Weekly review: share and bond markets sending contradictory signals

Whichever way you look at world markets, somebody seems to be getting things very wrong.

Will it be the share market investors who were whacked by a 6% to 7% rapid fall in the value of their investments since recently scaling new market peaks?

Or will it be the people piling into 30-year US Treasury bonds at a yield of just 2.0139% – the lowest level of all time?

Admittedly both sets of investors are reacting to slightly different things.

Share markets worried about recession

Share markets are tumbling back from their recent record levels because the fear of a recession – as tipped by the inverse yield curve in the US bond market which has seen short term yields “invert’’ until they are higher than long term yields – the opposite of a normal .

That force is overwhelming the factor that has been driving share markets higher – the search for higher yields than the miniscule ones on offer for cash.

If the inverted yield curve is an accurate predictor of a recession – and it has a fairly good track record in the US – then the recession that will arrive will mute corporate earnings and make shares less attractive.

Bond market players think rate will be lower for longer

For those piling into 30-year bonds with such a tiny yield, they are betting that interest rates will get lower than they are now and stay low for a long time, that the US dollar is a haven of safety and that inflation is virtually nowhere to be seen on even the long-term horizon.

Of course, they could both be right – share markets could muddle through for a while and then return to new highs even as interest rates fall back even further.

Maybe it will be different this time?

There are even a slew of very experienced market watchers who are warning that this time things could be different – that the inverse yield curve for once may not be pointing to a recession.

Some of those urging caution in interpreting the yield curve inversion include former US Federal Reserve chair Janet Yellen, the local Reserve Bank of Australia deputy governor Guy Debelle and AMP chief economist Dr Shane Oliver, to name a few.

The reason is that we live in very unusual economic times and forces other than market expectations about the future path of interest rates are pushing down long term yields.

One such force is central bank buying of long-term bonds, which has as a by-product pushed down long-term yields and helped to create the inverse yield curve.

All central banks are big players in bond markets so there could be a number of players working in this space.

Janet Yellen thinks yield curve may not be right

Former Federal Reserve Chair Janet Yellen said the markets may be wrong this time in trusting the yield curve inversion as a recession indicator because it is less of a good signal than it was in the past.

Asked if the United States is headed into a recession, Yellen said: “I think the answer is most likely no. I think the U.S. economy has enough strength to avoid that, but the odds have clearly risen and they’re higher than I’m frankly comfortable with.”

That’s a typically cautious answer from the former central banker but does add some weight to the idea that “this time things are different’’ – itself, one of the great indicators that share markets may be priced too high.

Some fundamentals point to a recession

On the fundamental side of life, there are some indicators that the world economy could be struggling, which in itself is an indicator that a recession is becoming more likely.

Chinese growth is still slowing, German growth shrank in the latest quarter and the US still looks OK but could change at any moment, given the nasty trade and currency wars between China and the US.

Here in Australia our latest jobs numbers were stronger, even though the economy overall seems to be muddling along rather than thriving.

Share prices can react to changes in these fundamentals very quickly – as we have seen in the 25% recovery in the Australian market since December, even if the shine has come off that record breaking run a little now.

With President Trump pushing back his latest Chinese tariff plans until after Christmas, the tariff war could be turning into a can that is endlessly kicked further down the road by both sides as they ratchet up the rhetoric but cut back on the action.

Tough week for investors

As you would expect it has been a tough week for investors in Australia with most stocks caught up in the severe global downdraft, with the exception of bonds and gold.

Wednesday in the US saw that market plunge 2.9% and we followed on Thursday with an identical 2.9 % plunge – the biggest one-day percentage fall for 18 months.

A little bit of calm returned to our market on Friday, with a flat day leaving the ASX 220 down by just 2.6pts or 0.04% to 6405.5 points.

The big banks helped to limit the losses on Friday with gains of up to 1% as bargain hunters bought up their juicy yields but there were plenty of sectors heading in the opposite direction, including mining stocks, Telstra (ASX: TLS), AMP (ASX: AMP) and the energy companies.

The Australian market has now shed 6% in August, marking a sharp reversal from the records set in July.

Aussie shares fell 2.7% this week, making it the third week of losses which takes the falls so far in August to 6%.

Shares in hearing implant maker Cochlear (ASX: COH) were up 3.9% after posting a 13% boost in net profit to an impressive $276.7 million over the past year.

Margins are improving given the improved profit came on the back of a lower overall number of implant sales and earnings are predicted to continue growing up $300 million in the coming year as new products are launched.

Seven West Media (ASX: SWM) shares rose 6.7% after the resignation of CEO Tim Worner after a shocking run so far this year which has seen the stock fall by almost 30%.

Shares in Domain (ASX: DHG), Nick Scali (ASX: NCK) and Super Retail Group (ASX: SUL) all improved strongly after positive profit reports.

One stock that lived up to its name was casino company Star Entertainment Group (ASX: SGR), with a 7% jump on the release of its 34% rise in profit, which came despite weakness in VIP revenue.

Small cap stock action

The small ords index took a beating this week, down 3.71% to close on 2767.7 points.

Small cap companies making headlines this week included:

Metalsearch (ASX: MSE)

Metalsearch impressed investors this week after announcing it was acquiring a high purity alumina project in Queensland.

The company revealed it had inked a binding agreement to acquire Abercorn Kaolin which owns the Abercorn HPA project and covers 128sq km.

Drilling at the project has comprised 24 reverse circulation holes over 19.25sq km with all holes intersecting kaolinite and mineralisation remaining open in all directions.

