ASX smashed as reality dawns that we are all losers in a trade war

The ASX joined markets around the world getting pulverised on Friday as the reality hit home that US President Trump is leading the world ever closer to a global trade war.

The ASX 200 quickly plunged below 5900 points at the open on Friday and kept falling all day, ending down 1.96 per cent or 116.5 points for the day to a close of 5820.7 points.

That wasn’t quite as bad as the brutal 2.5 per cent crunch on the S&P 500 in the US but shows the impact that US President Donald Trump’s memorandum to impose tariffs on up to US$60 billion of Chinese imports has had.

Markets have lost much more than that $US60 billion in capitalisation – indeed Australia lost around half of that on its own.

Also spooking traders and encouraging them to reduce risk and hit the exits were indications that the Chinese were ready to hit back hard on any US tariffs, with their own detailed list of 128 US products that it planned to target – a list that could easily grow dramatically.

While it is still possible that President Trump is simply trying to get a better deal on trade from China and is using this latest memorandum as a bargaining chip, it is certainly a highly risky strategy and until the air clears it will be a great time for bonds and gold as risk goes off the menu for investors.

Big miners were particularly hard hit in the market turmoil with shares in BHP down more than 3.1 per cent and Rio Tinto hit even harder with a 4.3 per cent slide.

All the big four banks were hit, with Commonwealth down 2.7 per cent, Westpac 2.5 per cent, National Australia 1.6 per cent and ANZ 1.7 per cent.

There were really no corners of the market left to hide with even defensive stocks getting hit hard and there could be more to come with futures trading suggesting there could be more falls to come around the world in the coming week.

It is a case of watch and wait to see how bad the damage gets in the coming week but the trade war has now moved from a theoretical possibility to a strong chance as the various sides ready their ammunition and prepare to engage.

Australia’s position as being strongly in support of free trade is unlikely to change with bi-partisan political support but that won’t save us from weaker demand for our minerals and other forms of punishment as we are caught in the crossfire of the global giants of the US, Europe and China.

If there is a silver lining it could be for our agricultural exports which could suddenly be in demand if any of the other big suppliers are dropped as part of the trade war.

Budget looking much better as tax receipts rise and spending slows

Of course the trade war ructions really overshadowed a strengthening of the financial position for the Australian government with tax receipts continuing to strengthen and government spending growth slowing down.

In the year to February this year the budget deficit stood at $18.6 billion or around 1 per cent of GDP, the lowest annual rolling figure for nine years and becoming much more manageable since the “budget emergency’’ days.

In general, a shrinking budget deficit is contractionary and should take the steam out of the economy a little but the continuing large amount of investment in infrastructure across the country should continue to stimulate jobs and provide some economic momentum.

Housing boom over and no interest rates rises in sight

Australia’s housing figures continue to show that the housing boom is over in Australia and our Reserve Bank seems to be in no hurry to move official interest rates from the now customary 1.5 per cent.

The numbers so far show the end of the housing boom is more of a tapering to low or sideways price movements than any sort of alarming slump and as long as interest rates remain steady, even our high levels of household debt shouldn’t cause too many problems.

We are now in the fairly unusual position of having lower official interest rates than the US, which hasn’t happened for 18 years.

US official rates are now up 0.25 per cent to a range of 1.5 per cent to 1.75 per cent after six rises with the prospect of more rises to come if new US Fed chair Jerome Powell carries through with his expected two more rate hikes this year and three more next year.

Things are very different here in Australia with our high levels of household debt and steady housing prices encouraging the Reserve Bank to leave rates steady where they have been for 19 months in a row.

With plenty of spare capacity in the Australian labour market and low inflation there is little to prompt the RBA into action which leaves a very strong focus on the level of the Australian dollar relative to the US currency.

With a reversal of the interest rate premium to favour the US, you would expect the Australian dollar to fall against the US dollar, although possibly not to the US48c mark it hit back in 2001 when Australian rates were lower than US rates.

The difference this time could be stronger commodity prices – trade wars permitting – but it is a good time to keep a very close eye on the Australian dollar indeed.

