Weekly review: US Federal Reserve sets tone for markets going forward

US Federal Reserve markets stimulus ASX June 2020 Jerome Powell Australia
WEEKLY MARKET REPORT

It was an ominous signal to global markets this week when US Federal Reserve chairman Jerome Powell said he expected interest rates to remain zero for years to come.

Mr Powell announced that the Federal Reserve would be leaving interest rates unchanged between 0% to 0.25% until at least 2021.

Adding to the gloomy outlook was Mr Powell’s prediction US unemployment would hit 9.3% and the country’s GDP would contract by 6.5% by the end of the year.

Mr Powell conceded that “millions” would not get their old jobs back, with many not expected not to be able to find new employment “for some time”.

He added COVID-19 induced recession was the “biggest economic shock” in living memory across the US and the world.

In more bad news for the US, former Morgan Stanley chairman and Yale lecturer Stephen Roach said he expects the US dollar to crash.

Mr Roach said spurring this crash would be a collapse in the US’s domestic savings.

Deep global recession

Meanwhile, in the World Bank’s latest outlook, the rest of the world isn’t faring much better, with the bank downgrading economic growth forecasts for all regions.

The World Bank also calling the current downturn the deepest recession since World War II and the fourth worst in 150 years.

Globally, GDP is predicted to contract 6.2% in 2020, with the recession anticipated to last at least a year.

Back in Australia

The Federal Reserve’s sluggish predictions caused the All Ords and ASX 200’s upward trend to falter on Thursday.

In a single day, the ASX 200 shed 3.05%, while the All Ords dropped 3.03%.

Following the US’ lead on Thursday night, the ASX sell-off continued on Friday with the ASX 200 falling a further 1.89% to 5,847.8 points and the All Ords dipping a similar 1.97% to 5,959.9 points.

However US stocks bounced on Friday heading into the weekend, signalling Thursday’s sell off was merely the market letting off some steam after weeks of endless rallying.

Banks hit hard

Among the worst hit in local markets were the banks with Australia and New Zealand Banking Group (ASX: ANZ) closing out Friday at $18.92 – down 4.30% on the week.

Westpac Banking Corporation (ASX: WBC) finished the week at $17.89, a decline of 3.30%. Sentiment towards the bank wasn’t helped by a market update where stated it was admitting to a “substantial majority” of Australian Transaction Reports and Analysis Centre’s alleged anti-money laundering breaches.

Faring slightly better was the Commonwealth Bank of Australia (ASX: CBA) which shed 2.05% for the week to $67.32, while National Australia Bank (ASX: NAB) closed Friday down 4.57% at $18.59.

Energy stocks slide on sluggish oil price

Energy stocks were also rocked this week – not helped by the falling oil price which plunged from nearly US$40 per barrel on Wednesday to US$35.23/bbl on Friday.

Among the hardest hit was Beach Energy (ASX: BPT), which fell more than 8.80% for the week to $1.55.

Oil Search (ASX: OSH) shed 8.10% for the week to $3.29 on Friday, while Woodside Petroleum (ASX: WPL) lost 8.52% to $21.37.

On Friday alone, Worley (ASX: WOR) dropped 5.75% to close the day at $9.02.

Seven West Media hooks AFL contract extension

In more positive news, Seven West Media (ASX: SWM) revealed it had secured a revised contract with the AFL for 2020 through to 2022 and a contract extension, which gives it media rights to air AFL games for a further two seasons covering 2023 and 2024.

Seven West the existing 2020-2022 contract would generate $87 million in net benefits.

The 2020 AFL season kicked-off on Thursday with Collingwood and Richmond the first teams to compete.

JB Hi-Fi and Kogan.com buck the trend

JB Hi-Fi (ASX: JBH) was one of the week’s star performers after a market update revealing the group had seen strong sales growth in 2H 2020.

Despite a slump in New Zealand sales due to COVID-19 restrictions, the group anticipates a net profit after tax for the 2020 financial year of $300-305 million, which is up to 22% higher than the previous corresponding period.

JB Hi-Fi closed the week at $40.00 per share, up almost 14% during the past month.

