Following the release of minutes from the Fed’s April meeting, markets are now minded to believe that there will be one, if not two, rate rises later this year - possibly starting as early as June although more likely to kick off in July.
The effect of this interest rate outlook on the commodities and mining markets has been interesting. Commodities in general have pulled back, although oil continues to hold at around US$50.
After briefly driving hard towards US$1,300 an ounce in late April, gold has now settled at below US$1,250.
Nickel’s brief run off the four-year lows it hit in February has gone into a sharp reverse. Copper’s up around 5% on where it was at the start of the year, but more than 10% down on the highs it hit mid-March. Lead has been yo-yoing up and down since January, and is currently on a down-leg. Meanwhile broker Liberum is talking of “multiple negative short-term indicators” for iron ore.
Only tin and zinc are still showing any strong signs of the bounce that was evident at the start of the year.
But as with all the best stories this one operates on several levels. And market participants know this.
The first level is straightforward enough: commodities often trade more strongly in the first half of the year, so the weaker trend that’s emerging as summer commences may not be anything out of the ordinary.
And so on to the second level: as with so many things, it all depends where you start from. If commodities, and also in consequence mining equity markets do give up some ground across the summer and going into autumn, it will have been after a four or five month stretch of strong gains, good volumes and much improved sentiment.
Giving ground from a position of strength somehow seems psychologically much easier than from a position of weakness. This time round, a retreat during the summer months won’t necessarily augur capitulation around autumn or Christmas time.
Which brings us to the third level: sentiment. Whatever the day-to-day movements in metals and equities prices, sentiment has now turned positive, although you still have to whisper it quietly.
In the past month or so junior mining company executives have been starting a fair few of their sentences with a variation on the following turn of phrase: “It’s far too early yet to call it a real recovery, but…”
With that hedge in place, they can then go on to talk about whatever fundraising, acquisition, property-staking, or other form of news release they are minded to undertake or put together, scarcely believing that the pall of the downturn that has hung over everything they have announced for the last four years has at last lifted.
Sentiment is back, and there is hard data involving share prices and the amount of shares changing hands to support it.
In Australia, it’s got to the point where UBS are now calling small cap miners as the next hot sector in the small cap arena.
This was reported with some fanfare in the Sydney Morning Herald, which then went on to talk about the relative merits of Fortescue (ASX:FML), Sundance (ASX:SDL), and Whitehaven Coal (ASX:WHC), hardly your classic small caps in any true sense of the word.
Recent activity in the lithium space has more of the feel of a classic small cap mining market buzz, especially since lithium carbonate prices have more than doubled over the past year or so.
UBS is not the only company moving in.
A lithium ETF has just been launched by Global X, and the North Americans have been busy too. Bacanora (CVE:BCN) has just raised US$11 mln from Blackrock for a Mexican project, while, over in Nevada’s Clayton Valley there’s been a flurry of activity as companies like Pure Energy (CVE:PE), Sienna Resources (CVE:SIE) and Noram (CVE:NRM) jostle for position next to the continent’s only existing brine producer.
Shares have been rising too. Between January and April this year, Pure’s shares more than doubled, although they too have since fallen back on the more recent shift away from commodities.
All in all though, that points to a changed market. A market in which shares can double and then drift off is very different from one in which shares can halve and then struggle and struggle to make up the lost ground. We are entering new territory.