Market Highlights: Wall Street falls sharply, franked dividends at risk, and 5 ASX small caps to watch today

ASX to open much lower on Friday after a big selloff on Wall Street
Big tech stocks plunged, with Arm falling below IPO price
Bank of England left rates unchanged

Australian shares are poised to track Wall Street and open sharply lower on Friday. At 8am AEST, the ASX 200 index futures was pointing down by -1.4%.

In New York, the S&P 500 fell by -1.64%, the blue chips Dow Jones index was down by -1.08%, and the tech-heavy Nasdaq slipped by -1.82%.

Traders are selling stocks on expectations that US rates will stay higher for longer as they combed through the Fed’s forecast.

The VIX, also called The Fear Index, spiked 16% to 17.5, its highest level since mid-August.

Big Tech stocks took the brunt of the selloff, with Alphabet tumbling by -2.5%, Amazon by -4.5%, and Nvidia by almost -3%.

Arm Holdings fell -1.4% and touched below its IPO price of US$51 before bouncing back to US$52.16. The ARM stock is now down for the fourth session in a row.

AI stock Splunk surged 20% after the company agreed to a US$28 billion takeover by Cisco.

To data, US new jobless claims came in at 201,000, dropping by 20,000 from the previous week – another sign of a resilient labour market.

Meanwhile, the Bank of England left its key interest rate unchanged overnight, snapping its 14 consecutive interest rate increases.

“We champion the Bank of England’s move to hold interest rates steady, but the central bank policymakers should go further and commit to stopping the hiking agenda, rather than just pausing it,” said de Vere Group’s Nigel Green.

Franked dividends regime could be at risk

Australia’s franking regime is in doubt as the government targets franked distributions funded by capital raising.

The government’s Treasury Laws Amendment Bill is looking to stop companies paying franked dividends being funded by capital raising.

Historically, large companies have often raised capital from shareholders through fully underwritten capital raisings, and then paid out all that money raised as a franked dividend.

“But the government wants to clamp down on this move, so that a company will not be able to pay out franked dividends that are directly or indirectly funded by capital raising,’ said Scott Kelly, portfolio manager at DNR Capital.

Whilst at face value that may not seem unreasonable, a number of concerns about unintended consequences have been noted.

According to Kelly, the first problem is that the proposed test to determine whether companies can pay out fully franked dividends observes whether they have been paying dividends over time, and this potentially puts startups at a disadvantage.

“Secondly, the proposal appears to capture a dividend reinvestment plan, which is also a form of capital raising and this potentially could result in shareholders losing franking credits over time.

“And finally, companies will still be able to fund dividends by taking on debt. This potentially puts small companies at a disadvantage given their limited access to capital markets relative to larger companies,” Kelly said.

“In our view, those who will be most affected by the changes are self-funded retirees and retail investors, and those investors with low and marginal tax rates.

“For companies, under the new proposals, there’s the increased risk that franking credits will become permanently trapped within the companies,” said Kelly.

In other markets …

10-year US bond yields approached 4.5%, reaching a level not seen since 2007.

Gold price traded -0.5% lower to US$1,920 an ounce.

Crude prices fell -0.3%, with Brent closing at US$93.25 a barrel.

Base metals prices were lower, with nickel futures losing ground by -2%, and copper futures by -1.5%.

Iron ore futures fell -0.1% to US$121.69 a tonne.

The Aussie dollar was down around -0.5% to US64.17c.

Bitcoin meanwhile fell -2% in the last 24 hours to trade at US$26,588.

Analytics firm Santiment observes that Bitcoin traders are aggressively shorting BTC on both the Deribit and Binance platforms.

5 ASX small caps to watch today

Cygnus Metals (ASX:CY5)
Cygnus says high grade assays and large widths show Bencubbin emerging as a potential significant rare earths discovery. Cygnus reported grades of up to 7,243ppm TREO (Total Rare Earth Oxide) from the latest drilling within intercepts up to 79m wide. Project wide auger results highlight widespread anomalism of >500ppm TREO close to surface over 22km.

Poseidon Nickel (ASX:POS)
Progress has been made towards the restart of the Black Swan operations, and proactive initiatives will be implemented. This includes Peter Harold transitioning from managing director and CEO to non-executive chair. Craig Jones, Poseidon’s current general manager Mining, will transition to CEO. And Derek La Ferla and Dean Hildebrand will retire from the board. POS says the changes at corporate and site will save approximately $3 million annually.

Pinnacle Minerals (ASX:PIM)
Review of historical data at the White Knight Project on the Eyre Peninsula, South Australia, identified multiple historical drill holes for follow-up analysis of TREO. Assays of historical core have returned high-grade TREO with over 20% magnet rare earth oxides in all intervals exceeding 500ppm in basement rocks.

Sipa Resources (ASX:SRI)
Sipa says the diamond drill program at the Paterson North project has been completed. Two major targets were tested using the heli-relocatable drill system. Core has now been received by the lab for cutting and assaying with results expected in 4-6 weeks.

Tivan (ASX:TVN)
Tivan announced the appointment of global engineering group Hatch to complete an engineering review for the pre-feasibility study of the salt roast processing pathway for the Speewah Vanadium-Titanium-Iron Project in WA. The salt roast pathway is considered the optimal approach to commencing commercialisation of the Speewah resource and vanadium production.