Electric cars could become cheaper than petrol guzzlers faster than expected

One of the things holding back the adoption of electric cars is their high price tag, although some Bloomberg research has said that the price gap is closing faster than expected.

In what could be good news for Australia given our large deposits in many battery metals including lithium, the research found that electric cars could be cheaper by 2025 due to a continuing fall in the price of lithium-ion batteries.

While the price of battery ingredients continues to climb, battery manufacturing is improving rapidly so the cost of electric cars is falling fast and new suppliers of battery metals are emerging.

Bloomberg predicted the price of mass manufacturing lithium ion storage could fall as low as US$70 a kilowatt hour by 2030 compared to the current cost of U$208.

Small cap stocks this week

Commodities are the traditional bread-and-butter market for Australia, while the new kid on the block is Biotechnology.

Both industries stood out this week, whilst making some hay for a select few small cap companies on the ASX.

This week has been dominated by commodities and biotechnology as both sectors were lifted by macroeconomic themes that continue to provide strong operating environments.

In commodities, raw material prices have been supportive of project acquisitions and takeovers across several cornerstone niches such as battery metals and hydrocarbons.

Several small cap names saw significant project progress, or better project economics courtesy of factors completely outside their control.

Meanwhile in biotechnology the wave of merger and acquisitions in the space, led by US companies since the start of the year, indicates that now could be the time to progress biotech projects given the improved investor propensity for risk exposure to this sector.

As an index, the ASX Small Ordinaries ticked up around 20 points during the week and remains largely unchanged since the start of the year. However, compared to this time last year, the index is trading at a 17% premium.

Tando Resources (ASX: TNO)

Tando Resources has surged into the growing vanadium market this week after the emergent company scooped up the “globally significant” high-grade SPD Vanadium Project in South Africa.

The news gave Tando a significant boost with investors as the company’s shares surged to close out the week at $0.66 per share — up 40% this week and a whopping 230% since the start of this year.

Demand for vanadium has picked up in recent months, driven by the increasing use of vanadium flow redox batteries in renewable energies. This demand is predicted to continue growing due to the vanadium flow redox batteries’ longer life-span and superior ability to retain charge for up to 12 months.

Tando also says that such batteries can discharge without damage and are scalable so that larger battery storage facilities can be developed.

The company raised A$2 million in capital to fast-track its newly acquired South African project and is confident of seeing its rapid development continue through to project completion.

Innate Immunotherapeutics (ASX: IIL)

Innate Immunotherapeutics is proposing to absorb Amplia Therapeutics, a privately-owned Melbourne-based biopharmaceutical company, as part of a strategic move that will boost its chances of getting a drug candidate past the post of clinical trials.

The company said it intends to finalise the acquisition as soon as possible before moving straight into evaluating all its options, including the development of not one, but two, experimental drug candidates currently being developed by Amplia, providing a promising target in cancer therapy.

Range Resources (ASX: RRS)

Life just keeps on getting better for oilers as oil prices continue to march onwards and upwards. Crude prices have climbed consistently between $40pb in July 2017, up to around $65pb today.

Buoyed by upward trending hydrocarbon prices, Range Resources has been tasked with drilling a well for a subsidiary of oil major Royal Dutch Shell in Trinidad. Having won the agreement, Range is confident it can complete the required drilling at the project within 10 days.

The rising tide in oil has also enabled Range to expedite work at its Perlak oilfield in Indonesia, with a new completion date of mid-2018 warming the hearts of shareholders this week.

The accelerated work program for its Perlak field in Indonesia is targeting first oil production during this year.

Early oil output estimates are topping out at 200 barrels per day, and an offtake agreement with state-owned oiler Pertamina already agreed.

Vital Metals (ASX: VML)

It’s not just oilers getting the warm updraft of positive macroeconomic factor this week.

Gold-focused company Vital Metals pulled out an impressive 156g/t gold from an ongoing exploration programme at its Bouli gold project in Niger.

The company then received a further boost in the form of a positive independent review that reduced its anticipated capital expenditure at the now-advanced Watershed tungsten project in Queensland.

