Interest rates on hold!

Today, the Reserve Bank of Australia (RBA) kept the cash rate steady at its record low of 0.25%. The RBA normally meets on the first Tuesday of every month to decide the direction of the nation’s monetary policy. It can technically either raise, lower or hold interest rates steady. But everyone knew the only real choice of today’s meeting would be whether to cut to zero or not.

So even though interest rates are still not quite at their absolute limit, in my view it doesn’t really make much difference at the end of the day if the cash rate is at 0.25% or zero.  

RBA governor Philip Lowe also flagged that rates will be at record lows for some time, stating, “the Board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band”.

So if low rates are indeed here to stay, here are 3 consequences I see happening for ASX investors.

Low interest rates means cash is no longer king

Cash will continue to be a lousy asset to hold over the long-term. That’s because the interest rates that you can expect to receive on cash investments like term deposits and savings accounts won’t meaningfully rise unless the RBA lifts interest rates. Thus, we can expect cash to continue to generate very little real return when considering the effects of inflation.

ASX 200 share prices will rise

Low interest rates have an indirect effect on the value of ASX shares. That’s because most valuation models use the ‘risk-free return’ of government bonds to figure out how much a share is worth. If interest rates remain low, so will the yield of government bonds.

Therefore, I expect the value of the S&P/ASX 200 Index (ASX: XJO) to be higher over the medium to long-term than they otherwise would be if interest rates were at more ‘normal’ levels (although it looks as though this is the new ‘normal’).

Expect more volatility

As a consequence of the first 2 impacts, I expect volatility to continue to be a feature of the share market while interest rates remain so low.

The fact that there are now very few avenues to building wealth outside the share market means that there will be more capital sloshing around. You will have investors who don’t really want to be in ASX shares but simply have no alternative.

As such, I expect higher loss aversion behaviours to be in play. There are going to be a lot of investors who don’t want to lose capital and are therefore more likely to sell their investments during natural downturns or corrections in the market.

In my opinion, all of this points to an increased level of volatility in shares going forward – as if we haven’t had enough of that this year already!

More reading

• 3 things ASX investors need to know about the RBA’s rate decision today
• These ASX shares were among the best performers in May, surpassing the ASX 200
• Could Goldman Sachs’ 2020 predictions for the US share market spell the end of the ASX 200s remarkable rise?
• The 3 ASX tech stocks that helped this fund manager outperform in May
• Is the a2 Milk share price too high to buy?

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Aurelia Metals Ltd (ASX: AMI) share price has taken off today after the small-cap ASX miner released a production update. 

Aurelia Metals is a mining and exploration company with a strategic landholding in the polymetallic Cobar Basin in New South Wales. The company operates 2 wholly-owned gold and base metal operations, Peak Mine and Hera Mine, along with 2 processing plants.

Aurelia is a gold-dominant business and in FY19, produced 117,521 ounces of gold at a group all-in sustaining cost of $1,045 per ounce. 

Why the Aurelia Metals share price is charging higher

This morning, Aurelia provided an update on group production for the June 2020 quarter to date. 

The company decided to provide these interim figures in light of the current absence of guidance due to COVID-19. Aurelia withdrew its guidance back in March given the uncertainty surrounding the spread, duration and impact of the pandemic.

Preliminary group production figures for the June quarter to 31 May 2020 are:

• Gold: 16,300 ounces
• Copper: 1,250 tonnes
• Lead: 3,300 tonnes
• Zinc: 2,300 tonnes

This represents a significant boost to the production figures announced for the March 2020 quarter.

Gold production in the entire March quarter came in at 14,304 ounces, while copper production was 871 tonnes. So in the first 2 months of the current quarter, Aurelia is already beating these production figures by 14% and 44%, respectively.

Lead is tracking along relatively in line with March figures of 4,657 ounces. However, zinc production in the current quarter is notably down from the 5,921 tonnes posted last quarter.

Nonetheless, on the whole, Aurelia is on track for a significantly improved quarter-on-quarter production result.

At the time of writing, the Aurelia share price has jumped 21.69% today to 43.2 cents. This takes the company’s market capitalisation to around $378 million.

More reading

• 3 things ASX investors need to know about the RBA’s rate decision today
• 2 cheap ASX 200 shares to buy right now
• Is the AFIC share price a buy right now?
• These ASX shares were among the best performers in May, surpassing the ASX 200
• 3 founder-led ASX shares to buy for strong long-term returns

Motley Fool contributor Cathryn Goh has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Aurelia Metals share price charges 22% higher on production update appeared first on Motley Fool Australia.

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No one will be surprised that the Reserve Bank of Australia (RBA) left interest rates unchanged at a record low of 0.25% today. But there are three things that every investor should know.

Before I get into that, it’s worth pointing out that the S&P/ASX 200 Index (Index:^AXJO) failed to react to the news as it continued to hover around breakeven.

But the Australian dollar ticked up slightly to US67.9 cents when the RBA released its monetary policy decision.

Currency traders are probably reacting to the relatively upbeat statement by RBA governor Philip Lowe and reassessing the prospects for negative interest rates.

Sounding upbeat

On the first point, the Governor Lowe is taking a glass half full perspective on the COVID-19 fallout.

While highlighting that we are suffering from the worst economic contraction since the Great Depression of the 1930s and that total hours worked dropped by a record 9% in April as 600,000 Australians lost their jobs, he thinks the downturn won’t be as bad as earlier expected.

The RBA also believes that bond markets are functioning well. So well in fact, that the central bank only had to buy government bonds once in the past month and that total purchases up to date stands at $50 billion.

Negative to negative rates

The second thing to note is that the market may be over estimating the chance of negative interest rates here.

Some believe that the RBA will have to adopt this drastic policy of charging financial institutions to park money with the central bank. Other central banks, like its European counterpart, have used this to stimulate their sagging economies.

Negative rates aren’t so much about lowering borrowing costs for businesses and consumers, but about “incentivising” nervous financial institutions to lend by penalising them for being too cashed up.

Dr Lowe played down the chances of negative rates here on a few occasions, and his statement seems to confirm this even though it didn’t mention negative rates.

Passing the buck to government

For one, his comments on how well bond markets are working suggest that the financial system is working as it should be.

The RBA’s relatively upbeat view on the economy further drives home the point with our central bankers looking to manage the economy with a light touch, in my view.

The RBA doesn’t look like it will be doing much in the interim as it is prepared to sit back to see what happens next.

This could put the federal government under more pressure to support the economy with the Morrison Government tipped to announce housing grants and other fiscal measures to support sectors of the economy that are on their knees.

Don’t feel abandoned

This takes me to the final takeaway from the RBA’s decision. While RBA may be taking a step back, it’s reassuring investors and borrowers that it stands ready to act if and when required.

No one knows how the unprecedented coronavirus crisis will play out, not even the central bank, but as Dr Lowe said: “the Bank is prepared to scale-up its bond purchases again and will do whatever is necessary to ensure bond markets remain functional.”

More reading

• These ASX shares were among the best performers in May, surpassing the ASX 200
• Could Goldman Sachs’ 2020 predictions for the US share market spell the end of the ASX 200s remarkable rise?
• The 3 ASX tech stocks that helped this fund manager outperform in May
• Is the a2 Milk share price too high to buy?
• ASX 200 investor in your 40s? 3 shares to buy now

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post 3 things ASX investors need to know about the RBA’s rate decision today appeared first on Motley Fool Australia.

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