Weekly review: stocks rise despite economy showing signs of slowdown

Stock market rise economic slow down 2019 September news ASX
WEEKLY MARKET REPORT

The Australian Bureau of Statistics revealed a mixed bag of economic figures this week, with the country posting its first account surplus in 44 years, followed by its lowest economic growth since the global financial crisis a decade ago.

On Tuesday, the ABS revealed the country had achieved its first account surplus since the June quarter of 1975.

During the June 2019 period, Australia achieved an account surplus of $5.85 billion – a turnaround of the March quarter’s deficit of $1.12 billion.

Underpinning the result was the largest ever quarterly goods and services surplus of $19.9 billion – with high iron ore prices a prime contributor.

Elevated export volumes of LNG and coal also helped boost the surplus.

Recession is a possibility

The possibility of a recession is even more prevalent after the ABS revealed the Australian economy only grew 0.5% (seasonally adjusted) during the June quarter – its slowest pace since the global financial crisis a decade ago.

For the 2019 fiscal year economic growth was 1.4%.

JP Morgan chief economist Sally Auld told Small Caps the market had expected this figure.

Ms Auld said she expected the economy will pick up in the second half as the RBA’s tax cuts and government’s tax rebates flow through to consumers.

With a “threatening” global climate, Ms Auld did note that a global event could provide an external shock that sends Australia into a recession.

She pointed out that Australia has a history of ducking recessions, but it may not be so lucky this time.

With the US facing a greater than 30% likelihood of a recession, Ms Auld said it wasn’t the nation to be concerned about – with Europe and emerging economies revealing far more “worrying” indicators.

Despite US unemployment numbers rising by 130,000 in August, according to the Bureau of Labor Statistics, it missed the market consensus that was projecting 163,000 new positions.

Doctor Copper hints economic slowdown

Doctor Copper is also hinting at a recession with the commodity’s price plunging over the last six months from almost US$3/lb (US$6,550/t) to a low of US$2.51/lb (US$5,536/t) this week.

The Doctor Copper term was coined from the metal’s ability to signal global growth and downturns due to its widespread use across homes and most economic sectors.

Primarily causing copper’s sluggish state is the ongoing trade war between the US and China, which is impacting manufacturing worldwide and has flowed through to raw materials including copper.

US manufacturing slump not as bad as feared

Despite initial forecasts that manufacturing PMI in the US had contracted to 49.9 for August, it actually lifted to 50.3.

However, it is down from 50.4 in July – and represents the weakest pace of expansion in the sector since September 2009.

The dip in the US manufacturing PMI follows falls in the UK, Germany, Japan and South Korea.

Meanwhile, China’s manufacturing PMI index was unexpectedly up for August – rising to 50.4 from 49.9 in July.

RBA leaves rates on hold

Unsurprisingly, the Reserve Bank of Australia revealed this week that rates would remain at 1%, with RBA governor Philip Lowe conceding that economic growth was “lower than expected” for 1H 2019.

Mr Lowe said downside risks to the global economy persisted and inflation remained subdued – with Australian inflation anticipated to remain under 2% in 2020.

“It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target. “

Mr Lowe said the RBA would also consider further cuts to support sustainable economic growth.

Negative interest rates spreading globally

Earlier this week, former US Federal Reserve chairman Alan Greenspan said it is only a matter of time before the US slips into negative interest rate territory following Japan, Sweden, Denmark and Switzerland.

The narrative being driven behind negative interest rates is that they will become the new norm.

A further 21 countries currently have zero per cent interest rates.

Retail spending declines

The ABS noted retail turnover had fallen 0.1% for July in seasonally adjusted terms – following a 0.4% rise in June and a 0.1% increase in May.

ABS director of quarterly economy wide surveys Ben James said cafes, restaurants and takeaway services led the decline – dropping 0.6%.

Clothing, footwear and personal accessory retailing dipped 0.1%, while department stores shrunk 0.2%.

All states apart from WA and the NT experienced retail declines.

However, Myer (ASX: MYR) bucked the department store retail trend reversing its $494 million loss last year to a profit $24.5 million in FY2019.

The company said its profit was a result of online growth, sturdy sales and cost cutting.

China-US to resume trade talks

A potential resolution to the trade war caused the Dow Jones industrial average, NASDAQ and Standard and Poor’s indices to lift this week.

US President Donald Trump and Chinese President Xi Jinping have agreed to resume talks in October.

In the ongoing tit-for-tat feud, China said last month it was implementing tariffs on US$75 billion worth of goods, which prompted President Trump to hike a previously announced 10% tariff to 15% on $300 billion worth of China imports.

A further tariff hike from 25% to 30% on $250 billion Chinese goods is anticipated to come into effect on 1 October.

Nickel rises on supply fears

The trade feud hasn’t been able to keep nickel down with the metal rocketing further this week after Indonesia revealed its export ban was being brought forward two years 1 January 2020.

The country’s ban is to preserve its own nickel reserves and ensure its refineries have enough material to process.

Meanwhile, the ban is expected to cut about 10% of global nickel supplies.

The ban caused nickel to surge to US$18,620/t on Monday before pulling back to US$17,535/t by Thursday.

Supply woes prompted Goldman Sachs to lift its 12-month nickel forecast from US$16,000/t to US$22,000/t.

Australian market rallies on US lead

Following the rise on Wall Street, Australia’s ASX 200 rose this week to end at 6,647.3 points, marking the third straight week the Aussie market has finished in the green.

Performing best on Friday was the information technology sector which grew 2.6%.