Having started the week trading at $0.09 per share, Vital Metals shares closed out this week trading at $0.12 per share — a gain of 33% on the week. 

Cobalt Blue (ASX: COB) and Broken Hill Prospecting (ASX: BPL)

Quite understandably, good battery metals market news reached the shores of cobalt miners given the increase in interest.

Cobalt Blue upgraded its mineral resource at Thackaringa with the project now hosting 61,000 tonnes of contained cobalt – up 23% on the previous resource it announced last year.

The upgrade effectively means that as well as the 23% increase in contained cobalt, the resource includes a 31% increase in overall project tonnage which is likely to extend the life of the project, to be confirmed in further geological technical studies.

A pre-feasibility study is underway and is due to be published in June in tandem with partner in the project, Broken Hill Prospecting. As it stands Broken Hill is the project vendor with a deal on the table for Cobalt Blue to earn-in to the entirety of the project.

The two companies finished off the week strong with news out on Friday that they has secured a US$6 million deal with a subsidiary of major battery manufacturer LG.

LG International has agreed to provide capital and technical assistance for the Thackaringa joint venture as part of the deal to help it move to making high-purity battery-grade cobalt sulphate at the site.

Avita Medical (ASX: AVH)

With regeneration as its core aim, Avita Medical revealed its plans to establish a significant presence in the Chinese market, on the back of regenerative skin technology that claims to slash existing recovery times for 2nd degree burns and other applicable skin injuries.

The Chinese government will fund the upcoming clinical trials of RECELL in China.

If successful, Avita’s RECELL technology could lead to significant improvements in how severe burns are treated, including reduced treatment time, less scarring and better pigmentation after treatment.

In addition to its confident-inspiring regenerative ambitions, Avita has also earmarked several clinical trials in burn patients in Australia and the United Kingdom later this year, as well as two controlled clinical trials in the US focusing on paediatric patients.

Patrys (ASX: PAB)

Enhanced survival rates for sufferers of some of the grisliest brain cancers, known as glioblastomas, could be just around the corner courtesy of Patrys.

Patrys received a strong confidence boost on the back of news that survival rates for mice implanted with cancerous cells were shown to survive for 20% longer than untreated mice, as a result of the administration of its proprietary drug candidate, PAT-DX1.

Invion (ASX: IVX)

Invion and the Hudson Institute of Medical Research have unified to collaborate on advancing Invion’s cancer treatment technology Photosoft.

The alliance opens the door for the parties to work together on research and development projects using Photosoft to treat a range of cancers, including ovarian cancer.

Hudson has agreed to provide research facilities and expertise and to help ensure compliance with legislation and industry standards.

Nkwe Platinum (ASX: NKP)

Chinese mining group Zijin Mining has made a bid to acquire the entire issued capital of Nkwe Platinum for A$0.08 per share — a 166% premium to the company’s opening price on Monday.

The news sent Nkwe Platinum’s share price soaring higher on the day with the upward momentum continuing all the way through to Friday’s close. Nkwe shares closed out the week 133% higher, more than doubling the company’s value during the week.

Zijin already owns 60.47% of Nkwe Platinum via a subsidiary so the buyout wasn’t a complete surprise.

Animoca Brands (ASX: AB1)

Mobile games maker Animoca Brands is going from strength to strength on the back of its games catalogue that has stuck a nerve with gamers of all ages.

The company dropped a huge hint regarding its financial metrics this week, by alluding to something “extraordinary” to be announced at the end of the Q1.

The A$1.26 million in sales revenues earnt on the back of its most popular game in recent months (Crazy Defense Heroes) may have something to do with Animoca’s forecast.

Investors are braced for more news as Animoca prepares to launch its iconic cult-classic game in more territories and an Android version later this year — with many investors keeping a gleaming eye for Animoca’s official financial quarterly.

The company also announced this week it is going to expand into the health and fitness market.

The week ahead

Continuing reaction and news on the US/China trade wars will dominate markets for weeks to come but there is still some news to watch for.

In Australia Thursday’s data on job vacancies and employment by industry could be interesting and in the US Thursday’s report on personal income and spending could give some pointers for the future for inflation and for interest rates.