Weekly review: Market marks time before big week of surprises

Royal commission findings market surprise
WEEKLY MARKET REPORT

The Australian market was marking time on Friday in the calm before the storm that arrives when the Hayne Royal Commission findings are announced.

While the report has now been handed to Governor General Peter Cosgrove, it will not be released publicly until just after the share market stops trading on Monday.

Many investors have been building up their short positions against the big banks and fund managers, hoping to make money if their shares plummet after the Royal Commission findings are announced.

However, it appears just as many investors believe much of the bad news about the banks has been baked in and they might enjoy a relief rally if the report is not as tough as some fear, with share prices of all of the major banks only weakening slightly.

Westpac (ASX: WBC) was the exception, adding $0.03 to $24.58 with the other banks shedding less than 1% as ANZ (ASX: ANZ) dropped $0.10 to $24.95, Commonwealth (ASX: CBA) shed $0.15 to $69.76 and NAB (ASX: NAB) lost $0.07 to $2.24.

It was a similar story for the large wealth managers with AMP (ASX: AMP) losing $0.02 to $2.24 and IOOF (ASX: IFL) gaining $0.08 to $5.11.

Shorting of Royal Commission stocks ramps up

Macquarie research showed there has been a $2 billion increase in the value of short selling of the big four banks, in which investors profit if the share price falls.

In total shorts against the big four were $5.3 billion by the end of December and may have increased since then as hedge funds and traders smelled a trading opportunity from the release of the Royal Commission report, which may suppress the $30 billion of profitability by the big four banks.

While January was a strong month, rising the most since April last year, February was off to a tamer start with the ASX 200 falling a tiny 1.9 points to close at 5862.8.

Miners helped by higher commodity prices

The big miners continued to perform strongly as commodity prices – in particular iron ore, which is rising on supply concerns from Brazil – continued to provide support.

BHP (ASX: BHP) added $0.17 to $35 and Rio Tinto (ASX: RIO) $0.52 to $87.57 but it was the third force in iron ore – Andrew “Twiggy” Forrest’s Fortescue Metals (ASX: FMG) which enjoyed the biggest percentage gain of 3.36% or $0.19 to $15.85.

Gold miners continued their great run with Newcrest (ASX: NCM) and Oceana (ASX: OGC) both adding more than 1.2% for the day.

It was also a happy time for shareholders in Treasury Wine Estates (ASX: TWE) – which produces a range of wine brands including Penfolds and Wolf Blass – with the stock adding almost 0.6% to close at $15.54.

Energy stocks a let down

For every good story there is a corresponding bad one and it was energy stocks that have been copping it in the neck, despite a lift in the oil price.

Santos (ASX: STO) shed almost 1% while Origin Energy (ASX: ORG)  lost almost 2% for the day.

In corporate news Healthscope (ASX: HSO) gained more than 3.8% after the private hospital operator accepted a $4.5 billion takeover offer by Canadian private equity firm Brookfield Partners.

That deal still needs to be ticked off by shareholders and the court but the market believes that won’t be an issue.

Federal Reserve softens its stance

During the week, US Federal Reserve chairman Jerome Powell signalled that interest rates could remain steady for several months due to economic pressures and mild inflation.

The decision to keep rates on hold was backed by a unanimous 10-0 vote.

In 2018 the Fed raised rates four times, the latest being in December, with markets feeling the immediate impact.

Investors will be looking for a period of stability from the Fed, which also stated they would be more responsive to market metrics in future.

Meaning they will keep rates on hold or cut if necessary, rather than keep ratcheting up rates based as they have been on forward looking statements made in the past when economic conditions differed.

Small cap stock action

Despite the ASX 200 losing marginal ground this week, the Small Ords index found its way into the green, up 0.26% to 2588.1 points.

ASX 200 XJO vs Small Ords January 2019
ASX 200 vs Small Ords index

Making headlines this week were companies including:

ClearVue Technologies (ASX: CPV)

It was a huge week for ClearVue Technologies, which started with the company debuting its advanced glass photovoltaic solar panels at Western Australia’s Warwick Grove shopping centre.

ClearVue has developed a technology that preserves glass transparency while generating electricity.

Hot on the heels of its technology debut was ClearVue’s quarterly report, which revealed “significant progress” towards commercialising its proprietary technology.

On Friday, ClearVue wrapped the week up with news it had signed a memorandum of understanding with a Middle East distributor Grafsol Trading.

The MoU gives Grafsol exclusive rights to distribute ClearVue’s technology across the United Arab Emirates, Kuwait, Bahrain and Qatar. The company also has non-exclusive licensed distributor rights throughout Saudi Arabia.

Real Energy (ASX: RLE)

Another director to back his company in recent weeks was Real Energy’s managing director Scott Brown who purchased $26,700 worth of company shares off-market on Tuesday.

This buy up follows Real Energy’s announcement it had recorded strong initial flow rates at its Tamarama-3 well at the Windorah gas project in Queensland.

With flow rates at Tamarama-3 shoring up earlier results at Tamarama-2 and Tamarama-1, Mr Brown said confidence levels in the project’s commercial viability have been boosted even further and the company has lodged a pipeline licence application to build a pipeline between its Tamarama wells and Santos’ (ASX: STO) Mt Howitt gas gathering facility.

The International Energy Agency released its latest World Energy Outlook, which predicts demand for natural gas will rise 45% by 2040 and overtake coal consumption by 2030.

Mr Brown told Small Caps the growing demand for gas is linked to rising living standards in emerging economies.

