Market Update & Important Indicators
US stocks have fallen sharply in the wake of the Federal Reserve's decision against raising interest rates because of worries about slowing global economic growth. Analysts said the Fed's decision on Thursday to keep benchmark rates at zero was concerning because it implied that headwinds facing the global economy are stronger than thought. "The fact that the Fed did not raise rates prolongs the uncertainty and the stock market does not like uncertainty," said Bill Lynch, director of investment, Hinsdale Associates. "We just face more of the same in terms of this waiting game as to when they'll finally pull the trigger."
The US Federal Reserve's decision to hold interest rates steady exposed a gulf in global stocks, with European shares slumping and emerging markets jumping. "Leaving US interest rates at rock bottom could mark a turning point for the relative performance of emerging and developed markets," analyst Jasper Lawler at CMC Markets UK said. "Since the decision was made, emerging markets closed the day higher while stocks in the US and Europe have dropped," he added. Furthermore over the weekend three Fed members noted that they argued that an interest rate increase is still warranted for this year.
The US central bank's decision to hold off raising its interest rate sent emerging market currencies and most Asian markets advancing, as concerns eased over an outflow of cash as the global economy suffers a painful slowdown. After one of the most eagerly awaited meetings in years, the US central bank's head, Janet Yellen, said the ongoing crisis in China and recent turmoil on world markets had played a role in keeping borrowing costs at zero. "For emerging-market central bankers, the Fed has given them some much-needed breathing room," said Jonathan Lewis, a principal at New York-based Samson Capital Advisors LLC. “Postponing a Fed tightening gives these central bankers room to be more accommodative, without their actions being offset by a tighter Fed," he added, according to Bloomberg News.
The Australian market looks set to open lower after US and European stocks fell following the Federal Reserve's decision not to lift its benchmark interest rate. At 0801 AEST on Monday, the September share price index futures contract was down 76 points at 5,072. In economic news on Monday, the Commonwealth Bank business sales indicator for August is due out. No major equities news is expected.
Oil prices have sunk after the US Federal Reserve expressed doubts about the strength of the global economy as it held off from an interest rate hike. "China is weighing on the demand side. Everything that is negative out of China is even more bearish than I am," said James Williams of WTRG Economics. "We are still in an oversupplied market by at least 1.5 million barrels a day."
Gold has risen to a near three-week high as the Federal Reserve's decision to leave US interest rates unchanged rattled investors' outlook on the global economy and weighed on equity markets in developed economies. "More supportive is the perception that the Fed seems to have lost a little confidence itself in the rate hike cycle," said Macquarie analyst Matthew Turner. "But we still think there will be a hike in December and therefore rallies are going to be capped." A majority of Wall Street's top banks now expect the Fed to begin increasing rates in December, according to a Reuters poll conducted on Thursday after the Fed's policy decision. "The later the Fed starts hiking, the more the weakness in gold prices will be shifted towards next year," said Georgette Boele, an ABN Amro analyst. "We are negative about gold mainly because we expect lower demand from investors."
LME metals were all down with Nickel and Copper the biggest losers, down 3.2% & 2.5% to US$9,644/t and US$5,273/t respectively. Gold rose 0.8% to US$1,140/oz, while Brent rose 0.5% to US$47.69/bbl. The AUD is buying US$0.72.
In This Issue
Evolution Mining (EVN) | HOLD
Argonaut initiates coverage on Evolution Mining (EVN) with a HOLD recommendation and A$1.25 valuation. CY15 has been a defining year for the Company, which has transformed into the second largest ASX gold stock producing ~800koz pa, following the recent acquisitions of Cowal and Mungari. The acquisition costs constitute ~56% of the current Enterprise Value of the Company, however, the two new mines will contribute ~66% group FCF in FY16 (see Page 3) and comprise ~57% of the group Reserve.
The stock offers size, liquidity, diversified Australian operations (seven operational mines), operational visibilities and production linked dividends (2% of gold revenue). The ~A$417m net debt position (~1.5 years of FCF) is mitigated with a sizable hedgebook (821koz @ A$1,591/oz). On a relative basis, EVN appears fairly priced when compared to ASX peers (see Page 3), reflecting its status as a “go-to” Australian gold stock, but is relatively inexpensive when compared to a global peer group. Argonaut’s site visit to Cowal confirmed a seasoned operation with significant operational flexibility and upside.
Recent Contacts & Presentations
Gold Road (GOR), Tox Free Solutions (TOX), AWE Limited (AWE), Ausdrill (ASL), GR Engineering (GNG), Troy (TRY), Northern Star (NST), Sandfire (SFR), Regis (RRL), Saracen (SAR), Sino Gas & Energy (SEH), Dacian (DCN), Buru Energy (BRU), Carnarvon Petroleum (CVN), Otto Energy (OEL), Empire Oil & Gas (EGO), FAR Limited (FAR), Central Petroleum (CTP), Senex Energy (SXY), Ironbark Zinc (IBG)