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Bond market flashing worry on economy, countering Fed view

The U.S. Treasury yield curve is flashing warning signs on the economy, pointing to a less optimistic prediction for longer-term economic growth at the same time as Federal Reserve officials are adopting a more aggressive tone on raising interest rates.

A flattening yield curve is often interpreted as a negative economic indicator as it shows concerns about the future pace of growth and inflation, because buyers of long-dated debt would demand higher yields if they expected higher costs.

“The Fed’s optimism has no real counterpart in any of the data that we’ve seen so far,” said Aaron Kohli, an interest rate strategist at BMO Capital Markets in New York “The presumption of weak economic growth is fairly firmly rooted and you can see that in the long-end of the curve.“

Dallas Federal Reserve Bank President Robert Kaplan on Tuesday said that the yield curve showed the market expected sluggish growth ahead; however, New York Fed President William Dudley said this week that the flat yield curve reflects low overseas inflation and borrowing costs and not a weakening U.S. economy.

The yield spread between five-year Treasury notes and 30-year Treasury bonds US5US30=TWEB on Wednesday flattened to 95 basis points, the narrowest since December 2007.

The gap between two-year note and 10-year note yields US2US10=TWEB also declined to 80 basis points, just above 10-year lows of 73 basis points reached in mid-2016.

The yield curve reflects the extra interest investors require to buy bonds of a longer maturity. When they demand higher payments for shorter-dated bonds than for longer-dated ones it shows that they are more concerned about nearer-term risks.

The flattening is not yet near an inversion, which is typically seen as a harbinger of a recession.

The curve flattened this week after Fed officials including Dudley and Boston Fed President Eric Rosengren took a more aggressive view to rate hikes, which sent shorter-dated bond yields higher.

That came despite recent data that shows inflation retreating from Fed targets and weakening retail sales and housing data.

Still, there is not widespread alarm of the risk of a recession. Economists at Deutsche Bank said earlier in June that the chances of a U.S. recession in the next 12 months are remote. Jeffrey Gundlach, chief executive officer at DoubleLine Capital, said the flatter curve would start being a concern “when two- and three-year U.S. Treasuries yield about the same.”

An economic downturn would be a setback for U.S. President Donald Trump who during his campaign had vowed to lift annual GDP growth to 4 percent, though administration officials now see 3 percent growth as more realistic. First-quarter economic growth disappointed.

Irrespective of economic predictions, investors say demand for high-quality assets is also helping to flatten the U.S. yield curve, as there are few other options that generate returns.

“The market is starved for product and starved for yield and has to be invested. We are still one of the highest-yielding bond markets on the planet,” said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.

CONDITIONS STILL LOOSE

The flattening yield curve may further loosen financial conditions despite the Fed’s attempts to tighten them, giving an additional boost to risk assets like stocks regardless of the strength of the economy.

That’s because long-dated debt is heavily influenced by pension funds, hedge funds and other participants that lend across the economy, often known as the “shadow banking” industry, and not the U.S. central bank.

“The Fed doesn’t have control over the monetary base because the pile of money represented by shadow banking is so much bigger than what the Fed has under its control,” said Lou Brien, a market strategist at DRW Trading in Chicago.

The Chicago Fed’s National Financial Conditions Index shows that economic conditions have in fact loosened from a year ago even though the Fed has raised rates three times since then.

As the flattening yield curve forces investors to chase higher returns to meet investment objectives, the curve could become even flatter, according to Brian Reynolds, chief market strategist at New Albion Partners in New York.

But history suggests it would be some time before the curve inverts, and even longer before stocks take a turn for the worse, he said.

When the yield gap between two-year and 10-year notes was similar to current levels in 2005 at around 80 basis points, it took 11 months for the yield curve to invert, after which stocks gave an annualized return of 14.8 percent before the bear market began 21 months later, Reynolds said.

In 1994, the yield curve took an additional three and a half years to invert from current levels and in that instance stocks returned 21.6 percent on an annualized basis after the inversion before the bull market ended 22 months later, Reynolds said.

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Tesla Confirms Work With Shanghai to Explore Output in China

Tesla Inc. said it’s working with the Shanghai government to explore local manufacturing in China, a move that would allow the electric-car maker to achieve economies of scale and bring down manufacturing, labor and shipping costs.

The electric-car maker led by Elon Musk expects to more clearly define production plans by the end of the year, according to an emailed statement. While most of its production is expected to remain in the U.S., the Palo Alto, California-based company said it needs to establish local factories “to ensure affordability for the markets they serve.”

