Weekly review: inflation fears take a toll on market as banks restart a recovery

Inflation fears market banks recovery ASX May 2021

Inflation fears sent the Australian market into a tailspin in the past week but a strong recovery by banks led a late recovery which pushed the ASX 200 back above 7000 points.

By the end of Friday, the ASX200 had added 0.5% or 31.5 points to close at 7014.2, which was a 0.9% fall for the week but still a strong recovery after three previous down days.

Banks continued their amazing rebound with market leader Commonwealth (ASX: CBA) hitting a record $97.38 before ending the day up 0.6% to set a new closing high of $96.58.

The other big banks were also firmer, with the National Australia Bank (ASX: NAB) and Westpac (ASX: WBC) both making up some of their losses from trading ex-dividends, rising 1% and 0.9%. ANZ Bank (ASX: ANZ) shares were up 1%.

While the share market may have recovered a little, the shockwaves from the US inflation surge in April to 4.2% remain and the markets will be on alert to see if the shock result was a one off or if it is the start of an upwards trend, which may lead to rising global interest rates.

Rates could be heading up and shares down

If inflationary pressures continue, then the accepted wisdom is that share prices will head downwards and interest rates will be forced up.

Time will tell whether inflation will keep rising and how it will shape up in Australia, but with the sharp rise in commodity prices such as copper and iron ore and higher food prices, it would be a surprise if these sorts of pressures didn’t bubble up into increased costs down the track.

Here in Australia, the Reserve Bank has been pushing hard to get inflation back up into its target zone of 2-3%, which all of a sudden is not looking quite as difficult to achieve.

The difficulty in predicting inflation lies in the fact that the COVID-19 pandemic has led to a lot of side effects including a lack of immigration, which is also having an impact on the supply and price of labour and also the supply of some imported goods.

Most sectors higher except for miners

Along with the banks, real estate, energy and consumer shares were mostly higher and even Bitcoin made a bit of a recovery to around US$50,000 after falling because recent convert and Tesla entrepreneur Elon Musk decided to no longer accept the blockchain currency for car payments due to the large amount of electricity required to “mine” new Bitcoin.

Mining stocks were the main casualty on Friday and continued to fall as iron ore prices weakened, with BHP (ASX: BHP) down 1.6% to $49.57, Rio Tinto (ASX: RIO) dipping 2% to $125.43 and Fortescue Metals (ASX: FMG) falling 2.8% to $22.79.

Afterpay turns around but Xero still dropping

Afterpay (ASX: APT) finally turned around from its seven-month low on Friday to rise 2.2% to $86.35, but there were no signs of recovery for accounting software company Xero (ASX: XRO) which fell a further 4.2% to $112.50.

Xero shares were down 15.9% for the week.

Hummgroup’s (ASX: HUM) third quarter update showed that buy-now-pay-later (BNPL) transaction volume was up 33% to $255.3 million while total customers rose 2.7 million, up 40%, sending Hummgroup shares 9.3% higher.

Small cap stock action

The Small Ords index fell 2.12% for the week to close at 3179.9 points.

May 2021 ASX 200 chart Small Ords
ASX 200 vs Small Ords

Small cap companies making headlines this week were:

Vintage Energy (ASX: VEN)

Vintage Energy had a positive news week for its 50% owned Vali field in Queensland’s Cooper Basin.

The company revealed on Thursday the Australian Competition and Consumer Commission had authorised it and its partners to jointly market gas from the field for five years and lock-in agreements that span up to 15 years.

The ACCC’s positive decision for Vintage and its joint venture partners followed the confirmation of gas in the Vali-2 well, which has now bee cased and suspended for future production.

E2 Metals (ASX: E2M)

Gold and silver explorer E2 Metals has discovered a high-grade silver zone at its Conserrat project in Argentina.

The discovery was made at the Emilia target, which is 5km north of Mia prospect.

Five holes were drilled at Emilia after rock chip sampling uncovered 16.4g/t gold and 981g/t silver.

Assays from the holes returned a 9.5 intercept grading 375g/t silver and 0.4g/t gold from 49m, including 2m at 630g/t silver and 0.5g/t gold from 49m.

Kingston Resources (ASX: KSN)

Aspiring gold producer Kingston Resources has uncovered more gold and silver during resource drilling at its flagship Misima project in Papua New Guinea.

Infill drilling has been underway a the Kulumalia target which is at the southern end of the main Umuna orebody.

Latest assays returned 20.7m at 2.52g/t gold and 86.1g/t silver from 99.3m; and 17.5m at 2.28g/t gold and 2.5g/t silver from 221.9m.

Alligator Energy (ASX: AGE)

Uranium explorer Alligator Energy has entered a partnership with global group Traxys North America.

The deal will see Traxys provide marketing services for Alligator’s future uranium production from the Samphire project.

Traxys will also handle long-term offtake contract, project development financing and assist in future uranium project opportunities.

Alligator chief executive officer Greg Hall said the agreement with Traxys adds “exceptional experience” towards the company’s goal of becoming a uranium producer.

Sovereign Metals (ASX: SVM)

Sovereign Metals has expanded its Kasiya rutile deposit in Malawi following recent drill results.

Latest assays have increased the deposit’s mineralised zone by more than 35% to 89sq km.

Better results from the latest assay batch were 1m at 1.78% rutile, including 8m at 2.01% rutile; 14m at 1.3%, including 5m at 1.8% rutile; 13m at 1.08%, including 5m at 1.52% rutile; 11m at 1.34%, including 5m at 1.54% rutile; and 11m at 1.17%, including 5m at 1.48% rutile.

Mindax (ASX: MDX)

By far the biggest performer this week (in relation to share price movement) was Mindax which saw its stock skyrocket more than 7,700% on Friday when it was reinstated to official quotation after an almost two year suspension.

The company has restarted trading with $1.9 million in the bank and has two projects in Western Australia.

Mindax began drilling at its Meekatharra North gold project at the start of the month with the program to comprise 14-holes for 2,380m of reverse circulation percussion drilling.

Norton Gold is earning a 19.9% stake in Meekatharra North by spending $20 million on exploration.

The company also owns the Mt Forrest iron ore project and says it has received a lot of interest in both assets given the commodity price increases.

By the final closing bell, shares in Mindax had cooled off somewhat to close at $0.037, up 1,133%.

The week ahead

The big news to watch out for this week will be any signs that Australia’s economic progress is strong enough to keep up with the share market, but not so strong that inflation threatens to break out.

Naturally the big highlight will be detailed data on wages and employment, along with the minutes from the May Reserve Bank board meeting on Tuesday.

The wages and employment numbers will be the first to come out since the end of the JobKeeper wage subsidy so they will add some important details to how the jobs market is performing, with unemployment expected to continue falling.

Other releases during the week include consumer sentiment, household spending intentions, skilled job vacancies for April, purchasing managers’ indexes for manufacturing and services and retail trade data for April.

Overseas, the biggest releases to watch out for include the minutes for the US Federal Reserve Open Market Committee, along with a raft of housing data.

Chinese activity data for retail sales, industrial production, fixed asset investment, unemployment and new home prices are out, with retail expected to have risen by a quarter compared to a year ago.

This week’s top stocks

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