Weekly review: interest rate vaccine has been tried and failed against coronavirus
WEEKLY MARKET REPORT
The most potent form of coronavirus “vaccine” for financial markets has already been tried and failed.
Emergency cuts to interest rates and stimulus spending – last used during the global financial crisis in late 2008 – have been tried and effectively failed in the past week to halt the coronavirus contagion which has caused share markets to seriously tank over the past couple of weeks.
Here in Australia, an extraordinary triple whammy of a 0.25% interest rate cut, a pass on by all of the big four banks to mortgage holders of that cut and the promise of extra government stimulus spending which has yet to be announced proved ineffective in containing the damage to battered markets.
And in the US, an even larger emergency cut of 0.5% to official interest rates was also glossed over by financial markets, which are struggling to comprehend what the damage to businesses will be from the coronavirus.
Hard to believe stimulus can be maintained
While it could be argued that some of the relatively minor share market rallies might owe their existence to the emergency stimulus measures, a conclusion such measures have the capacity to restore calm and order to markets seems like a very difficult argument to believe.
It is also difficult to believe that this time around such stimulus can be maintained and strengthened, given that official interest rates are much closer to zero than they were during the global financial crisis and government debt levels are higher, making a big spending stimulus package difficult.
Only a couple of shots left in the locker
Effectively, the US Federal Reserve has only four 0.25% shots left in the locker before it hits zero and the Australian RBA has only two 0.25% shots left.
Even making those cuts and certainly any more to follow them would effectively require the use of some form of quantitative easing (QE) such as bond buy-backs to “manufacture’’ an interest rate cut.
That has certainly been tried in recent history with some success but it is possible that QE may still not be effective against the sort of risks posed by the coronavirus, which is causing a rapid and co-ordinated cut to world trade and travel.
On the debt side, Australia is certainly in a better position than the US to hand out stimulus money – having come close to a balanced budget and with a gross debt to GDP level of around 40%.
In the US that gross debt to GDP measure is around 80%, although the US does have the advantage of having a “world’’ currency that allows it to run higher debt levels if required.
Genuine containment looks like the best hope
The inescapable conclusion for investors is that there must be a fair level of doubt about both the capacity and effectiveness of monetary and fiscal stimulus measures, which means that they must look to on the ground containment measures for some indication of how long and severe this coronavirus effect will be for companies listed on stock exchanges – plus bond and currency markets as well.
On that level there is arguably more hope around than relying on monetary and fiscal stimulus.
In China, which has been the epicentre of the virus, infection levels are falling, meaning it is possible that other countries can learn from their experience of locking up whole areas and restricting the movement of people.
The picture is more mixed outside China, with some countries such as Italy, Iran and South Korea obviously facing an uphill battle to contain their outbreaks.
Even here in Australia with the benefit of relative remoteness infections are rising and beginning to spread locally, although hopefully we have learned some of the lessons from China and will be able to maintain public support for effective quarantine measures.
Market slide confirms lack of effectiveness
As if to confirm the lack of effectiveness of the interest rate “vaccine”, the Australian share market once again tumbled on Friday thanks to a strong selloff in banking stocks.
The benchmark ASX 200 tumbled 179.5 points or 2.8% to 6216.2 points, meaning the market has now fallen 13.5% since the record high set on February 20.
After suffering the largest weekly decline since the global financial crisis to end February, the benchmark fell a further 3.5% in the first full week of March.
Banking stocks bore the brunt of investor worries over the coronavirus, as Australian 10-year bond yields collapsed to an unprecedented record low of 0.675% and a Credit Suisse report predicted an increase in bad debts due to the coronavirus.
National Australia Bank (ASX: NAB) and Westpac (ASX: WBC) both closed at the lowest levels they have been since 2012, falling 5.5% and 4.0% to $22.00 and $21.35.
ANZ (ASX: ANZ) shed 4.7% to $22.14, hitting levels last seen in early 2016 while the Commonwealth Bank (ASX: CBA) slumped 3.7% to $73.93, a fresh 10-month low.
Bendigo and Adelaide Bank (ASX: BEN) shares were really badly hit as they traded ex-dividend, sliding 8.2% to $7.78.
The declines coincided with Australian 10-year bond yields falling to 0.675%, the lowest level on record.
Small cap stock action
The Small Ords index fell 2.79% for the week after a selloff on Friday to close on 2641.5 points.
ASX 200 vs Small Ords
Small cap companies making headlines this week were:
Tesoro Resources (ASX: TSO)
ASX newcomer Tesoro Resources has impressed investors after revealing “exceptional” gold assays for its El Zorro project in Chile, only four weeks after listing.
The company has now received assays from the upper part of the first drill hole of the current campaign, with Tesoro describing the results as “outstanding”.
Notable results were 23m at 7.2g/t gold from 183.22m, including 15m at 10.82g/t from 190m and 5.3m at 25.31g/t gold from 197m and 2.3m at 46.41g/t gold from 200m.
Tesoro managing director Zeff Reeves said the results were “exceptional” and the best the company had encountered to date at El Zorro.
“The wide, high-grade nature of the results received so far demonstrate the huge potential El Zorro has to host a significant gold deposit and confirms our geological model of multiple stack gold mineralised zones that are increasing in grade as they go deeper,” he added.
Three holes have now been completed out of the current 10-hole program, with a resource for the project scheduled for release before the end of the year.
Adavale Resources (ASX: ADD)
Adavale Resources has scooped up ex-BHP tenements adjoining the world-class Kabanga nickel project in Tanzania.
