Weekly review: monumental changes in interest rates and income tax, ASX nears all-time high

Australia interest rate income tax changes ASX all-time high
WEEKLY MARKET REPORT

There were two big changes made this week that will fundamentally reshape the Australian economy.

The first and most important was the second cut in official interest rates to a new record low of just 1% and the second was the passage of the Coalition Government’s entire tax package.

Looking at interest rates first, just imagine you are charged with keeping a fire burning and you have only six firelighters left.

Smouldering fire fails to blaze

After carefully watching the fire smoulder for a while and then improve before smouldering again you finally make the fateful decision to use two of your six firelighters in an attempt to ensure that the fire really catches alight properly.

That is very similar to the situation facing the Reserve Bank this week when it used up the second firelighter in the form of another 25-basis point interest rate reduction (0.25%).

There are now only four more 25-basis point possible reductions before official interest rates hit zero so Reserve Bank Governor Dr Philip Lowe is now in that tense position of waiting and watching the fire of the Australian economy and hoping that the rare two cuts in two months effort with the firelighters is successful.

Less taxing times ahead

On the tax front, the Coalition Government finally got its planned tax cuts through both houses of parliament.

While the overall package is worth $158 billion, the initial boost is a much more modest $15 billion, with 4.5 million workers set to get a full $1,080 rebate in their tax returns from the last financial year.

This will be a bit of a consumer boost and help the Reserve Bank as it tries to add some growth to the economy and soak up some underemployment, but it is a long way from being a total panacea given the vast bulk of the fiscal stimulus happens after the next election.

That leaves open the question of what extra measures the Coalition Government might consider to help with the task of stimulating the economy, which has turned out to be far less rosy than its rhetoric suggested at the recent election.

Home loans can get bigger again

One stimulatory measure which did appear out of left field on Friday was banking regulator APRA’s decision to finally ditch the 7.25% reference rate which was used by banks to check if new home loan applicants can afford interest rate rises.

Instead, banks will need to test if customers could manage to keep up with home loan repayments if rates rose 2.5% above their current rate.

The changes should allow a household on an average income to borrow up to $77,000 extra from a bank, while an average full-time worker could borrow up to $66,000 more.

Share market powering towards all-time high

Despite all of the potential for further economic weakness, the Australian share market soared during the week as investors continued to assume that lower interest rates would be bullish for shares.

Over the week, the ASX 200 index jumped 2% or 132.5 points, to 6,751.3 on Friday.

That is a fresh 11 and a half year high and a mesmerising 77.4 points off its record high recorded way back in November 2007.

Similarly, the All Ordinaries index was up 132.6 points to end the week at 6,831.8, just 21.8 points short of its all-time close.

That puts the two main indices on track to break through to new record levels next week, with any modicum of luck.

Lower interest rates weren’t entirely good news with the banks suffering as investors figured lower rates would squeeze their margins.

ANZ (ASX: ANZ) fell 0.2% to $28.15, Commonwealth Bank (ASX: CBA) was down 0.6% to $82.26, Westpac (ASX: WBC) down slightly to $28.35 as NAB (ASX: NAB) ran against the herd to close up 0.9% to $26.97.

Most of the bond proxy stocks were higher though, given that actual 10-year Government bond yields fell close to record lows.

Toll road operator Transurban (ASX: TCL) was a standout, up 3.9% to $15.32 and most property trusts were also up strongly.

Goodman Group (ASX: GMG) rose 6.9% to $16.07, Scentre Group (ASX: SCG) was up 7.6% to $4.13, Dexus (ASX: DXS) rose 7.1% to $13.90, Vicinity Centres (ASX: VCX) jumped 9.8% to $2.69, Mirvac Group (ASX: MGR) was up 6.1% to $3.32 and Stockland (ASX: SGP) rose 7% to $4.46.

Lendlease (ASX: LLC) added 7.6% to end the week at $13.99.

Woolworths (ASX: WOW) shares were also a good performer, up 3.3% to $34.31 after the big retailer announced that it will combines its hotel, pokies and drinks businesses into a new company called Endeavour Group before splitting it off through a share market float or sale.

Small cap stock action

The Small Ords index also rallied this week 2.02% to close out the week on 2,904.8 points.