Reaching a deal to produce cars in China would help Tesla better compete with local rivals because it would eliminate a 25 percent import tariff that makes Tesla’s Model S sedans and Model X sport utility vehicles more costly than in U.S. showrooms. The company is scheduled to begin production in July of the Model 3, the cheapest model in its lineup so far, from its lone assembly plant in California.

“The entrance of Tesla into local production is a necessary step for Tesla to gain relevance in the world’s largest EV market,” said Bill Russo, managing director of Gao Feng Advisory Co. and a former head of Fiat Chrysler Automobiles NV’s Chrysler unit in China. “Tesla’s participation thus far has been limited to imported Model S and Model X cars. However, unlocking the mass market will require a price point that is only achievable with a locally produced Model 3.”

Tesla shares rose 1.2 percent to $380.92 at 11:12 a.m. in New York and are up 78 percent this year. The company’s statement didn’t specify which Tesla products are being considered for local manufacturing in China.

China has identified new-energy vehicles as a strategic emerging industry and aims to boost annual sales of plug-in hybrids and fully electric cars 10-fold in the next decade. A total of 507,000 new-energy vehicles including electric cars were sold last year in the country, according to the China Association of Automobile Manufacturers. About 15 percent of Tesla’s $7 billion in revenue last year was generated in China, according to data compiled by Bloomberg.

 

Tesla has signed a preliminary agreement with the city of Shanghai to produce vehicles in China for the first time, Bloomberg News reported earlier. The agreement would allow Tesla to build facilities in Shanghai’s Lingang development zone, according to people familiar with the negotiations. Under existing rules, Tesla will also need to set up a joint venture with at least one Chinese company to obtain the necessary manufacturing permits.

Shanghai Lingang Holdings Co., a state-owned industrial zone developer and landlord, said in a filing it hadn’t had contact with Tesla. The carmaker said in its statement Thursday that it’s been working directly with the Shanghai municipal government.

“It’s just at the right moment for Tesla to localize production because China now has suppliers with world-leading technology,” said Fu Yuwu, president of the government-backed Society of Automotive Engineers of China. “Tesla will also need to develop customized mass-market products for Chinese market, which is unique from the rest of the world.”

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NEWS: First Cobalt Signs LOI with CobalTech

First Cobalt Corp. (TSX VENTURE:FCC)(OTCQB:FTSSF) (the “Company”) is pleased to announce it has entered into a non-binding letter of intent (“LOI”) to acquire all of the issued and outstanding shares of CobalTech Mining Inc. (TSX VENTURE:CSK), an arm’s length party, through a negotiated share exchange transaction.

CobalTech has assembled a strong portfolio of prospective cobalt properties, including 11 past producing mines in the town of Cobalt, Ontario, the Werner Lake East Cobalt property near Kenora, Ontario and eight properties in the Province of Quebec. Its flagship asset is the Duncan Kerr Project and includes the past-producing Kerr Lake and Lawson mines which operated between 1905 and 1966 and reportedly produced approximately 32.7 million ounces of silver as well as significant cobalt by-product.

CobalTech also owns a 100 tonne per day mill in the town of Cobalt. This asset would complement the Yukon refinery, over which First Cobalt has a joint venture option for a 50% interest.

CobalTech has 6,588 tonnes of crushed stockpile with an average grade of 761 g/t Ag and 0.95% Co over 2,000 samples on its Duncan Kerr property.1 The potential quantity and grade of this stockpile is conceptual in nature, there has been insufficient exploration to define a mineral resource and it is uncertain if further exploration will result in the stockpile being delineated as a mineral resource.

The LOI provides both parties the opportunity to exchange information and maintain confidentiality as each party seeks to determine whether mutually beneficial business opportunities may exist. The LOI does not represent a change of business for either company. The LOI does not contemplate a definitive agreement between the parties. First Cobalt has engaged Canaccord Genuity Corp. as financial advisors and Cassels Brock and Blackwell, LLP as legal advisors on any transactions entered into by the Company.

Trent Mell, First Cobalt President and CEO, commented,

“We believe CobalTech’s assets in the Cobalt camp are complementary to our own, and see this transaction as an opportunity to provide value to both our shareholders and those of CobalTech. The future potential from 11 additional past producing mines, as well as a milling facility could provide the pathway to early production in this region. This potential transaction is a credit to the quality assets the team at CobalTech have built.”

