Easter break leads to contemplation of Australian dollar and trade tantrums

Australian dollar easter break trade wars
WEEKLY MARKET REPORT

One of the great things about the Easter break is that it gives everyone a chance to take an enforced break from day to day share market trading and think about the broader macro trends.

And from my perspective the two trends worth keeping an eagle eye on are the Australian dollar and the continuation or otherwise of trade tantrums on world share markets.

Dollar shows first signs of weakness

We got a good preview of the first trend in the past week as the Australian dollar started to show some perhaps overdue recognition that the yield advantage we have traditionally enjoyed over many countries is evaporating and reversing.

With no sign of official interest rates rising here in the foreseeable future and a progressive series of rises planned in the US and most likely many other countries as well, the dollar bulls are going to need to look much harder for a reason for the Australian dollar to stay strong relative to offshore currencies.

Relatively firm prices for iron ore and other commodities such as coal which we export by the shipload is certainly one but what happens if the price of ‘Aussie’ commodities begins to slide?

Certainly the carry trade – which sees offshore investors send money here to enjoy higher interest rates – will be evaporating from all but the lowest interest rate countries such as Japan.

Economic growth premium also disappearing

It is also unlikely that Australia will record an economic growth premium over as many countries as it traditionally does either, with the US last week recording a stellar 2.9 per cent GDP growth in the fourth quarter, once again surpassing expectations of around 2.7 per cent.

Certainly the past week has seen the first real signs of Australian dollar weakness as it continued to slowly decline against US dollar, reaching into the US76.6c region before rallying slightly, the lowest level for 2018.

There are still some Australian dollar bulls around but they are getting lonely and it is worth considering some diversification strategies to cope with a falling dollar.

Perhaps the most common is to buy Australian companies with much of their earnings offshore, particularly in US dollars, to hedge against the chances of a weaker dollar.

Then there is the option to buy offshore shares or indices directly, most commonly through locally listed exchange traded funds (ETF’s).

Then there is the option of investing directly in different currencies through vanilla and geared exchange traded funds such as USD, YANK, POU and EEU.

It is obviously an individual decision but with many Australian investors heavily overweight local equities and cash, a potentially weakening dollar provides some impetus to consider the best method of getting some offshore diversification.

On the second front, world share markets are beginning to trade in a way that is reminiscent of the taper tantrums that happened when the US Fed first began reeling in its extraordinary loose monetary policy following the global financial crisis.

Then the markets went through repeated dummy spits despite nothing really changing too much on the company earnings side and this time the trade tantrums look fairly similar.

That is not to say that a “risk-off” strategy is not a good idea in the face of US President Trump’s continuing threats of trade wars against China and others, although it is worth noting that the original steel and aluminium tariffs are looking less scary by the day as various countries such as Canada, Mexico and Australia are awarded exemptions and concessions.

The jury is still out as to whether the threats are more of a bargaining chip rather than reality but investors are likely to remain skittish as long as they feel like they can’t get their arms around the trade issue.

While that is happening, even the attraction of the good fundamentals of synchronised global growth and persistent low inflation will remain in the background, only emerging again when the trade issue is resolved.

One interesting thing to watch is whether the US S&P 500 will drop back to the February 8 correction low of 2580 points.

It has got close a couple of times but is still hanging above that level even during the worst of the trade tantrums.

Property market going sideways rather than plummeting

Another thing to watch out for this coming week is the latest March CoreLogic property price levels, which will be released on Tuesday.

So far the softening in property prices in Australia this year is following the traditional pattern of trading broadly sidewards following a period of very strong growth.

So far annual price growth across Australia’s mainland state capitals has slowed to 0.7 per cent, helped along largely by recent declines in Sydney and Melbourne.

According to CoreLogic, prices across Australia’s five mainland state capitals have slipped 0.1 per cent in average weighted terms.

That reflected a 0.2 per cent drop in Melbourne which, along with a 0.1 per cent decline in Brisbane, offset flat to slightly higher results in the other capitals.

