Weekly review: market applauds US Fed’s rate hike but dangers await
WEEKLY MARKET REPORT
Like a high wire act traversing Niagara Falls, Federal Reserve chairman Jerome Powell took a tentative first step on the wire this week, promising there would be six more tiny steps coming this year.
It was a move that was broadly welcomed by world markets which rallied on the idea of more certainty and a slower hike in interest rates than they had feared.
However, the risks involved should not be underestimated and applause from the share market for a modest 0.25% interest rate rise is not always a good thing.
Inflation will be hard to rein in from 40-year highs
The risks are already apparent – inflation is boiling up at 40-year record levels in the US and it is very unclear whether such baby steps will be enough to tame it and bring it back under control.
For that to happen it would have been a good idea to set off on the high wire at least six months ago – a time when the Fed thought the inflation they were seeing was “transitory”, something that has proved to be wishful thinking rather than a reasoned economic judgement.
The second very important issue is whether the US economy will keep growing, perhaps more slowly, as borrowing costs inch their way higher.
Recession is a distinct possibility
A recession is always a possibility in a rising interest rate period and with the pandemic and the war in Ukraine both still very much with us, the chance of an unpleasant shock is much higher than ever.
Certainly, Powell was talking a tough game, saying that he was confident of the strength of the US economy to withstand higher rates but also stating that he wants inflation back at the 2% target over time.
“We’re acutely aware of the need to restore price stability,” said Powell.
“In fact, it’s a precondition for achieving the kind of labour market that we want. You can’t have maximum employment for any sustained period without price stability.”
Australia also preparing to raise rates
Here in Australia, we are on a very similar path but starting from further back with inflation not yet at the very high levels recorded in the US, although rocketing fuel prices are expected to add plenty of fuel to our upcoming inflation numbers.
Reserve Bank Governor Dr Philip Lowe is also fairly reluctant to signal any official interest rate rises but the market is pencilling them in for him around the middle of the year.
ASX powers to strongest week in a year
On the back of all of this early enthusiasm for the US Fed’s high wire act, the ASX 200 powered home in the final minutes of Friday’s session to close 0.6% higher to 7294.40 points.
That may not have been as strong as the 1.2% jump in the Dow Jones in the US but it capped off the strongest week in the Australian market for more than a year.
Across the week the benchmark index climbed 3.3% or 230.79 points with the market for March now up by more than 4% and is now higher than before Russia invaded Ukraine.
Energy stocks were particularly strong on the back of oil rising above US$100 a barrel.
Energy sector up
The energy sector rose 2.2% on higher energy prices, with Paladin Energy (ASX: PDN) shares up 7%, Ampol (ASX: ALD) up 3.1% and Woodside (ASX: WPL) up 2.7%.
The strongest result on the market came from Liontown Resources (ASX: LTR) with shares jumping 7.8% with Block shares (ASX: SQ2) leaping 7.2%, with the US based payment and crypto stock up a hefty 24.4% since Wednesday.
The big miners reacted well to higher iron ore prices with Fortescue Metals (ASX: FMG) up 2.2%, Rio Tinto (ASX: RIO) up 1.6% and BHP (ASX: BHP) up 1.3%.
There were some laggards among the positive day with shares in gambling group Star Entertainment (ASX: SGR) falling a further 3.6% in the continuing fallout from the company’s $900 million money laundering scandal.
Megaport (ASX: MP1) shares also fell 8.1% after the company’s chairman sold $39 million worth of shares and Abacus Property Group (ASX: ABP) shares also fell 5.9% after it raised $200 million in fresh equity.
Small cap stock action
The Small Ords index rallied 3.19% for the week to close at 3281.2 points.
ASX 200 vs Small Ords
Small cap companies making headlines this week were:
Imagion Biosystems (ASX: IBX)
Cancer detection technology developer Imagion Biosystems has revealed its injectable MagSense imaging agent was safe and well tolerated during its first in-human study of patients with HER2 breast cancer.