ASX 200 Small Ords July 2019 chart
ASX 200 vs Small Ords

Small cap companies making headlines this week included:

Challenger Exploration (ASX: CEL)

Challenger Exploration was reinstated to official quotation on Thursday after a 12 month hiatus, with the company boasting a fresh board, $5 million in cash and a new focus on “exciting” gold projects in South America.

Formerly focused on gas, the company has two new projects the Hualilan gold asset in Argentina and El Guayabo in Ecuador which is prospective for copper and gold.

Challenger is acquiring 75% of Hualilan and 100% of El Guayabo by securing AEP Corporation Pty Ltd for 180 million ordinary shares, 78.4 million options and a further 120 million in performance shares.

Both projects are near towns and infrastructure and host numerous anomalies, which Challenger plans to follow up during the remainder of the year.

NeuroScientific Biopharmaceuticals (ASX: NSB)

It was a positive week for NeuroScientific Biopharmaceuticals which reported a “breakthrough study” using its lead drug candidate EmtinB on rat tissue.

The company’s managing director and chief executive officer Matthew Liddelow said he was confident the drug could pave the way as a disease-modifying therapy for Alzheimer’s.

During the trial, EmtinB was shown to stimulate the regeneration of nerve cells by more than 300% in comparison to controls with sterile water.

“We believe that EmtinB has potential to bridge this gap and bring this breakthrough medicine to clinics and with our strong cash position, look forward to commencing our human studies,” NeuroScientific chairman Brian Leedman said.

Silver Chef (ASX: SIV)

Embattled hospitality equipment leaser Silver Chef’s fortunes turned around mid-week after it entered into a binding scheme implementation agreement to be taken over by Next Capital and its investor consortium.

Valuing Silver Chef at $0.70 per share, the deal was slightly lower than the original offer of $1.00 per share in April.

Next Capital was able to undertake due diligence on Silver Chef’s books, which revealed a statutory net loss after tax of $11.7 million and a near 17% drop in revenue (year-on-year) for the FY2019 first half.

“The scheme consideration provides certainty of value to Silver Chef shareholders and an ability to share in the potential upside from the run-down of the GoGetta business,” Silver Chef chair of the independent board committee Sophie Mitchell said.

Kyckr (ASX: KYK)

Regulatory compliance technology developer Kyckr revealed on Thursday preliminary unaudited full year revenue for the 2019 financial year would be $2.1 million – up 20% on 2018.

Driving this revenue growth was a 41% increase in online revenue which accounted for $1.5 million of the total figure.

On Wednesday, the company reported it had collared an agreement with AXA Singapore, which will adopt Kyckr’s application-programming interface for developing new insurance services.

The deal with AXA is expected to bring in initial revenue of S$380,000 (A$400,000) to Kyckr for its technology services and digital data.

Pura Vida Energy (ASX: PVD)

Oil and gas explorer Pura Vida Energy entered an agreement to acquire a 35% interest in Gemini Resources’ Nowa Sol and Gora onshore concessions in Poland.

To secure the 35% stake, Pura will spend $6.5 million on work programs at both assets as well as paying Gemini a €250,000 (A$400,870) exclusivity fee.

To fund the work commitments, Pura will raise $3.73 million via a placement and an entitlement offer.

The remainder will be funder through Pura’s cash on hand which was $6.7 million in April.

Alt Resources (ASX: ARS)

Alt Resources impressed investors with its high grade gold hits at the Tim’s Find prospect, within the company’s Mt Ida project.

Assays were returned for the first 20 holes drilled at the prospect which revealed gold grading up to 34.2g/t.

Notable results were 4m at 17.8g/t gold, including 2m at 34.2g/t gold from 5m; 9m at 7g/t gold, including 21.5g/t gold from 14m; and 5m at 12.6g/t gold, including 2m at 28.5g/t gold from 26m.

The results are part of a 5,200m reverse circulation drilling program that aims to confirm the grade and continuity of mineralisation at Tim’s Find.

engage:BDR (ASX: EN1)

Programmatic advertising company engage:BRD is back in the green after announcing it had achieved positive cashflow during the June quarter.

The company’s cash balance at the end of the quarter was up 328% on the March period to $2.66 million.

engage:BDR chief executive officer Ted Dhanik told Small Caps he was “extremely proud” of the company’s accomplishments so far this year.