The small losses in Melbourne coincided with a record number of auctions.

Prices in Sydney, which previously led the recent national slowdown, have been flat while those in Adelaide and Perth rose by 0.1 per cent and 0.2 per cent respectively.

Combined with prior losses, all mainland state capitals except for Brisbane have seen prices decline this year, led by Sydney’s 1.8 per cent fall.

Small cap stocks this week

The small cap sector was dominated by commodities news, as both copper and cobalt once again made an impact on investor outlooks in Australia.

With that having being said, new-age market developments are coming to the fore rather quickly in the form of competitive gaming and medical marvels that could soon be gracing store shelves across Australia, if not online.

With that in mind, here are the news stories that stood out first and foremost this week.

OZ Minerals (ASX: OZL) and Avanco Resources (ASX: AVB)

Avanco’s 1,800 square kilometre landholding in Brazil’s Carajás province attracted the attentions of OZ Minerals, who launched a A$444 million takeover bid for the Brazil-based copper miner this week.

As with lithium, graphite, nickel and cobalt, the copper price is on an upward trajectory, driven by the emerging electric vehicle market.

It turns out copper is just as inextricably linked to the emergent battery market as lithium, cobalt and graphite — with this fact not escaping the attentions of OZ Minerals who feel comfortable paying a 115% premium to acquire copper-rich Avanco.

During 2017, Avanco produced around 14,000 tonnes of copper and 11,366 ounces of gold from its Antas mine, generating a gross profit of around $17 million.

Avanco has already received endorsement for the takeover with almost a third of its shareholders indicating they would accept the offer in absence of a superior proposal, give boards of both companies already having given the offer a nod of approval.

OZ Minerals claims Avanco’s assets will help it achieve its 50,000tpa of copper and 100,000oz gold low-cost production targets by 2024.

Australian Dairy Farms (ASX: AHF)

Australian Dairy Farms is switching up its business strategy, having announced it would convert all six of its dairy farms to organic and enter the organic infant formula market.

The strategic move is the result of an 18-month plan the company had been developing.

Australian Dairy Farms also said it is introducing operational changes that would “move it up the value chain” and reposition it from being a conventional milk-market company, over to a more value-added organic milk processor.

Australian Dairy Farms acquired a new site last November where it plans to build infrastructure to dry, tin and produce infant formula, with CEO Mr Skene saying the company would work with strategic partners to reduce capital expenditure, with details to be revealed to market in due course.

Adherium (ASX: ADR)

A rather good week for Australian biotechs as several firms received key FDA approvals for completely different reasons.

Adherium was granted 510(k) clearance for over-the-counter (OTC) sales of its Smartinhaler sensor for AstraZeneca’s Symbicort aerosol asthma inhaler — a device that helps patients to maintain medication schedules easily missed under chronic, and often debilitating conditions.

This was in addition to Kazia Therapeutics (ASX: KZA) which received an orphan drug designation for its latest drug candidate tackling brain tumours.

Obtaining the green light for OTC sales of its Smartinhaler SmartTouch for Symbicort means Adherium can now sell its products directly to US consumers nationwide, including through pharmacies and online vendors with no restrictions and without prescriptions.

As validation of the news’ commercial significance, investors bought up Adherium shares and taking its valuation ~45% higher during the course of a single day this week.

Esports Mogul (ASX: ESH)

Many naysayers were doubting it, but the reality is that eSports is a viable niche market that’s currently worth millions of dollars (and gradually maturing into a billion-dollar market).

As one of the first Australian companies to move into this niche market, Esports Mogul’s popularity is growing, with the company reporting a doubling of its registered user base in less than a month.

According to Esports Mogul, its Mogul Arena platform acquired 39,697 registered users in just 6 days. The reason for the sharp increase were two new features launched by Esports Mogul.

