Weekly review: rising market set to be tested by Reserve Bank

Will the Reserve Bank manage to rein in the runaway Australian share market?

It is an open question for the coming week with our market sitting less than 1% off its record high of 7,632.8 points after another 0.6% or 46.5 point rise on the ASX 200 to 7558.10 points on Friday.

In the coming week, we have the two big chances for the Reserve Bank of Australia (RBA) to throw a spanner in the works with the RBA board meeting to set official interest rates on Tuesday and the releasing of its quarterly statement on Monetary Policy on Friday, which will include a raft of forecasts about where the bank thinks the economy is heading.

In the first case, a 0.25% rise is widely expected but a higher rise could give the markets pause, while the forecasts for the economy are likely to foreshadow a weakening of growth and employment.

Whether that is enough to temper rises, including the Commonwealth Bank (ASX: CBA) reaching an all-time high of $111.15, remains to be seen but given that higher rates help to boost bank profits – unless they lead to widespread foreclosures – then, it seems unlikely.

Early company results will provide guidance

The other point to consider is that the real economy in the form of February company results will also increasingly intrude over the next few weeks, with some of the stocks to report in the coming week to including: Argo (ASX: ARG), Transurban (ASX: TCL), Suncorp (ASX: SUN), Amcor (ASX: AMC), AGL (ASX: AGL) and property group Mirvac (ASX: MGR).

By the end of February, we will have a much more accurate view of how the biggest companies on the ASX are travelling and, perhaps, more importantly, how their management teams see their profitability developing over the coming months.

Such forecasts when combined with analysis by the RBA tend to set the consensus for where the market it heading and whether the current rally will prove to be an over-optimistic flash in the pan or the start of an enduring bull market in which the Cassandras pointing to rising rates as a recipe to cripple economic growth prove to be hopelessly wrong.

Market rose despite patchy US lead-in

Friday’s rise was all the more impressive given that the US markets had given a mixed and patchy lead, with the Dow Jones index down 0.1%, while the S&P 500 was up 1.5% and the tech heavy Nasdaq 3.3% higher.

After the US market closed, results from Apple, Google owner Alphabet and Amazon all led to individual stock falls which was also not an encouraging sign.

Nevertheless 10 of the ASX’s 12 industry sectors were up with the biggest heroes being defensives including Health Care (up 2.6%) and Real Estate Investment Trusts (up 2.4%).

At the other end of the scale the big miners were down with the Materials sector off by 1.5% and Utilities fell 0.2%.

There were some notable individual moves with shares in insurer IAG (ASX: IAG) falling 2.1% after it provided an update on the Auckland flooding and the sort of dent that would leave in profitability.

IAG said underlying margins for the first six months of this financial year would fall from 15.1% to 10.7%.

Even though a transition had been flagged, shares in Bega Group (ASX: BGA) fell 4% after news that chief executive officer Paul van Heerwaarden was leaving with chief operating officer Pete Findlay appointed to the top job.

Shares in international equities player Janus Henderson (ASX: JHG) rose 12.9% after total assets under management rose 5% to US$287 billion at the end of the December quarter.

Small cap stock action

The Small Ords index inched 0.16% higher this week to close at 3016.7 points.

Small cap companies making headlines this week were:

Lode Resources (ASX: LDR)

Lode Resources has discovered high-grade silver, zinc, lead and copper at its Webbs Consol project in New South Wales’ New England Fold Belt.

The latest results showed a 116.1m intercept of silver equivalent at an average of 1,003 grams per tonne, with silver grades averaging 254g/t, 8.35% zinc, 6.35% lead and 0.24% copper. The hole demonstrated the vertical continuity of Tangoa West Lode and showed rapidly increasing mineralisation with depth.

This drill intercept represents the highest endowment of all the drilling done by the company so far at Webbs Consol, and is seven times greater than the previous hole.

Lode plans to test the Tangoa West Lode down to a vertical depth of 450m.

Genetic Technologies (ASX: GTG)

Genetic Technologies is introducing a comprehensive risk assessment for breast and ovarian cancer using a quick saliva test and the company’s proprietary GeneType platform to assess the risk of developing either of the cancers, whether from a hereditary mutation or from more prevalent familial or sporadic causes.