Market bright spots

Buy now pay later stock Afterpay Touch (ASX: APT) has continued its positive growth – closing Friday 9.61% higher at $33.87.

The company’s stock has risen more than 50% in the past month, alone.

WiseTech Global (ASX: WTC) is another stock to post substantial growth – up 41% for the month and closing the week almost 4% higher at $38.14.

TPG Telecom tumbles on large drop in profit

Not faring as well was TPG Telecom (ASX: TPM) which recorded a 56% drop in net after tax profit for FY 2018-19 to $173.8 million.

Contributing to the fall was the company’s decision to can its plans to develop Australia’s fourth mobile and data network which gave rise to a $236.8 million impairment expense.

Additionally, the drawn-out court battle resulting from TPG’s attempts to merge with Hutchison Telecommunications (ASX: HTA) hasn’t helped the company’s situation.

The ACCC blocked the $15 billion merger in May, but the duo is appealing the decision, with the case to be heard in Federal Court next week and expected to be completed within three weeks.

TPG closed Friday at $6.42 – down 2.73% for the week.

Small cap stock action

Taking its lead from larger indices, the Small Ords index closed the week up 2.44% at 2,887.1.

ASX 200 XJO Small Ords Sept 2019
ASX 200 vs Small Ords

Small cap companies making headlines this week were:

African Gold (ASX: A1G)

On Thursday, African Gold revealed it had scooped up ground in Mali and Cote D’Ivoire – substantially expanding its gold portfolio in the region.

The company is securing the ground by acquiring Abra Resources, which is the holder of the permits.

Previous drilling at the 80sq km Sitikali permit unearthed 6.6m at 115.5g/t gold and 4m at 28.9g/t gold.

Historic exploration at other permits also returned gold intersections. Additionally, many of the tenements abut or are along strike from major gold operations.

Big Star Energy (ASX: BNL)

Another company impressing investors this week was Big Star Energy with its helium find on its recently acquired Enterprise oil and gas lease in the US.

Currently covering 1,800 acres, Big Star plans to expand the project to 5,000 acres.

Interim results from Big Star’s helium soil gas survey across 30 prospects and leads confirmed an active helium system with some anomalies hosting concentrations 50% greater than atmospheric levels.

Big Star is integrating the new data into a geological model which will be used to pinpoint further prospects and leads.

Beacon Minerals (ASX: BCN)

Beacon Minerals is about to produce its first gold bullion from its Jaurdi project after revealing this week that commissioning was advancing above pre-feasibility levels.

The company revealed mill throughputs were running 20% above the PFS estimate, while recoveries were 5% higher than expected and exceeding 90%.

Jaurdi is located near Coolgardie in WA and Beacon is advancing a 500,000tpa carbon-in-leach operation.

Beacon expects to generate $208.5 million in revenue over the mine’s initial five years – based on an average gold price of A$1,650/oz and all in sustaining costs of A$830/oz.

Freehill Mining (ASX: FHS)

Iron ore hopeful Freehill Mining has expanded its Yerbas Buenas project in Brazil by acquiring the Arenas XI 1/20 adjoining 80ha tenement.

With the acquisition tripling the project’s size, Freehill chief executive officer Peter Hinner told Small Caps it offered “considerable upside” to the project particularly in growing the known high-grade 1.1km YB6 magnetic structure.

The acquisition now expands the structure’s magnetic footprint from 9.6ha to 29ha.

Similar to the initial structure, Freehill anticipates the expanded footprint also has a smaller overburden of mineralised sand, which requires simple pre-stripping.

BPH Energy (ASX: BPH)

Diversified oil and gas and biomedical company BPH Energy has edged into the medicinal cannabis space through a 10% investment in Chile-based Patagonia Genetics SPA.

Patagonia is a craft cannabis company and owns a genetic collection containing more than 260 cannabis and hemp strains.

To lock-in its 10% interest in Patagonia, BPH subscribed for $50,000-worth of shares and issued 150 million BPH shares.

A further $50,000 is payable to Patagonia shareholders over six months. BPH also has the option to boost its stake in Patagonia to 49%.

Orthocell (ASX: OCC)

Perth-based Orthocell has confirmed all patients within a CelGro tendon regeneration trial achieved a successful tendon repair.

Additionally, there was no requirement for revision surgeries which occurs in up to 57% of people treated traditionally.

The trial consisted of 10 patients with 89% returning to pain-free function, and reporting improvements in daily activities.

Orthocell also noted there were no adverse events related to its CelGro and no evidence of adverse reactions or side effects at the implant site.

Galan Lithium (ASX: GLN)

Lithium brine explorer Galan Lithium had a positive week, revealing it had added former SQM vice president of sales Daniel Jiménez Schuster to its board as a non-executive director.

Mr Jiménez Schuster spent 28 years with SQM in various senior roles in different regions.

According to Galan chairman Nathan McMahon people with Mr Jiménez Schuster’s skills and experience are hard to find.

The company ended the week with news it had intersected three brine horizons within the Pata Pila licence at the company’s Western Basin projects in South America’s Lithium Triangle.

Pata Pila is adjacent to Livent Corporation’s Fenix operation in Argentina.

The week ahead

In Australia we have consumer and business confidence numbers out that will give another signal of the health of the local economy.

Home loan lending data out on Monday will also give an indication of whether the housing market has stabilised.

In the US next week the key points to look out for will be inflation data and retail numbers.

Over in China news to keep an eye on will be both inflation data and international trade numbers for August.

This week’s top stocks