Its first innovation of the week was Esports Elite, allowing users to speculate on the outcome of events using its 2nd new feature, zSilver, a virtual loyalty credit system that serves as a means of exchange and voting collateral for participants.

zSilver has been introduced in partnership with Razer, a US-based lifestyle brand for gamers, as a means of monetising the growing interest in eSports from both professional full-time gamers and spectators watching gamers compete.

iSignthis (ASX: ISX)

iSignthis bagged American Express into its growing payments repertoire this week, with wholly-owned subsidiary iSignthis eMoney (AU), signing a payment aggregator agreement with the US giant, currently the world’s largest card issuer by purchase volume.

Introducing AMEX into its existing pool is highly complementary for iSignthis and adds a further layer of functionality for consumers to take advantage of when using ISXPay, the proprietary platform developed and implemented by iSignthis.

As it stands, ISXPay provides a full range of gateway, risk management, risk avoidance and processing services for card transactions, as well as alternative payment methods. With the addition of AMEX, iSignthis bolsters its coverage and is therefore able to offer its services to a greater number of customers.

Magnis Resources (ASX: MNS)

Investors may want to get used to resources companies expanding their horizons into developing end-user technology, as this tendency continues occurring on a weekly basis.

Vertical supply-chain integration offers lower costs and expansive market potential, which is possibly why graphite powerhouse Magnis Resources decided to pull the trigger in acquiring a 10% stake in Charge CCCV (C4V), a US-based, lithium-ion battery technology group, this week.

The deal also includes an exclusive 5-year agreement over selective patents, thereby laying the foundations for resources company Magnis to begin making commercial headway in the lithium-ion battery sector.

The real kicker is that Magnis has acquired a stake in a battery-maker that’s adamant it can avoid the use of cobalt to create high-end batteries.

With cobalt prices currently at around US$95,000 per tonne (and growing), removing cobalt from the lithium-ion battery construction equation could be extremely cost-effective and lucrative for anyone to achieve such as feat. Magnis and C4V will certainly be having a go.

Argosy Minerals (ASX: AGY)

The market is on the cusp of welcoming yet another high-grade lithium carbonate producer in the form of Argosy Minerals.

This week, the small cap lithium developer reported that it is almost ready to begin processing its lithium brine concentrate through its pilot plant with preparations for kicking-off processing at the company’s flagship Rincon project in Argentina, “almost finalised”.

Argosy expects to produce its first lithium carbonate equivalent from its Rincon lithium brine and quickly move towards building a sustainable battery grade lithium production company in the coming years.

Tawana Resources (ASX: TAW)

Tawana Resources is going from strength to strength. Earlier this month, Tawana reported it had begun producing lithium concentrate at Bald Hill in Western Australia.

And this week, Tawana announced that maiden spodumene production at its flagship Bald Hill project had begun, in league with joint venture partner Singapore-listed Alliance Mineral Assets.

The company said that nameplate capacity of 162 tonnes per hour was achieved within the first two weeks of commissioning, with ramp up to full production on-track for the next quarter.

The duo has agreed to a $12.5 million five-year offtake arrangement in place with Burwill Holdings. Burwill will purchase 6% lithium concentrate for five years at US$880 per tonne for 2018 and 2019, with the new price to be agreed on thereafter.

The week ahead

Despite the extended trading break over Easter, there is no shortage of economic data to be released in Australia over the coming week with Tuesday’s Reserve Bank Board meeting looming large, despite no prospect of more than a subtle change of language and no chance of a change in interest rates.

Other releases include manufacturing sector surveys, ANZ job advertisements index, retail trade, building approvals, services sector surveys, international trade and new vehicle sales.

US employment and trade reports round out a relatively busy week of economic releases.

John is a highly experienced business journalist and formerly chief business writer for the Herald Sun. He has covered Federal politics in Canberra, was Los Angeles Bureau chief for News Limited and was also chief of staff for the Herald Sun. He has covered a wide range of small and large cap ASX stocks and has a special interest in mining, technology and biotech.