A short questionnaire is also included with the test, which will be available in the US through business-to-business and consumer-initiated testing channels after receiving regulatory approval.

Women are currently underscreened for the risk of hereditary breast and ovarian cancer syndrome and the test aims to provide women with their risk profile and the opportunity to take proactive steps.

Mamba Exploration (ASX: M24)

Mamba Exploration has discovered massive and semi-massive sulphide mineralisation in its first diamond drilling program at the Black Hills target in Western Australia.

The drilling intersected 5.55m of mineralisation and included 1.15m of massive sulphides, 1.9m of semi-massive sulphides, and 2.5m of disseminated sulphides. The mineralisation was identified within a broader zone of disseminated sulphides and the sulphides are believed to be dominated by pyrrhotite and pyrite.

Mamba managing director Mike Dunbar said the sulphide zone is the conductor, based on the correlation between the massive sulphides and the fixed-loop surface EM conductor.

The company will continue diamond drilling and is expected to understand the significance of the mineralisation over the next few months.

Vintage Energy (ASX: VEN)

Vintage Energy has confirmed plans to bring the Vali gas field online in February 2023.

The company is focused on completing the final steps of Vali’s construction for commissioning early next month, while work continues to link gas from the Odin field later in the year.

The installation of Vali production facilities is progressing and the mechanical handover is expected in early February.

Vintage Energy operates several other assets including the Deeps joint venture in the Galilee Basin, the Nangwarry gas field in the Otway Basin, and an exploration permit in the Northern Territory’s Bonaparte Basin.

As of 31 December, Vintage’s cash and cash equivalents totalled $7.5 million, with net debt at $2.5 million.

Babylon Pump & Power (ASX: BPP)

Babylon Pump & Power (BPP) reported a 55% improvement in operating cash flow for the first half of 2023, which was fuelled by positive earnings before interest, tax, depreciation and amortisations (EBITDA) in the last three months of the period.

Babylon made progress on its strategic goals in the December quarter, including acquiring Resource Water Group and RBH Engineering.

The company expects to have positive operating cash flow in the second half of the financial year. It also recently relocated to a purpose-built facility in Perth and has $4.2 million in cash and undrawn debt facilities and $5.2 million in receivables.

BPH Energy (ASX: BPH) and Bounty Oil & Gas (ASX: BUY)

The PEP 11 gas project off the coast of New South Wales, which was blocked by former Prime Minister Scott Morrison, is likely to be overturned.

The companies involved, BPH Energy and Bounty Oil & Gas, have filed proposed consent orders with the Federal Court of Australia to end litigation over the project.

If approved, Mr Morrison’s ban using the Commonwealth-NSW Offshore Petroleum Joint Authority will be set aside.

Mr Morrison was seen as intervening to save critical Liberal seats in the area, but the move was not enough to save the seat of Liberal member Dave Sharma.

The PEP 11 project is viewed as one of the most significant untested gas plays in Australia and is adjacent to the Sydney-Newcastle area, the largest domestic gas market in the country.

The week ahead

As mentioned earlier, the RBA will play a large part in what happens in the coming week, especially if the interest rate decision is above the widely expected 0.25%.

That seems unlikely after central bank rises across the world were generally a bit softer than expected with US Fed chairman Jerome Powell suggesting that official US rates could stay below 5% and still see inflation fall back to a targeted 2%.

US inflation has fallen from 9.1% in June last year to 6.5% now, with the Fed’s interest rate rises also trimming down to 0.25% after four earlier hikes of 0.75%.

Here in Australia the inflation numbers are still very high so market watchers won’t be expecting such dovish comments from RBA Governor Philip Lowe, but with many more Australian fixed mortgages rolling over to much higher variable rates this year, some caution on local rate rises will also be important.

Some of the other things to watch for in the coming week include the quarterly retail trade data on Monday which will add texture to the first signs of weakening consumer spending.

Also of interest will be the Melbourne Institute’s monthly inflation gauge, while a speech from US Federal Reserve Chair Jerome Powell will also be closely watched.

Earnings reports from the US will continue as will the early reports from Australia, with corporate guidance likely to be cautious given economic uncertainty and falling retail spending.

In China a series of economic indicators will be released with the inflation numbers likely to be pivotal.

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