CobalTech CEO Bruce Bragagnolo commented,

“First Cobalt has a strong vision for the future of this region and this transaction will be beneficial to both to CobalTech shareholders and the community. We look forward to finalizing this transaction with First Cobalt in due course.”

To view Figure 1 – First Cobalt and CobalTech land packages in Cobalt camp, Ontario, please visit the following link: http://media3.marketwire.com/docs/First%20Cobalt%20and%20CobalTech.jpg

Readers are cautioned that the LOI entered into with CobalTech is non-binding, and that completion of the transaction is subject to a number of conditions, including but not limited to, completion of due diligence, negotiation of definitive agreements in respect of the transaction, receipt of any required regulatory approvals, the approval of the TSX Venture Exchange, and the approval of the shareholders of CobalTech. The transaction cannot be completed until these conditions are satisfied. There can be no assurance that the transaction will be completed as proposed or at all.

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NEWS: First Cobalt Proposes Friendly Merger with Cobalt One

First Cobalt Corp. (TSX-V: FCC, OTC: FTSSF) (the “Company”) is pleased to announce it has delivered a proposal to Cobalt One Ltd., which is listed on the Australian Securities Exchange, for the merger of Cobalt One and First Cobalt. Under the proposal, First Cobalt would acquire all of the outstanding common shares of Cobalt One which would result in the shareholders of Cobalt One holding approximately 60% of the equity in the merged entity and the shareholders of First Cobalt holding the remaining 40%.

If concluded, this merger would consolidate the two largest land packages in the Cobalt camp into a single landholder with over 10,000 hectares (Figure 1). First Cobalt would also become 100% owner of the Yukon refinery, previously a joint venture option between the two companies.

The proposal delivered to Cobalt One includes the following elements:

  • Cobalt One shareholders would own 60% of the merged entity and First Cobalt shareholders would own the remaining 40%, prior to giving effect to any subsequent equity issuances by either company;
  • The merged entity would be based in Toronto, a five-hour drive from the Cobalt mining camp;
  • First Cobalt would maintain its TSXV listing and seek to obtain a secondary listing on the ASX of CHESS Depositary Interests; and
  • It would be a condition of the transaction that the Board of Directors of the merged entity would include Cobalt One Chairman Paul Matysek, Cobalt One CEO Jason Bontempo as well as Bob Cross and some or all of the current First Cobalt Board members.

Trent Mell, President and CEO commented,

“First Cobalt previously concluded a partnership with Cobalt One on the Yukon refinery near Cobalt, Ontario and we shared a common vision for the Cobalt Ontario camp. Both companies believe that a rebirth of this historic mining district will occur through the application of modern geoscience, a better understanding of disseminated cobalt mineralization and ultimately, bulk mining methods. A consolidation of properties, the refinery and the permitted property upon which the refinery is situated offer the potential to significantly shorten the pathway to production. This transaction will benefit shareholders in both companies, while creating one of the largest cobalt exploration companies in the world.”

Cobalt One’s properties are in Canada, adjacent to First Cobalt’s properties, making First Cobalt’s Canadian-based management team (with their experience in this region) the ideal choice to manage the merged entity. Consolidating the land package could facilitate new discoveries in this camp, which is unique for its cobalt-silver mineralization, and provide meaningful future cobalt production in a politically stable, mining-friendly jurisdiction. The refinery is a unique asset in this area and the permitted facility could meaningfully accelerate permitting of a future mining and processing operation. First Cobalt also believes Cobalt One is an attractive counterparty due to its Australian Securities Exchange listing and strong institutional shareholder support in that market.

First Cobalt has engaged Canaccord Genuity Corp. as financial advisors and Cassels Brock and Blackwell, LLP as legal advisors on any transactions entered into by the Company.

About Cobalt One

Cobalt One Ltd. is an ASX-listed exploration company focused on cobalt. The company holds a significant land package of 7,272 hectares in the Cobalt region of Ontario Canada. Many of Cobalt One’s holdings are adjacent to those of First Cobalt. Cobalt One currently owns the Yukon refinery, located in the Cobalt camp.

Figure 1 – First Cobalt and Cobalt One land packages in Cobalt camp, Ontario

Readers are cautioned that the proposal provided to Cobalt One is non-binding, and that completion of any transaction is subject to a number of conditions, including but not limited to, completion of due diligence, negotiation of definitive agreements in respect of the transaction, and receipt of any required Board, regulatory and shareholder approvals. A transaction cannot be completed until these conditions are satisfied. There can be no assurance that any transaction will be completed as proposed or at all.