Driving this increase in cashflow is the company’s programmatic partnership, with integrations six months ahead of target.

eSense-Lab (ASX: ESE)

eSense-Lab has received an additional order for its e-cigarette liquid, known as e-juice, from its new North American distributor VaporSpec.

VaporSpec has ordered an extra 10,000 bottles of 30Ml e-juice, with the new order following on from the 500-bottle test shipment.

eSense has also agreed to supply VaporSpec with a minimum 450,000 bottle of its e-juice during the first year of the agreement and up to 5 million bottles over three years.

“This is a real vote of confidence and shows the satisfaction and trust that VaporSpec has in our products,” eSense chief executive officer Haim Cohen said.

Northern Cobalt (ASX: N27)

Multi-commodity explorer Northern Cobalt has boosted the iron ore potential at its Snettisham project in Alaska after metallurgical analysis demonstrated a high-grade magnetite concentrate with vanadium by-products could be produced from the project’s ore.

Test work on surface samples generated a 63% iron and 0.64% vanadium pentoxide concentrate at “very coarse” grind size of 250 microns.

Northern Cobalt has established a magnetite iron ore exploration target for Snettisham between 297-551Mt at 28-52% iron (high-grade target) and a lower-grade target between 1.1-2.1Bt at 14-26% iron.

“The results demonstrate a consistent, premium product can be produced from both the high-grade and low-grade material allowing flexibility in sourcing mining material,” Northern Cobalt managing director Michael Schwarz said.

Zelda Therapeutics (ASX: ZLD)

Zelda Therapeutics is attempting to mitigate the opioid epidemic that is sweeping many countries including the US and Australia with a phase 1 opioid reduction trial using medicinal cannabis now approved.

The trial will evaluate its medicinal cannabis in reducing opioid dependence in patients with chronic non-cancer pain.

In addition to monitoring opioid use, Zelda noted the trial will also evaluate the effect of medicinal cannabis on pain, mood, and sleep.

“To our knowledge, this is the first clinical trial to be designed with a primary endpoint assessing the efficacy of a full spectrum plant-derived cannabis formulation containing THC and CBD to reduce opioid dependence in chronic non-cancer patients,” Zelda managing director Dr Richard Hopkins explained.

Bryah Resources (ASX: BYH)

Manganese exploration at Bryah Resources’ Bryah Basin project has resulted in “significant” manganese intersections at the Brumby Creek prospect and the discovery of the Cheval prospect.

Brumby Creek was discovered last July and recent drilling at the prospect returned 15m at 26.2% manganese from 3m, including 2m at 33.5% manganese; 10m at 22.6% manganese from 1m, including 2m at 30.3% manganese; and 8m at 24.1% manganese, including 2m at 31% manganese.

Meanwhile, rock chip sampling was carried out at Cheval and revealed a peak grade of 41.3% manganese, with 15 of the 35 samples grading above 30% manganese.

“The new find is particularly exciting in light of Bryah’s recent success in defining significant mineralisation at Brumby Creek,” Bryah managing director Neil Marston said.

Bryah is advancing permitting activities to begin drilling at Cheval “as soon as possible”.

ASX floats this week

Small Caps readers who want to view upcoming IPOs or see the performance of stocks that have listed in 2019 can now do so.

The latest company to make its way onto the ASX this week was:

Invex Therapeutics ASX IXC IPO Exenatide

Invex Therapeutics (ASX: IXC)

Biopharmaceutical company Invex Therapeutics made its ASX debut on Friday after raising $12 million via the issue of 25 million shares at $0.40 each.

The company will use the funds to advance its ambitions of repurposing diabetic drug Exenatide for neurological conditions.

Exenatide already has US Food and Drug Administration and European Medicines Agency approvals for treating Type II diabetes.

However, Invex has found Exenatide can lower intracranial pressure by reducing cerebral spinal fluid secretion in the choroid plexus of the brain.

On its first day of trade, Invex rocketed 168.75% to close Friday at $1.075.

The week ahead

For Australia, the main numbers this week will provide an interesting window into the post-election economic environment with business and consumer confidence numbers.

It wouldn’t be a surprise to see some muted numbers while there is unlikely to be much cheer in other measures such as job ads, building activity, lending and tourism data.

In the US, the Federal Reserve chair Jerome Powell is testifying before the US Congress and the minutes from their latest board meeting are released.

Inflation readings from the US and China will also provide a window into flat lining prices in the US and China.

This week’s top stocks