What’s particularly worrying are reports that the heart and lungs of the global economy, trading in premium grade government bonds, might be starting to seize up – as they did in 2008 after the Lehman Brothers bank collapsed.
But before the bad news, of which you’ve had plenty in the past 48 hours, a touch of optimism because gold is enjoying the gloom, rising when other asset classes are falling with the uncertainty created by the relentless central bank attack on inflation lifting the gold price to around US$1913 an ounce, up US$100/oz over the past week.
ANZ Bank reckons gold will keep rising, all the way to US$2000/oz by the end of the year, up US$400/oz on the price five months ago, while Morgan Stanley yesterday pushed the boat out a bit further with an end-of-year price forecast of US$2160/0z.
As gold rises, other commodities, including oil and copper, are being sold off as investors take to the sidelines in case conditions worsen, which seems likely if forecasts from people such as National Bank chief executive, Ross McEwan, are correct.
McEwan is tipping two more interest rate increases this year by Australia’s central bank as it delivers on a threat to “keep raising until you stop spending”. His forecast is supported by the latest better-than-expected unemployment data which showed a national fall to 3.5%.
What happened at SVB, with Credit Suisse following, came at a particularly interesting time for me because it coincided with a visit to London this month and a memorable night at the theatre where I saw a brilliant play called The Lehmann Trilogy.
Lehmann, in case you have forgotten, was the U.S. bank which sparked the GFC after being caught with massive exposure to financial instruments tied to the sub-prime mortgage market which collapsed when, you guessed it, interest rates started rising and mortgagees couldn’t service their debts.
The play, which can be described as art imitating life, is more about the Lehmann family than the business they founded but it is a great example of what happens when risky behaviour replaces prudence.
This time around no-one has mentioned sub-prime but the principal is the same: rising interest rates expose heavily-indebted businesses and households which believed low rates can last forever – which they never do.
SVB’s mistake, which is almost laughable if not so serious, is that it accepted short-term deposits and then parked the money in low-yield, long-term, government and corporate bonds. It seemed a smart idea until rates took off at their fasted pace in decade which meant the bank could not liquidate its long bonds at a pace to keep up with withdrawals. Bang!
The question asked by SVB’s failure is whether it is the only cockroach in the kitchen, and we all know the answer to that because cockroaches are never alone – with Credit Suisse looking awfully like the second roach after being forced to turn to the Swiss Government for a financial bail-out.
Cheap money, as one London commentator said this week, drove the SVB bonfire and it’s now a question of seeing how far it spreads.
Next week is shaping as the most important since rate increases started at roughly this time last year with the Federal Reserve of the U.S. scheduled to consider its next move against a backdrop of a modest slowdown in inflation offset by seemingly unstoppable strength in the U.S. economy.
The challenge for the Federal Reserve is in judging whether it’s done enough to tame inflation or whether it needs to keep increasing until the economy peaks and slips into reverse, which seems to be the case among technology leaders, where cost cutting has become the share price driver.
Meta, once known as Facebook, is a case study of investors warming to the cost cutting theme with its share price up 10% over the past month despite announcing 10,000 staff lay-offs on top of 11,000 job cuts in November – a total cull equivalent to 25% of employees.
Overall, the Australian market lost 3.5% this week as measured by the all ordinaries index, wiping out all the gains since the start of the year. The mining sector was down 7%, largely because of concern about the effect on commodity demand from a global growth slowdown.
The gold index, as mentioned earlier, was the star of the week rising by 6.5%, led by the reborn Kingsgate Consolidated which rose by 6c to $1.52 after announcing the final government inspections on its Chatree mine in Thailand.
Northern Star also gained ground despite an outage at its big Pogo mine in Alaska with the stock rising by 51c over the week to $11.12. Most other gold price moves were modest with a handful of falls, including Evolution which slipped 4c lower to $2.73.
Lithium stocks had a torrid time largely because they rose too far in the first place and when questions were asked about the impact of rising supply and slowing demand the inevitable correction kicked in.
All major lithium stocks fell to earth, including Pilbara, down 57c to $3.54. Allkem, down $1.77 to $10.33. Global Lithium lost a hefty 30c to $1.37 but remains a favourite of Macquarie Bank which maintained a buy tip and price target of $3.60.
Liontown recovered some lost ground yesterday but still lost 11c to $1.51 over the week though Citi sees the stock recovering to $1.80 and Macquarie goes a step further with a price forecast of $2.60. Patriot Battery Metals was 29c weaker at $1.20 with the fall partly the result of a big capital raising for project development.
Nickel, another leading member of the battery metals sector continued to slide, losing US20c to US$10.23 a pound. It was selling for US$12.06/lb a month ago.
Xiang Guangda, China’s nickel king, was back in the news this week with plans to list his REPT Battery Energy business in Hong Kong. It will be the first public look at his business, which is dominated by outright ownership of Tsingshan Stainless Steel, the company which spectacularly shorted the nickel market last year and almost broke the London Metal Exchange.
Most local nickel stocks lost ground this week, including Mincor, which was 14c weaker at $1.05 and Centaurus, which slipped 9c lower to 82c after reporting a delay in the definitive feasibility study into its Jaguar project in Brazil after receiving strong metallurgical test results.
Lunnon Metals was a rare nickel player to hold its ground, trading steady at 95c after reporting the start of seismic trials at its Silver Lake and Fisher project near Kambalda in WA. Macquarie reckons Lunnon will rise to $1.30.
Iron ore continued its rise towards the US$150/t target set by Goldman Sachs earlier this month settling at around US$134/t, up US$5/t over the week despite news that the big Simandou project in Guinea has cleared another milestone after decades of delay.
Most local iron ore stocks lost ground. FMG was down 96c at $20.95. Champion Iron slipped 31c lower to $7.34 and Mineral Resources, which is also exposed to lithium was off a sharp $8.02 at $78.33.
Other news and market moves during the week included:
- Whitehaven and other local coal stock continued to fall even as China said it was removing all remaining curbs on Australian coal. Whitehaven lost 69c to $6.64 (it was trading at $11 late last year.
- Chalice Mining recovered some ground yesterday but lost 25c over the week to $6.01 with investor interest growing in the expected release soon of a resource update for its Gonneville polymetallic project in WA.
- VHM continues to attract investment bank attention with CG Capital Markets tipping a future price of $1.60 even as the emerging Victorian-focussed rare earth and mineral sands traded at 67c, down 19c for the week.
- 29 Metals fell 32c to $1.13 after reporting that flooding at its Capricorn copper mine in Queensland had inflicted more damage than previously reported, and
- Michael O’Keeffe, the man behind Riversdale Mining and Champion Iron, threw his hat into the diamond ring using Burgundy Diamond Mines to buy the Ekati project in Canada for US$136 million. Trading in Burgundy shares remains suspended.
