54 (9.5%) over the week to close at $14.77.
Other nickel stocks were also sold off despite a promising US80c increase in the nickel price to a six-week high of US$10.87a pound.
- Galileo Mining, which reported a new discovery 400 metres north of its Callisto project in WA, lost 6c to $1.12, and
- Mincor fell by 16c to $1.36 despite bullish research reports from two stockbroking firms, Bell Potter, which sees Mincor rising to $1.90, and Shaw which is tipping a target price of $2.30.
Geopolitical uncertainties are keeping investors awake at night, especially in Europe where the Ukraine war threatens to drag on indefinitely, threatening energy supplies and pointing to a grim winter and a deep recession next year.
China too remains a concern as its once spectacular growth rate splutters thanks to impossibly strict Covid controls and tighter government regulation of business which is crushing the profit incentive.
Citi, an investment bank, reckons the only way China can start growing again is with a countrywide Covid vaccine roll out and until that happens, prices for most minerals and metals exported by Australia will remain under pressure.
Iron ore, as mentioned earlier, has fallen sharply and could continue falling which is why big producers such as BHP, Rio Tinto and Fortescue Metals Group (FMG) are feeling the same pressures as small miners of the steel making material.
BHP saw a $1 rise early in the week largely lost yesterday as it slipped back to $38.02. Rio Tinto performed a similar trick with a retreat to $90, while FMG outperformed its bigger rivals with a 15c rise to $15.29 thanks to news that its Iron Bridge iron ore processing project is nearing practical completion.
Despite FMG’s price increase, banks remain concerned about the company as it tries to build a green energy business on top of its iron ore mines. Bell Potter told clients that the stock remains a sell with a price target of $14.09. No leading banks have FMG as a buy.
The outlook is certainly not bright for iron ore. Citi reckons investor sentiment has plunged after the bad press which followed the 20th communist party congress in Beijing. The bank expects iron ore to drop further to around US$70/t, a hefty fall on Citi’s previous price tip of US$95/t.
All sectors of the market turned down this week after a positive start, including lithium, the star performer of the past six months.
Lithium sector leader Pilbara Minerals slipped 9c lower to $5.05 despite Macquarie maintaining its optimistic view and a price tip of $5.80. Liontown lost 13c to $1.81. Core was down 4c to $1.36. Global dropped by 25c to $2.27 and Vulcan was 16c weaker at $7.14 despite announcing an expansion into France.
A lithium bright spot was newly-listed Atlantic Lithium which rose by 25c to 88c after reporting high grade intersections from drilling at its Ewoyaa project in Ghana with a best hit of 1 metre at 4.52% lithium from a depth of 54m. Most other assays grades were around 1.5% lithium.
Gold, which might reasonably have been expected to lap up the gloom, did react initially with a US$20 an ounce jump to US$1663/oz before beating a retreat as investors headed for the exits, closing yesterday at US$1636/oz, down US$11/oz.
Most Australian gold stocks lost ground. St Barbara lost 3c to 48c (it was $1.65 at the start of the year). Takeover target Dacian added 1c to 15c. Orecorp, which is trying to finance its big Nyanzaga project in Tanzania, also added 1c to 33c but almost everything else was down, though not by much.
Bellevue was 1c weaker at 75c. Northern Star lost 25c to $8.62 and Regis was 3c weaker at $1.49 but could go down further with Morgan Stanley tipping a price target of $1.30.
Titanium and zircon stocks (the sand miners) did reasonably well. Iluka, which also has rare earths on its plate, added 20c to $8.81 but is set to reach $10 according to Credit Suisse. Strandline added 2c to 43c as interest grows in first production from the Coburn project in WA. Shaw & Partners reckons Strandline is heading for 80c.
Other news and market moves this week included:
- Rare earth stocks had a mixed week with sector leader Lynas up 8c to $8.42 while Hastings lost 7c to $4.50. Desert Metals lost 10c to 35c after reporting what it described an outstanding high grade exploration results from its Innouendy project in WA.
- Coal stocks lost ground after an exceptional year of rising prices. Whitehaven fell by 38c to $9.40 and New Hope was 28c weaker at $5.89. An exception was a report in The Australian which said Queensland coal miner, Sam Chong, had seen his fortune swell to $1.92 billion after receiving his dividend cheque from part-owned Jellinbah Mines, and
- Neometals added 3.5c to $1.15 after reporting successful commercial scale smelting trials at the Barrambie vanadium project in WA.