Meanwhile online retailer Kogan.com (ASX: KGN) successfully completed an oversubscribed $100m placement, with an addition $15m to be raised via a share purchase plan in the near future.

This came on the heels of the company announcing earlier this week that its sales were up over 100% over the past quarter, with profits up more than 130%.

Shares in Kogan.com have risen over 235% over the past 3 months, to close trade on Friday at $13.15.

Improving business and consumer sentiment

It wasn’t all doom and gloom this week with the National Australia Bank’s business confidence index for May revealing that although confidence remained negative at -20, it had improved since April’s -34.

This has been attributed to rising sales, profits and employment.

“We will continue to closely watch the recovery in confidence, as it will likely be a key factor in how businesses recover from the largest downturn since the 1930s,” NAB economist Alan Oster said.

Meanwhile, the Westpac-Melbourne Institute Index of Consumer Sentiment was even more positive.

The index showed consumer confidence was now back around pre-COVID levels and had recovered from the extreme 20% drop seen in March-April when the pandemic first exploded.

Consumer confidence is now only 2% below the average in the preceding September to February period.

Small cap stock action

The Small Ords index fell 3.51% for the week, closing on 2609.2 points.

ASX 200 Small Ords index June 2020 chart
ASX 200 vs Small Ords

Small cap companies making headlines this week were:

Immuron (ASX: IMC)

In conjunction with the US Navy Medical Research Centre, Immuron is preparing to develop an oral hyperimmune drug to combat E. Coli and campylobacter infections.

As part of this, the NMRC recently requested a pre-investigational new drug meeting with the US Food and Drug Administration.

Following the FDA’s feedback, NMRC will file an IND application later this year.

Immuron chief executive officer Dr Jerry Kanellos said the easing of COVID-19 restrictions would now enable the company to re-start development of the clinical product for treating the infections.

“The plan is to have the product completed by the end of this year and have it ready for clinical evaluation next year,” Dr Kanellos added.

Phase 2 clinical studies using the oral therapeutic are scheduled to begin during the first half of 2021.

One trial will focus on the ability of the drug’s ability to protect volunteers from moderate-to-severe campylobacteriosis, while the second study will focus on E. Coli infections.

Digital Wine Ventures (ASX: DW8)

In a company update this week, Digital Wine Ventures revealed its WINEDEPOT business had processed a record number of orders in May – a 37% increase on April and equating to 2,890 orders.

The company added WINEDEPOT’s quarterly growth was now tracking in excess of 100%.

According to Digital Wine chief executive officer Dean Taylor, the quarterly growth rate was more than double what the company had previously indicated, adding most of the growth was a result of new customers.

“What’s encouraging is that this has been achieved during a very challenging period, when most of our customers’ cellar doors have been closing forcing them to rely on just their websites and wine clubs to carry them through.”

Mr Taylor pointed out that trade orders generally comprise more cases than direct-to-consumer orders.

“Therefore, as tens of thousands of venues reopen, we are likely to see a strong lift in both order and case volumes.”

He added this would likely occur in the December quarter when venues are at their busiest.

Digital Wine expects the volume of trade orders will be boosted once the company’s B2B Marketplace goes live in the second half of the year.

Musgrave Minerals (ASX: MGV)

Gold explorer Musgrave Minerals unearthed a bonanza 498.2g/t gold this week within the Starlight lode of its Break of Day deposit at the company’s WA-based Cue project.

The 6m at 498.2g/t gold interval was found in a broader 42m intercept grading 77.3g/t gold from 30m.

Other highlight results were 61m at 12.7g/t gold from 76m, including 6m at 44.6g/t gold; 22m at 21g/t gold from 2m, including 9m at 49.2g/t gold; and 9m at 16.5g/t gold from 225m, including 3m at 47.6g/t gold.

Assays are from infill and extensional drilling undertaken at Starlight, with mineralisation now intersected over 115m of strike and remaining open at depth and along strike.

Musgrave managing director Rob Waugh said the grades from Starlight were “amazing” particularly in near-surface drilling.

He added the bonanza grades will have “significant positive impact” on developing Break of Day.