Metallurgical testwork on ore from Abercorn’s Cynthia prospect generated a 99.99% pure HPA.

Lithium Australia (ASX: LIT)

Integrated lithium technology company Lithium Australia has created refined lithium phosphate (LP) from spent lithium-ion batteries – offering a sustainable recycling solution for lithium-ion batteries shipped to landfill.

The LP will be used to produce lithium-ferro-phosphate cathode powder, which will then be incorporated in the company’s lithium-ion coin cell batteries and tested.

In addition to recovering lithium from spent batteries, Lithium Australia has also extracted other battery metals including nickel and cobalt, which are suitable for commercial refining.

Lithium Australian managing director Adrian Griffin explained that only a few battery recycling operations worldwide have been able to recover the lithium element. He pointed out Lithium Australia’s process has the potential to “improve sustainability” and “ease future supply constraints” for lithium-ion batteries.

Castle Minerals (ASX: CDT)

Private West African company Iguana Resource will earn up to 80% of Castle Minerals’ Degbiwu and Gbiniyiri licences in Ghana’s Upper West region.

The duo has agreed for Iguana to earn its stake by spending US$11.7 million on exploration in three stages over five years.

Degbiwu hosts the Kpali target which has an open-ended inferred resource of 107,200oz gold. Iguana will initially focus exploration on the Kpali and Bundi prospects as well as three other anomalies.

Castle’s managing director Stephen Stone said the earn-in will allow Castle’s exploration in Ghana to be expedited.

Winchester Energy (ASX: WEL)

Oil and gas explorer Winchester Energy has kicked-off completion activities at its Arledge 16-2 well in the Lightning Prospect in the Permian Basin, Texas.

The company previously noted wireline logs had confirmed 25 feet of calculated net pay in the upper Cisco sand plus 20ft in the lower Cisco sand.

After further processing its data, Winchester has calculated additional net pay in the lower Cisco sand with the figure now increased to 50ft – boosting the potential gross pay of the sand interval to 190ft.

Winchester has also begun drilling the White Hat 20#5 well, which is targeting the Strawn formation within the company’s Mustang Oil field.

The company estimates the well will reach a depth of 6,200ft over 10 days.

Northern Minerals (ASX: NTU)

Rare earth developer Northern Minerals has added $20 million to its balance sheet via a private placement to Chinese state owned Baogang Group Investment Australia.

The placement will give Baogang a 13% stake in Northern Minerals, and the funds will be used to progress Northern Minerals’ Browns Range project in WA.

Earlier in the week, Northern Minerals announced it was starting a scoping study to evaluate downstream processing of its rare earth ore from Browns Range into separated into rare earth oxides.

Commenting on the scoping study, Northern Minerals managing director and chief executive officer George Bauk said the project had the potential to become a “globally significant” heavy rare earth producer and the study was a natural extension of the current pilot plant work.

Meteoric Resources (ASX: MEI)

Meteoric Resources ended the week on a high after reporting it has uncovered visible gold in the first hole of its diamond drilling program at Juruena in Brazil.

The hole intersected visible gold within a 16m zone at the project’s Dona Maria prospect.

Meteoric managing director Dr Andrew Tunks said the visible gold had excited the exploration team and provided “early vindication” to the company in its decision to begin drilling immediately after acquiring Juruena.

Earlier in the week, Meteoric carried out a $2.7 million placement which will help fund the company’s accelerated exploration plans across Juruena and the nearby Novo Astro project, which is also prospective for gold.

XCD Energy (ASX: XCD)

Formerly known as Entek Energy, XCD Energy has a fresh board, assets and management team to advance its 13 oil and gas leases covering 149,590 acres across Alaska’s North Slope.

The North Slope already hosts some of the world’s largest oil and gas players including BP (LON: BP), ExxonMobil (NYSE: XOM) and ConocoPhillips (NYSE: COP).

Additionally, the region has given up 1 billion barrels of oil in recent discoveries and has produced more than 16 billion bbls of oil from several fields including Prudhoe Bay.

XCD’s acreage is within the Nanushuk oil trend on the North Slope and in proximity to some mega finds, with the company targeting a maiden resource within the next two months.

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:

Fineos Corporation Holdings (ASX: FCL)

Fineos Corporation Holdings’ began trading on Friday after raising $211 million via the issue and transfer of 84.4 million CDIs at $2.50 each.

Incorporated in Ireland, Fineos provides core software systems to the global life, accident and health insurance sector.

The company’s integrated cloud-based platform has three main products: Fineos AdminSuite, Fineos Engage, and Fineos Insight.

Funds from the IPO will be used to expand Fineos’ sales, marketing and product delivery as well as finance ongoing research and development to enhance the software platform.

Fineos closed out its first day on the ASX at $2.70 – an 8% premium on the offer price.

The week ahead

With not many data releases in the week ahead, sentiment will once again hold sway over the market reaction.

There are some releases that with pique investor interest, particularly the release on Tuesday of the minutes of the Reserve Bank Board meeting which was held on August 6.

There are also some consumer confidence figures and some detailed labour force figures but the only other major thing to look forward to is the release on Sunday of a speech by RBA Governor Dr Philip Lowe, from the Jackson Hole Symposium in Wyoming.

It is similar slim pickings internationally with the minutes of last Federal Reserve Open Market Committee (FOMC) meeting out on Wednesday and some US data on jobless claims, manufacturing, services, home sales and hopefully some more interesting speeches out of the Jackson Hole Symposium.

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