Market Update & Important Indicators
U.S. stocks rose in choppy trading after minutes from the Federal Reserve's latest meeting showed officials were divided about whether to raise interest rates in June. Stocks briefly turned lower after the release of the Fed minutes before rebounding. At the Fed's March 17-18 policy meeting, the central bank opened the door to raising rates as early as June, while indicating it was in no hurry to do so. The Fed minutes showed some participants believed an increase in rates would not be appropriate until later in the year, while a couple of participants suggested that the economic outlook does not warrant an increase until 2016. The Dow rose 27 points, or 0.2%, to 17,903 and the S&P 500 advanced 6 points, or 0.3%, to 2,082.
European stocks climbed to a 15-year high, buoyed by a rise in oil and gas shares as investors bet Royal Dutch Shell PLC's deal to buy BG Group PLC will spark a wave of mergers in the industry. The Stoxx Europe 600 as a whole closed 0.1% higher at 404.66, its highest level since 2000.
Cash flooded into Hong Kong's stock market, sending the benchmark index soaring to its highest since 2008 and setting record trading volumes in the city. The sudden interest in Hong Kong is a turnaround for one of Asia's biggest and most-traded markets that had been struggling this year. The Hang Seng Index jumped 3.8% to 26,236.86, led by a 12.3% gain for Hong Kong Exchanges & Clearing Ltd, the city's stock exchange operator.
Base metals on the LME were mixed. Lead closed 1.0% higher at US$1,923/t as the number of cancelled warrants rose sharply. Gold lost 0.5% to US$1,202.2/oz and brent fell 6.0% to US$55.55/bbl. Oil prices extended their losses after U.S. inventory data showed the largest one-week build in crude supplies since 2001. The AUD is buying US$0.769.
Thought for the Day
China: The ‘new normal’
Our largest export partner: As the largest consumer of Australia’s exports, the outlook for China directly impacts our future. The slogan at the recent China Development Forum was “the new normal’, a phrase coined by President Xi Jinping to describe the economic landscape in China. The transition to lower growth and the successful implementation of China’s reform agenda will remain a key risk to China’s economic prospects over the medium term and will have flow on effects to major trading partners.
2014 the slowest growth in 24 years: In 2014, the Chinese economy grew by 7.4% which was its slowest annual increase in the last 24 years. The slowdown is largely relating to lower fixed asset investment and a difficult environment in the manufacturing sector. A cooling real estate market is another key driver of the economy, accounting for 18.9% of total fixed asset investment in 2014. The sector has been impacted by tighter credit conditions, surplus supply, stringent regulations and reduced buying interest which has affected sales and new builds.
Property downturn: Soft conditions in the property sector are anticipated to continue in the near term. The government is considering a range of initiatives to stimulate the sector including a reduction in down payment requirements for second homes, lowering minimum holding period to avoid sales tax and easing mortgage rules. It is likely to be some time until new measures take effect and a turnaround is visible. In the future, development of central and western China may stimulate the future.
Navigating the transition: This year will be crucial for transitioning the economy towards greater domestic consumption to support economic growth in the future. This will be dependent on successful implementation of reforms directed at state-owned enterprises, liberalising the banking sector, developing financial markets, pricing, and taxation. China’s GDP is assumed to moderate to average around 6.5 per cent by 2020. While the rate of growth is slowing, it will still support large year-on-year increases in commodity demand in absolute terms.
In This Issue
Commodity Price and FX revision
Argonaut has revised its gold, copper, nickel, iron ore and AUD/USD FX assumptions. Our preferred sector is Australian domiciled gold, based on a favourable AUD gold price translating into high margins. We maintain a positive medium to long term view on copper driven by Chinese led demand and higher incentivise prices required for new lower grade, higher sovereign risk supply. Iron Ore is our least preferred commodity based on relentless high grade supply growth from the majors.
Gold: Argonaut’s gold price forecast from FY16 onwards has been decreased by US$50/oz to reflect a strengthening USD. Shorter term, gold price will remain highly leveraged to policy statements from the Federal Reserve regarding future US interest rate movements. Our gold price assumptions in AUD terms are little changed given favourable AUD/USD FX movements (US$1220/oz Q4 FY15, US$1200/oz FY16, US$1250/oz FY17 and US$1300 long term).
Copper: Argonaut remains positive on the medium term outlook for copper, despite rising inventories from the start of CY15. We believe there is strong price support from China with touted Government stimulus and rising investment in power infrastructure. Argonaut has marginally adjusted our short term prices decreasing in Q4 FY15 to US$2.80/lb and US$3.00/lb in H1 FY16 (from US$3.25/lb). Thereafter, we maintain US$3.25/lb out to FY17 and US$3.00/lb long term.
Iron Ore: The declining iron ore price has fallen well below our price assumptions as high grade supply growth from BHP, RIO, Vale and Roy Hill continues to surpass declining global demand growth. Our price targets reduce to US$45/dmt (62% Fe basis) for Q4 FY15, US$55/dmt for FY16, US$65/dmt for FY17 and US$70/dmt long term.
Nickel: While nickel faces near term head winds with high inventories on the LME and high (albeit declining) Chinese stocks, we forecast price accretion going forward driven by lower than expected ramp-up of Indonesian NPI, low nickel sulphide discovery rates in the past 10 years and >5% demand growth. Nevertheless, we have tempered our nickel forecasts with highest price adjustments in the near-term. (US$6.00/lb Q4 FY15, US$7.25/lb FY16, US$8.50/lb FY17 and US$9.00/lb long term).
FX: Our AUD/USD FX assumption out to FY17 has been reduced to 0.78 from 0.80. Our long term exchange rate decreases from 0.85 to 0.80. We foresee strengthening in the USD to AUD, based on a recovering US economy and lower export revenue from Australian bulk commodities.
Copper – Sandfire Resources (SFR) | BUY, Price Target $6.10
Gold – Saracen (BUY) | BUY, Price Target $0.54
Nickel – Sirius Resources (SIR) | BUY, Price Target $3.65
Speculative – Gold Road (GOR) | SPEC BUY, Price Target $0.60
Recent Contacts & Presentations
Saracen (SAR), Beadell (BDR), Fertoz (FTZ), Atrum (ATU), Doray (DRM), Austal (ASB), TFS Corporation (TFC), Buru Energy (BRU), Carnarvon Energy (CVN), Otto Energy (OEL), Empire Oil & Gas (EGO), Pura Vida Energy NL (PVD), Migme (MIG), Vmoto (VMT), Pioneer Credit (PNC)