Weekly review: market climbing two walls of worry – inflation and China
WEEKLY MARKET REPORT
There are two major walls of worry that the Australian share market is trying to climb at the moment.
The first and most obvious is the issue of how high and fast interest rates will climb before a more settled outlook on the inflation fighting period arrives and the second is when China will return to some form of normality amid the current severe unrest around their COVID zero policy.
The problem for investors is that there is so much confusion around both issues that it is really hard to be definitive about either one.
Markets jumping around
Which is why all markets – currency, bond, shares and commodities – have been jumping around so much in reaction to every little bit of news, positive or negative.
However, this week there was some tentative outcomes on both issues that at least made the outlook look a little less cloudy than it had been.
Better news on interest rates
A speech by Fed chairman Jerome Powell saying that they were likely to slow the pace of interest rate rises was one positive on the interest rate outlook, although he also said the Fed may need to push rates a little higher than previously expected.
Another good sign was Australia’s inflation figures which came in lower than expected – although it should be stressed that these figures are incomplete and do not reflect some of the price pressures that arose from major floods.
Still, both pieces of news were received well by the share market, which seems happy to rally on any sign of positive news.
Situation in China hard to read
On the China front, it is very difficult to get much clarity on what will happen as a result of significant social unrest but there have been tentative signs that the country is preparing to relax the COVID restrictions a little.
These two issues are particularly important in Australia, which has a strong reliance on China as our biggest trading partner, with the added complication that relations with China are only just moving out of the deep freeze they entered when China slapped bans on a host of Australian exports.
If you are bullish that both the China situation and the inflation/interest rates situation are stabilising, then you are almost by definition bullish on the share market in general.
However, if there are delays or complications in resolving either situation, then the view on the share market is highly uncertain while if you think either issue will become protracted and difficult, then you will logically be bearish on the share market.
It is in that context that the Australian market has been trading for the last week – jumping at any signs of a central bank pivot on interest rates and falling if higher interest rates appear to be on the way.
China has played out more on the big mining shares, which tend to jump when things start to look promising on China moving back towards higher production levels and exports of commodities such as iron ore look more promising.
In that context Friday’s trade was cautiously lower, with the ASX 200 slipping 52.90 points or 0.72% to 7,301.50, weakening off a little the previous day’s seven month high.
Despite that fall, the market still managed to rise 0.6% for the week.
Gold stocks rally
One of the highlights of the day though was the strength in the gold price which rallied above US$1800 an ounce on the back of slowing US manufacturing data and indications that inflation is starting to ease, along with some Chinese COVID restrictions.
That pushed gold mining shares up led by St Barbara (ASX: SBM) with its shares up 10.4% to 69c, while Newcrest (ASX: NCM) was up 2% to $21.09 and shares in Ramelius Resources (ASX: RMS) were up 4.8%.
Mining shares were slightly weaker despite some higher commodity prices with BHP (ASX: BHP) down 1.6% to $45.76 and Rio Tinto (ASX: RIO) shares down 1.1% to $111.94.
Seven of the 11 sectors on the market finished down with real estate and energy the weakest despite rising oil prices in the lead-up to OPEC+ meeting.
Small cap stock action
The Small Ords index rallied 1.71% for the week to 2945.9 points.
ASX 200 vs Small Ords
Small cap companies making headlines this week were:
Microba Life Sciences (ASX: MAP)
Leading medical diagnostics provider, Sonic Healthcare scooped up an almost 20% holding in Microba Life Sciences this week as part of a commercial partnership agreement.
Sonic invested $17.8 million for the stake and plans to acquire a further 5% through options. If Sonic exercises the options, it would provide Microba with a further $7.5 million.
As part of the deal, Sonic will assist Microba in accelerating distribution of its microbiome testing technology into primary and specialist healthcare throughout Australia, Germany, the UK, Switzerland, US, NZ and Belgium.
Greenstone Resources (ASX: GSR)
A maiden drilling program at Greenstone Resources’ Burbanks project just south of Coolgardie in Western Australia returned a shallow bonanza intercept of 7m at 57.8g/t gold from 90m.
Within this was a 1m interval grading 375g/t from 90m.
Greenstone managing director and chief executive officer Chris Hansen said the 1m at 375g/t gold interval powered the company into the top 10 gold intercepts in 2022 for a pre-development project in WA.
He added the results highlighted the potential to significantly increase the project’s resource.
New Age Exploration (ASX: NAE)
Extensive and strong lithium anomalies have been noted across New Age Exploration’s Central Pilbara project in WA.
Preliminary results from Ultrafine geochemical soil surveys have identified five “exceptionally strong, coherent lithium anomalisms” over extensive areas at the project.
“Each of the areas are defined by lithium values in excess of 150 parts per million and all are supported by all of the key multi-elements, including caesium, tantalum, tin and rubidium which are well documented associations of lithium-bearing ‘rare-metal’ LCT pegmatite mineral systems,” New Age executive director Joshua Wellisch said.
Echo IQ (ASX: EIQ)
A US clinical study at the Harvard Medical School’s Beth Israel Deaconess Medical Center (BIDMC) has achieved primary objectives for Echo IQ’s AI-backed EchoSolv heart disease detection technology.
The study retrospectively analysed patient records to assess EchoSolv in detecting individuals with severe aortic stenosis as well as those with increased risk of death from the disease.
“The AI-backed technology identified a clear cohort of patients with a substantially increased risk of death,” Echo IQ chief research and strategy officer Prof Geoff Strange said.
“This has the capability to assist clinicians, physicians and heart care teams in delivering specialist care where it is needed most,” he added.
Stavely Minerals (ASX: SVY)
Following a review of data and drill core at Stavely Minerals’ namesake deposit in Victoria, a new porphyry target has been identified.
The review indicates mineralisation at the Cayley Lode deposit is transitioning from “high sulphidation” to “intermediate sulphidation” high-grade copper-gold towards the southeast.
This is evidenced where previous drilling intercepted 10.4m 4.34% copper, 3.17g/t gold and 11g/t silver from 421m.
Stavely will undertake a six diamond hole program in January next year to target the Caley Lode down-plunge and test this theory.
The week ahead
There is really only one big bit of news to watch out for in the coming week with the Reserve Bank Board’s last meeting for the year on Tuesday now widely tipped to announce a 25-basis point rise to official interest rates.
This meeting is crucial because there won’t be another one until February so the stakes are higher than normal.
If the RBA were unexpectedly to go for a 0.5% rise and inflation data continued to improve that would cause needless pain for mortgage holders while underdoing the rise with 0.25% if inflation heads in the other direction risks the RBA once again falling behind the curve.
All told, the 0.25% rise seems like the safest bet, followed in the now familiar pattern with all of the banks raising their mortgage rates and – eventually – some of their highly selective deposit rates.