The Tanzanian Government’s Ministry of Minerals and Mining Commission officially granted Kabanga North and Kabanga North East early this week, with the tenements spanning 400sq km and adjoining Kabanga, which has a JORC resource of 57Mt at 2.62% nickel.
Adavale chairman Louis Clinton said the new tenements presented a “significant opportunity” for the company.
Initial exploration on the tenements will include field work to test targets BHP had originally identified.
Some of the world’s largest nickel miners and lithium-ion battery producers are vying for the actual Kabanga project, which came up for grabs in late 2017 after the government cancelled a retention licence.
Adavale noted it was in discussions with potential joint venture partners regarding tendering for the asset itself.
Dimerix (ASX: DXB)
Patients under phase 2 trials will get to continue using Dimerix’s DMX-200 therapy for treating diabetic kidney disease and focus segmental glomerulosclerosis (FSGS).
The patients will be able to continue the treatment under Australia’s Therapeutic Goods Administration’s compassionate use special access scheme (SAS), with clinical evidence indicating the drug may be of benefit for sufferers of these diseases.
Arrangements will be made for patients on a case by case basis.
The phase 2 diabetic kidney disease study includes 45 patients, with final dosing in the trial scheduled for July 2020.
Meanwhile, the phase 2a FSGS study is due to be completed in June 2020 after recruitment was completed in July 2019.
“The current blinded clinical studies are exploring the effect of DMX-200 over several months of treatment; however, it is pleasing that physicians have requested extended treatment of their patients with DMX-200,” Dimerix chief executive officer and managing director Dr Nina Webster said.
Buddy Technologies (ASX: BUD)
Buddy Technologies has unveiled its LIFX White smart light, which is anticipated to address the two main hurdles to mainstream adoption of smart lights – cost and set up difficulty.
The LIFX White lights are expected to retail for US$9.99 a unit and are the first Buddy LIFX product to break the US$10 barrier.
Additionally, the lights have been designed to be simply set up and integrated with a customer’s home wireless network – and will work seamlessly with voice assistants such as Amazon Alexa.
Buddy chief executive officer David McLauchlan said it was only possible to reach the price point and maintain the company’s margins due to the anticipated global order volume of its retail partners.
“Importantly, there has been a vast improvement in the set-up experience Amazon provides with its simple set-up technologies for smart devices within the Alexa ecosystem.”
Buddy is aiming to ensure production of the units is at full capacity in time for the US and European summer launch.
De Grey (ASX: DEG)
Gold explorer De Grey Mining impressed investors yet again this week after it confirmed a large scale gold system at the recent Hemi discovery, which is part of the Mallina gold project in Western Australia.
Latest assays from the Brolga Zone (previously Section B) returned a 93m intersection grading 3.3 grams per tonne gold from 39m.
Within that was a higher grade 21m at 4.7g/t gold interval. Another drill intersection at the zone uncovered 51m at 2.2g/t from 98m, including 8m at 4.1g/t gold.
Reverse circulation drilling at Brolga has now confirmed gold mineralisation at depth along more than 320m of strike, with up to 200m widths.
Over at the Aquila Zone (formerly Section A), drilling has defined 750m of strike that is up to 50m wide.
Recent results from this zone were 11m at 3g/t gold from 193m, including 4m at 6.5g/t gold that ended in high-grade mineralisation.
Another intersection returned 42m at 2.7g/t gold from 96m, including 4m at 4.2g/t gold.
De Grey exploration manager Phil Tornatora said the early results had revealed some of the best discovery intersections he’d ever seen.
The company has three rigs on site to advance the discovery.
Sensera (ASX: SE1)
Internet of Things solution provider Sensera has inked a worldwide distribution agreement with Braemac.
The agreement covers Sensera’s entire range of IoT products including chips, RF modules, sensors, anchors and software.
Braemac chief executive officer Kristen Pimpini said Sensera’s technology will “nicely complement” Braemac’s portfolio and enable it to strengthen its range of IoT and sensor-based solutions.
Sydney-headquartered Braemac employs more than 200 people worldwide and has 21 offices across Australia, New Zealand, Hong Kong, China, Vietnam, Singapore, the UK, Canada and the US.
BPH Energy (ASX: BPH)
BPH Energy’s investee Cortical Dynamics had some good news on Friday, with life science consulting firm IntuitiveX and Korea-based VC investor Gentium Partners committing to a combined to $250,000 investment in the entity.
Seattle-based IntuitiveX will assist Cortical through the US FDA process for securing certification for its Brain Anaesthesia Response System (BARM) which can measure a patient’s brain electrical activity via a forehead sensor.
The company will also help Cortical with fund raising and commercialisation plans.
Investor Gentium Partners will provide Cortical with funding assistance and mentoring as it grows.
Cortical’s core product is the BARM, which it claims is a “next generation” brain function monitor.
It enables anaesthetists to be able to determine how deeply anaesthetised a patient is to prevent an accidental wake up during a procedure, while also reducing side effects.
The week ahead
Australia is in for a quiet week on the data side with the biggest announcement probably the economic stimulus package from the Federal Government.
Apart from that, the main economic indicators to watch out for are the business and consumer confidence figures and lending data.
Reserve Bank of Australia Deputy Governor Guy Debelle will also speak at the Australian Financial Review Business Summit on Wednesday morning.
Offshore, inflation data in the US and China will be in the news and there may be some more official interest rate cuts and economic stimulus packages announced around the world to deal with economic damage from the coronavirus.