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Weekly Market Update: Commodities back up while investors keep an eye on rate cuts

7 June 2024 14:38

It was a positive return for most global markets this week, which set the tone for the ASX 200 to end the week in the green. The index finished 2.2% higher than market close last Friday, up to 7860 from 7697, just short of April’s record high.

The positive sentiment was felt around the globe, with the S&P 500 and Nasdaq Composite seeing gains, rising by 1.2% and 1.5% respectively. The Dow Jones Industrial Average also climbed by 0.8%. Japan’s Nikkei 225 surged by 2%, hitting a 33-year high. The Shanghai Composite Index rose by 1%, and Hong Kong’s Hang Seng Index gained 1.2%.

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Figure 1: ASX 200 performance for the week ending June 7, 2024. Source: Trading Economics

All eyes on NFP report

Investors will closely watch the outcome of Friday’s crucial U.S. Non-Farm Payrolls (NFP) report. Friday’s report is expected to convey a job market that’s slowed in recent months but remains on firm footing. Non-Farm payrolls grew by about 185,000 in May based on a consensus figure. Such a number would be up from April’s six-month low of 175,000 but down from last year’s monthly average of 225,000. The U.S. unemployment rate in May is expected to hold at 3.9%.

Any upside or downside surprise could prompt investors to reassess their outlook for Fed rate policies. Many analysts eye September as the most likely time frame for a rate cut, assuming inflation continues to ease.

ECB cut rates

The European Central Bank (ECB) announced overnight a 0.25 percentage point cut in borrowing rates for the eurozone, marking the first decrease since 2019. The central bank’s main borrowing rate is now 4.25%, down from its previous all-time high of 4.50%.

On Thursday the key global interest rate benchmark, the yield on the US 10-year T-Note, fell for a fifth straight day, dropping from 4.64% to 4.28%. Investors have essentially factored in almost one-and-a-half standard rate cuts, even though the US Federal Reserve (and Australia’s RBA) typically move in 25 basis point increments. It should be noted that the Fed hasn’t made any moves and isn’t obligated to follow investor expectations.

The sharp decline in market yields was triggered by last Friday’s Core PCE data, which showed US inflation stagnating instead of increasing as many had anticipated. This unexpected stagnation has led investors to anticipate earlier Fed rate cuts, boosting stock prices as a result.

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Figure 2: Australian yearly CPI numbers. Source: ABS

Back home in Australia, worse than expected CPI numbers in April showed an inflation rise, pushing back any hope of an interest rate cut well into 2025.

Commodities back up

Commodities also performed well for the week, with Brent crude futures increasing by 2.1% to US$80 per barrel driven by supply constraints due to geopolitical tensions in the Middle East.

It was another positive week for gold, silver and copper markets. Gold prices saw a 2.5% bump to US$2385 per ounce, while silver increased 3% to US$31.50 per ounce and copper edged slightly higher, up 1% to US$4.67 per pound.

Positive UBS report sees gold bounce back

After a recent pull back following May’s all-time highs, it was a positive UBS forecast that was the driving factor in its bounce back week to start June. The leading global investment bank says it expects gold to push to US$2,800 an ounce (A$4,000) by the end of 2025, driven by factors such as macro uncertainty, geopolitical risk and increased allocations to gold.

Interestingly, despite the fact the commodities have seen similar rises this year (Gold +16%, Copper +20%), it has been copper stocks that have outperformed gold stocks on the market.

Copper stocks outperforming gold

Ord Minnett analysts suggest these moves aren’t reflected proportionately in equity market investor sentiment, with copper-exposed stocks beating gold stocks by +29% during the period. It speaks to the investors appetite for copper, with the market factoring in the higher prices more so than gold companies.

They express a cautious outlook for the upcoming FY2025 due to ongoing inflation. They observe that market expectations have risen alongside improvements in commodity prices. However, they believe that costs and capital expenditure projections for large-cap mining companies will exceed current consensus estimates.

ASX big movers

There’s less concern about smaller cap peers given their relative underperformance. Here are some of the best performing small cap stocks on the Australian market this week.

Metalstech Ltd

Metalstech Limited (ASX:MTC) this week announced the condition regarding the underground mining activity permit for the Sturec Gold Mine has been fulfilled. This development meets a crucial requirement for Trans Metal Fund’s US$81 million acquisition offer.

Shareholders are set to benefit from an initial cash payment, an additional payment once the mine’s permit is granted, and the option for MetalsTech to convert a royalty into a lump sum after commercial production begins.

MTC closed at $0.24, up 11.5% for the week.

Nimy Resources

Nimy Resources (ASX:NIM) has surged this week on the back of their recent announcements regarding the p its Mons Project. Advancements have been made, commencing electromagnetic (EM) and induced polarisation (IP) surveys across its Masson, Block 3, and Vera’s Gossan prospects.

Rock chip sampling at the Vera’s Gossan Prospect has identified notable concentrations of key minerals, with the peak sample, NRR00004, exhibiting significant levels of nickel (2,750ppm), copper (1,119ppm), cobalt (1,370ppm), zinc (3,180ppm), and sulphur (1,360ppm).

The company expects to conduct a follow up drill program upon completion of data analysis and modelling of drill targets.

NIM closed at $0.059, up 44% for the week.

LTR Pharma Ltd

Over to Biotech and LTR Pharma Limited (ASX:LTP) has announced promising initial results from its clinical study of SPONTAN® Nasal Spray for treating erectile dysfunction. The study shows that SPONTAN® achieves rapid absorption and a faster onset of action compared to similar oral PDE5 inhibitors, delivering a similar amount of the drug at half the dose and with a significantly faster effect. Additionally, SPONTAN® demonstrated a better safety profile than oral PDE5 inhibitors.

The positive results will support regulatory filings in key markets, marking a significant milestone for the company and indicating that SPONTAN® could potentially disrupt the global PDE5 market.

LTP closed at $0.805, up 25% for the week.

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