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NEWS: Zinc One Receives Independent Report Confirming Processing Techniques of Bongará Zinc Oxide Mineralization

Zinc One Resources Inc. (TSXV: Z) (OTC Pink: ZZZOF) (FSE: RH33) (“Zinc One or the Company”) is pleased to provide a summary of an independent report commissioned on zinc oxide production, which was prepared by Mr. Pascal Briol and Mr. Noel Masson, and highlights to its upcoming exploration plans.

Mr. Briol and Masson have extensive experience in zinc oxide metallurgy and the development of numerous zinc oxide projects including those located in Kazakhstan, Iran, Yemen and Turkey.

The zinc-oxide ore at the Shaimerden deposit in Kazakhstan, near Isfahan in Iran, and various deposits in the Kayseri, Turkey area, among others, are all processed through a Waelz kiln. At Shaimerden, it is known that the mineralogy and general geochemistry of the zinc-oxide ore are similar to that of the mineralization at Bongará. The Shaimerden zinc-oxide ore is currently being treated at the Ridder Smelter complex in Kazakhstan where Wood MacKenzie has reported a zinc recovery of 95% utilizing the Waelz kiln. Wood Mackenzie is a global energy, chemicals, renewables, metals and mining research and consultancy group with an international reputation for supplying comprehensive data, written analysis and consultancy advice.

For further information on independent report prepared by Mr. Pascal Briol and Mr. Noel Masson please refer to

Zinc Oxide Processing Report

After receipt of this independent report, Zinc One is planning to collect core for metallurgical testing from the upcoming drill programme. Both pyro and hydrometallurgical methods will be studied as part of a planned Preliminary Economic Assessment. The previous operator of the Bongará mine successfully processed the zinc-oxide mineralization via a Waelz kiln, a pyrometallurgical method typically used to process electric-arc furnace dust (“EAFD”), a residue from the steel industry. Zinc-oxide has a similar geochemistry as EAFD and as such can be treated by a Waelz kiln.

One of the advantages of using Waelz-kiln processing technology is that the resulting residue is relatively easier to manage than the tailings from leach technologies.

For further information on Waelz kiln technology, please refer to:

http://www.globalsteeldust.com/waelz_kiln_technology

Future Plans

Zinc One plans to submit drill-platform permit applications to the Ministry with the intention to begin the drill program in the third quarter. The proposed drill program will involve low-cost shallow drilling and tight drill spacing in the zones of known mineralization as well as test zones on the periphery of the known mineralization. Zinc One intends to have the program completed by year end as the basis for a National Instrument 43-101 technical report to be completed shortly thereafter.

James Walchuck, CEO of Zinc One commented. “The high-grade Bongará Zinc-Oxide Project will be our major focus in the near term. We also firmly believe that there is substantial upside for additional high-grade, zinc-oxide mineralization along the six-kilometre long trend of the known mineralization from Mina Grande in the southeast to Charlotte Bongará to the northwest. Zinc One continues to focus on the Bongará property and will use all of the management’s collective skill sets to advance the project. We believe this is the perfect time to be advancing a zinc project and remain bullish on the zinc commodity pricing.”

About Zinc One Resources Inc.

Zinc One is focused on the acquisition, exploration and development of prospective and advanced zinc projects in mining friendly jurisdictions. Zinc One’s key assets are the past producing Bongará Zinc-Oxide Project and Charlotte Bongará Zinc-Oxide Project in Peru. The Bongará Zinc-Oxide Project was in production from 2007 to 2008 but shut down due to the global financial crisis and concurrent decrease in the zinc price. Past production show greater than 20% zinc grades and recoveries over 90% all from surface. The neighboring Charlotte Bongará Zinc-Oxide Project has multiple at surface high grade drill intercepts providing numerous drill targets and blue sky potential. Zinc One’s business plan is to restart production at the Bongará Zinc-Oxide Project with exploration of targets along a six kilometer strike as well as the Charlotte Bongará Zinc-Oxide Project. The Company is managed by a proven team of exploration geologists, and engineers having previously constructed and operated successful mining operations.

The technical content of this news release has been reviewed and approved by James Walchuck, CEO, President and Director of Zinc One, a qualified person as defined by National Instrument 43-101.

For more information, please visit the website at www.zincone.com or contact James Walchuck, CEO, President and director at (604) 683-0911 or email at info@zincone.com.

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