The patients all received injections of MagSense, with the imaging agent also deemed capable of reaching the lymph nodes.
Imagion executive chairman Bob Proulx said the results provided “sufficient justification” for the company to continue the study.
The news sent the company’s share price sky-rocketing to a high of $0.071 during intraday trade on Thursday.
Respiri (ASX: RSH)
Respiri’s wheezo device is being used in a remote patient monitoring (RPM) pilot program at the Children’s Hospital of Michigan in the US.
Via a collaboration with partner company Access Telehealth, the program will provide a full RPM solution for a group of children with asthma. The program aims to reduce exacerbations and hospitalisations, while improving outcomes and reducing healthcare costs.
Respiri noted its wheezo devices and Access Telehealth services qualify for reimbursement through select private health insurers and the US Medicaid program for low-income earners.
Neometals (ASX: NMT)
Mercedes-Benz subsidiary LICULAR has partnered with Neometals’ 50%-owned subsidiary Primobius on the design and construction of a lithium-ion battery recycling plant in Germany’s south.
The partnership marks Mercedes’ first move into battery recycling, which is expected to make it less reliant on future raw materials.
“We are proud that one of the greatest names in the automobile industry has announced its intention to partner with Primobius and made a clear commitment towards sustainable battery recycling,” Neometals managing director Chris Reed said.
Resource Base (ASX: RBX)
Assays from an initial 1,800m of aircore drilling at the Nebula prospect within Resource Base’s Black Range project has confirmed the presence of commonly associated indicator elements for volcanic-hosted massive sulphide deposits, which are known to host copper, lead and zinc minerals.
The indicator elements present were silver, arsenic, barium, thallium, tellurium and copper.
Resource Base executive chairman and chief executive officer Shannon Green said the company was “very encouraged” with the early-stage results.
The news followed the company’s completion of an aircore drilling program earlier this week at the Mitre Hill rare earth elements project in Victoria.
Resource Base undertook 34 holes for 465m across the first tenement within the project, which is only 12km east of Australian Rare Earths’ (ASX: AR3) Koppamurra deposit.
Assays from the initial aircore drilling at Mitre Hill are expected next month.
Vintage Energy (ASX: VEN)
Vintage Energy’s 30%-owned Cervantes-1 oil well is about to be spudded after the company revealed the Ensign 970 rig had been mobilised to site.
It is expected the rig will arrive within seven days with spudding to occur “shortly thereafter”.
The Cervantes-1 well will be located on permit L14 in WA’s Perth Basin, and is assessed to contain gross recoverable prospective resources (P50) of 15.3 million barrels of oil (4.6MMbl net to Vintage).
Vintage is funding 50% of the well’s costs in order to secure the 30% interest, with Metgasco (ASX: MEL) footing the remaining 50% to also lock-in a 30% stake.
RCMA Australia will retain 40% and operator status.
The week ahead
We are in for a fairly quiet week for economic announcements but one date that is fast approaching is the Federal Budget on 29 March.
It would be unusual if some indications and/or leaks sis not start to appear, particularly as there is meant to be some sort of assistance arriving to help with cost-of-living increases.
Other than sneak peeks the main items for the week include consumer confidence figures, household spending, skilled job vacancies and the purchasing manager’s index.
It would be a surprise if consumers have not lost some confidence given zooming petrol prices, floods, the Ukraine war, speculation of interest rate rises and the ongoing COVID-19 pandemic.
Reserve Bank Governor Dr Philip Lowe, is also appearing at the Walkley Awards for Business Journalism, although he is unlikely to let too many secrets out of the bag among that crowd.
Overseas US Federal Reserve chair Jerome Powell is delivering a speech and there are a range of releases on home sales, durable good sales, the current account and consumer sentiment.
Chinese prime lending rates are out on Monday with the last rate cuts happening in January.