Fed prepares for another rates cut

THE US Federal Reserve is expected to cut interest rates for a final time in this cycle on December 11, with most pundits noting that the end of US interest rate cuts had historically led to a strong rally in equities over the subsequent year.

Expectations of a further interest rate cut have built up because of an expected rebound in economic activity that has supported the US market’s recent run. Underlying these moves has been a rally in global bond yields, which has been interpreted as pointing to stronger economic growth.

The expectation in the US is that the end of the rate easing cycle will encourage an environment where low interest rates are combined with the backdrop of an improvement in corporate earnings and economic growth.

On the numbers of UBS Warburg’s chief equities strategist Sakthi Siva, the average gain in the All Ordinaries Index in the 12 months after the end of Federal Reserve easing is 30 per cent. “These strong and consistent gains were largely because the end of the Fed easing either coincided with or led the trough in world growth by three months,” Ms Siva said in a recent strategy note.

The Reserve Bank of Australia meets on December 4 and is to consider cutting official interest rates by 25 basis points, which would bring the official rate to 4.25 per cent, a figure not seen since the early 1960s.

Norwest Energy

Norwest Energy is an active junior oil explorer based in Perth that has a 5 per cent interest in the Cliff Head-1 well located on the west coast near Dongara. This well is to be tested in mid-December for an oil/gas target in shallow water approximately 10km offshore. It is directly west of the producing Dongara gas/oil field.

The shares are currently trading at 9.4 cents, and have two classes of options that are tradeable on the share market. At current levels, Norwest Energy has a market capitalisation of $8.4 million undiluted.

Exploration in the Perth basin has received a boost from the use of 3D seismic in shallow waters. Significant hydrocarbon discoveries at Hovea and Beharra Springs, along with an active drilling program should help Norwest Energy capture market attention.

The acquisition of recent seismic data has led to the definition of three large targets for drilling. The first target is expected to be drilled in mid-December, and this area is estimated to contain 100 million barrels of oil and/or 300 billion cubic feet of gas if hydrocarbons are present.

If this target is successful, more tests will be made at the nearby Cliff Head north and south structures, which together could contain a more significant structure. Norwest Energy is funding 8 per cent of the cost of Cliff Head to earn a 5 per cent interest in the permit, and the well will have a depth of 1,587 metres in 16 metres of water.

A discovery at Cliff Head-1 is estimated to be worth between eight and 21 cents per share, depending on size and content. The company is well cashed up for exploration after an equity injection of $1.1 million via a recent non-renounceable options rights issue.

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