Cash rate confidence

A rise in the jobless rate has confirmed market suspicions the Reserve Bank will cut rates, which is helping shares.

The S&P/ASX200 Index rose as much as 1.3% after June’s unemployment rate rose to the highest level in almost four years, improving the chances of a rate cut. Investors bought banks, attracted to their dividends which Citigroup says won’t fall even if earnings slide.

At 1300 AEST the benchmark added 42.744, or 0.9%, to 4944.10, after rising as high as 4963.20 in morning trading. UBS says there is more than a three-in-four chance the Reserve Bank of Australia will cut its cash rate next month from 2.75% after June’s jobless rate rose to 5.7%, the highest since September 2009.

“A sustained low inflation reading in two weeks’ time will mean the RBA has run out of legitimate reasons not to cut rates by 0.25 percentage points in August,” says Matt Sherwood, the strategist at fund manager Perpetual. “If inflation in the June quarter comes in benign, as per market expectations, then the probability of an August rate cut is likely to soar.”

Still, for the market to gain substantially from current levels trading volume needs to increase, says Tony Paterno, a senior client advisor at Ord Minnett. About $1.4 billion worth of stock changed hands a little after noon. Daily trading volumes need to be over $4 billion to fuel any further share price increases, says Paterno.

“The 5000-point level seems a bit of a bogey point,” he told Markets Spectator. “If we break through that then it’s a pivotal turning point for the market.”

The index is on track for its fifth gain in six trading days and is up 5.9% since a low this year on June 24, of 4669.144.

At 1301 AEST National Australia Bank rose 27 cents, or 0.9%, to $29.72. Westpac gained 26 cents, or 0.9%, to $29.30. Investors are buying bank shares in the hope of reaping good dividends (see John Abernethy's Bank stocks a hold strategy). Citigroup Craig Williams says does not expect any dividend cuts even if earnings slide.

“With no threat to dividend payouts from our slowdown scenario, the sector’s 5.9% prospective dividend yield in our view still provides compelling value,” says Williams.

BHP, the world’s biggest mining company, increased 74 cents, or 2.3%, to $32.57, around levels the stock closed at on July 5 at $31.60. Rio Tinto, the world’s biggest iron ore miner, gained $1.26, or 2.4%, to $53.65.

Iron ore imported through the northeast Chinese port of Tianjin yesterday rose US cents 20, or 0.2%, to $US123.90 yesterday. The Tianjin iron ore price is up 12% since May 31, according to Bloomberg data.

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