Beston Global Food Company (ASX: BFC)

Beston Global Food Company is selling its interest in four South Australian dairy farms to Aurora Dairies for $40.4 million in cash.

The company announced on Thursday the sale includes water licences and all other operating assets relating to four farms in the state’s Mount Gambier region.

All-up, the farms cover 15.46sq km and comprise a dairy cow herd of 3,687.

Beston will use the sale proceeds to expand its mozzarella and dairy nutraceuticals production lines including lactoferrin, which is a protein used in infant formula and contains bioactive properties that mimic breast milk.

Lactoferrin is also included in other dairy foods, dietary supplements and pharmaceuticals.

The company expects an increase in lactoferrin production could generate an addition $6 million to its EBITDA.

As part of the sale, Beston will receive 100% of the milk supply form the farms, which is currently about 17 million litres per annum.

Novatti Group (ASX: NOV)

Digital banking and payments company Novatti Group will have its China-focused cross-border payments system ChinaPayments added to the main page of Alipay’s app.

ChinaPayments was launched in 2018 to enable Australian bills to be paid online using Chinese currency, including education fees, utilities, rent, council rates and phone charges.

Novatti noted that more than 500 BPAY billers had received payments through its ChinaPayments platform during the past 12 months.

“[The platform] provides an innovative solution to help Chinese residents pay their bills and gives many Australian billing companies the opportunity to improve their cash flow through on-time payment,” Novatti managing director Peter Cook said.

Novatti receives a fee per transaction, with revenue dependent on take-up of the platform.

“We have enjoyed a constructive partnership with Alipay and our close co-operation has led to the integration of ChinaPayments into Alipay’s platform, validating our strategy of working with tier one providers,” Mr Cook said.

Tesoro Resources (ASX: TSO)

Chile gold explorer Tesoro Resources’ El Zorro project continues to impress, with metallurgical test work results achieving gold recoveries of up to 99%.

Test work was carried out on a 50kg sample of mineralised rock taken from four drill holes at the Ternera deposit.

Tesoro claims the test results indicate Tenera ore is free milling, with a high gravity recovered gold component and “excellent” cyanide leaching characteristics.

These results will underpin a more detailed metallurgical test work program with the goal of establishing a project flowsheet.

Following the positive metallurgical results, Tesoro revealed the assay results from the final two holes of a recently completed diamond drilling program at the Ternera target within the project.

Results were 18m at 1.36g/t gold from 92m, including 4.6m at 4.99g/t gold from 105.4m; and 12m at 0.64g/t gold from 176m, including 6m at 1.21g/t gold from 176m.

With the Ternera target looking bigger than Tesoro first thought, the company plans to kick-off a 5,000m accelerated campaign next month.

As part of this, Tesoro launched a $5.98 million capital raising offering eligible shareholders the opportunity to subscribe for shares at $0.06, which is a 13% discount to the company’s closing price of $0.069 on 11 June.

Proceeds will also be used to complete metallurgical test work, resource delineation, and start a scoping study.

Lithium Australia (ASX: LIT)

Lithium Australia had another big news week – announcing field trials had begun evaluating fertilisers blended with zinc and manganese from spent alkaline batteries, while revealing its second generation LieNA® lithium processing technology had been confirmed as novel and inventive.

The company’s 90%-owned subsidiary Envirostream Australia began seeding for the trial on 5 June at a site near Kojonup in WA.

The trial involved five different treatments, including: no fertiliser in seed furrows, application of mono-ammonium phosphate (MAP) only, application of commercial fertiliser with added zinc and manganese, and use of MAP blended with two different dosages of Envirostream’s mixed metal dust, which contains the zinc and manganese extracted from the spent batteries.

It is expected harvesting will occur in December this year, with trial results anticipated in the first quarter of 2021.

Meanwhile, Lithium Australia’s LieNA® technology was evaluated by the International Preliminary Examining Authority, which concluded the process was novel, inventive and industrial applicable.

With the positive endorsement of its technology, Lithium Australia will advance the National Phase assessment in jurisdictions where it seeks legal protection.

Lithium Australia has been advancing the technology in collaboration with the Australian Nuclear Science and Technology Organisation (ANSTO).