Red Metal (ASX: RDM) and OZ Minerals (ASX: OZL)

Small cap Red Metal will enjoy the expertise and funds from cashed-up copper producer OZ Minerals after the duo agreed to team up and fast-track a search for greenfield discoveries.

OZ Minerals has a two-year option to fund a series of mutually agreed, proof-of-concept work programs across six of Red Metal’s projects.

The early-stage base metal projects are located in WA and Queensland and OZ Minerals will spend $8.05 million on exploring the tenements.

Once the exploration has been completed, OZ Minerals can elect to earn up to 70% in each project. 

Intra Energy Corporation (ASX: IEC)

Coal miner Intra Energy Corporation managed to turn its operation around in the half-year ending December 2018 after reporting EBITDA of $3.27 million, compared to a $787,000 loss for the 2017 corresponding period.

The turnaround was attributed to increased production, better mine efficiencies and an ongoing focus on cost management.

At its 70%-owned Tancoal mine in Tanzania, Intra Energy produced 181,336t of coal and sold 211,147t.

As the largest operating coal mine in Tanzania, Intra Energy is a dominant coal supplier to industrial energy users in the region.

Dubber Corporation (ASX: DUB)

Another stock with a positive December quarter was telecommunications specialist Dubber Corporation which achieved record revenue for the period.

Revenue for the last three months of 2018 was $1.27 million – up 77% on the September quarter and 327% on the 2017 corresponding period.

Dubber attributed the record revenue to growth in its service provider partnerships which increased from 57 to 92, including a deal with IBM to offer a cognitive call solution.

The solution combines Dubber’s cloud-based call recording with IBM’s Watson artificial intelligence to provide clients with a comprehensive analysis of recorded calls and meetings.

De.mem (ASX: DEM)

After achieving its revenue target for 2018, wastewater and water treatment company De.mem expects to continue its growth trajectory in 2019.

During 2018, De.mem’s accounting revenues reached $10.5 million, compared to $2.9 million in 2017.

De.mem chief executive officer Andreas Kroell said 2018 had been a “great year” for the company.

“The company built an extensive project pipeline in the second half of CY2018 and we expect this to translate to new revenue generating contracts in CY2019,” he added.

Part of the company’s growth strategy for 2019 will be “aggressively” targeting the food and beverage and agricultural sectors.

Red 5 (ASX: RED)

Drilling at Red 5’s King of the Hills gold operation has uncovered a 312m intercept grading 2.01g/t gold.

The intercept was unearthed at the Eastern Margin Contact Zone where a 30,000m drilling program is underway.

Red 5 is reviewing bulk mining options at the site, with assay results from the current campaign expected to continue trickling in.

Results from the campaign will be included in an updated resource, with the existing resource totalling 28.7 million tonnes grading 2.0g/t gold for an estimated 1.88Moz of contained gold at a 1g/t gold cut-off.

Freehill Mining (ASX: FHS)

Freehill Mining is eagerly awaiting assays from the 24-hole RC drilling campaign completed at its Yerbas Buenas project in Chile during the December quarter.

While official results are pending, indicative grade estimates reveal the mineralisation’s high-grade nature.

Drilling at the targets has unearthed 170m of “effectively continuous high-grade magnetite material”.

Freehill plans to progress the project and explore its copper and gold potential during 2019, with a maiden magnetite resource due by the end of March.

The timing is good for Freehill, with iron ore stocks enjoying an upward ride this month – propelled by higher iron ore prices.

IPOs this week

Small Caps readers who want to view upcoming IPOs or see the stocks that have listed in 2019 and how they are performing can now do so.

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

Splitit IPO ASX SPT first week performance

Splitit Payments (ASX: SPT)

Israeli-based instalment payment solutions company Splitit joined the ASX club on Tuesday this week after raising $12 million in its oversubscribed IPO.

The Afterpay rival began its first morning on the ASX at a premium to its $0.20 offer price, closing its first day at $0.38.

During its first week, Splitit rocketed as high as $0.785 before slipping to close Friday at $0.54 – up 170% on the $0.20 IPO price.

Splitit offers a buy now, pay later service to shoppers – giving them up to 36 interest-free monthly payments on their purchases using their Visa and Mastercards.

The week ahead

This week will be dominated by the release of the Hayne Royal Commission and the Reserve Bank interest rate announcement and an important speech by RBA Governor Philip Lowe.

The Royal Commission findings will be released after the stock market closes on Monday around 4.10pm, the RBA announcement is on Tuesday and Governor Lowe’s Sydney speech is on Wednesday at 12.30pm.

Other than those big events, there is still plenty of other announcements that will command attention.

Here, in Australia, there are announcements on retail trade, international trade, job advertisements, building approvals and new vehicle sales.

Together this data will provide a good read on how the struggling property and consumer sectors are faring.

Overseas, the US is expected to catch up on a raft of economic data that has been delayed due to the government shutdown including economic growth, inflation, retail sales, factory orders and employment, which will provide the first concrete information on how fast economic activity was falling near the end of 2018.

All told, it will be a week when a whole series of data and new announcements will jostle for attention on share markets.

Weekly top stocks

John is a highly experienced business journalist and formerly chief business writer for the Herald Sun. He has covered Federal politics in Canberra, was Los Angeles Bureau chief for News Limited and was also chief of staff for the Herald Sun. He has covered a wide range of small and large cap ASX stocks and has a special interest in mining, technology and biotech.