To advance towards commercialisation, Lithium Australia has committed to a semi-continuous pilot plant evaluation of the flowsheet, which is the scope of Lithium Australia’s Australian Government’s $1.3 million CRC-P grant.

Blackstone Minerals (ASX: BSX)

Vietnam focused Blackstone Minerals has intersected a broad zone of nickel sulphides within the third maiden drill hole at its Ban Chang discovery at the Ta Khoa project.

The hole uncovered 9.15m of sulphide vein mineralisation comprising intervals of massive sulphide and semi-massive sulphide veins.

Blackstone managing director Scott Williamson noted the fact that mineralisation at Ban Chang had now been identified over 1km of strike indicated the potential for a bulk underground mining scenario.

“We’ll continue to explore Ban Chang’s potential to become a supplementary high-grade feed source to the main Ban Phuc disseminated sulphide orebody, with further holes planned for drilling in this area,” he added.

The three drill holes at Ban Chang were targeting a 1.2km anomaly the company had defined by high-priority EM plates.

The prospect is 2.5km from the main Ban Phuc deposit and 450,000tpa processing facility.

Blackstone plans to debut a maiden resource for the project in the September quarter.

Upcoming listings

Looking at the upcoming floats, we have two companies looking to make their way onto the ASX in the near future.

Manuka Resources (ASX: MKR)

Unlike many new gold producers, Manuka Resources is only now giving investors a chance to gain exposure to the company’s assets.

The company owns the Wonawinta silver operation and the Mt Boppy gold project in central NSW.

Manuka’s IPO closed on Friday – two weeks ahead of schedule. The IPO was heavily oversubscribed and raised the maximum $7 million via the issue of about 35 million shares at $0.20 each.

The IPO was launched on Tuesday, shortly after Manuka achieved its maiden gold pour from ore mined at Mt Boppy that was processed at the Wonawinta plant.

The 850,000tpa plant was recently updated and 800oz of gold (in carbon) was produced in April.

Manuka acquired the Wonawinta silver project in 2016, with the project hosting a JORC resource of 38.8Mt at 42g/t silver for 52.4Moz silver.

Meanwhile, Mt Boppy has a resource of 320,000t grading 3g/t of gold for 31,000oz gold.

“Between Mt Boppy and Wonawinta, there has been more than $120 million invested in plant and associated infrastructure by previous owners and Manuka is now poised to take advantage of all this,” Manuka executive chairman Dennis Karp said.

The company aims to recover up to 24,000oz gold from Mt Boppy stockpiles over the next 12 months, with production to then move to processing the silver stockpiles at Wonawinta.

IPO proceeds will be used for drilling and exploration at both projects.

Advent Health (ASX: AH1)

Advent Health plans to list on the ASX via a reverse takeover next month, which will see the issue of 21 million shares at $1 each to raise $21 million.

Shell company Millennium (ASX: MHD) will acquire all of the issued capital in Advent with plans to relist on the ASX with Advent’s name and the ticker code AH1.

According to Advent chief executive officer Cris Massis, the reverse takeover means the company is able to enter the ASX quickly and give its vendors some certainty of listing.

The resultant company will comprise 300 clinicians in 12 allied health practices across 59 locations nation-wide.

Mr Massis told Small Caps the company has the ability to turnkey quickly and generate revenue from day one.

The IPO is open and closes on 26 June.

Advent anticipates it will be resume trading on the ASX on 16 July under its new name and ticker.

The week ahead

Out next week we have the Reserve Bank meeting minutes out on Tuesday, the central bank having left rates at 0.25% and unlikely to even hint at raising them for a long time to come.

Stating that the country is experiencing the biggest economic contraction since the 1930s.

Eyes will be on unemployment numbers for May which will show how the so called recovery is going, along with retail sales numbers.

Housing statistics with regards to price changes for the quarter and new home sales data for May will also be release.

Similarly in the US retail sales numbers for May will be out.

If the market experiences another sell off, expect Federal Reserve chairman Jerome Powell to discuss further support for the markets, along with mainstream media talking up vaccine hopes for COVID-19 and ‘progress’ being made on a China trade deal, all being coordinated to boost equity markets.

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