Index up 1.1% on hopes for China pick-up

TALK that China is planning to do more to boost economic activity lifted the market yesterday as traders reassessed their positions on the prospect for growth in the world's second-biggest economy.

By InvestSMART · 30 May 2012

By InvestSMART ·
30 May 2012

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TALK that China is planning to do more to boost economic activity lifted the market yesterday as traders reassessed their positions on the prospect for growth in the world's second-biggest economy.

Resource and energy stocks were swept up in

the buying, lifting the benchmark index to its highest in a week.

The S&P/ASX 200 put on 46.4 points, or 1.1 per cent, to 4114.4.

After three straight weeks of falls, the market has now risen 2.1 per cent in two days.

Shares in Fortescue Metals surged for a second day as talk that China would restart some infrastructure projects forced short-sellers to cover their positions.

Fortescue, which has been targeted by renowned short-seller Jim Chanos in recent months, rose 34?, or 7.5 per cent, to $4.89 after rising 24? on Monday.

BHP Billiton rose 32? to $32.37 and Rio Tinto surged $1.24 at $58.14.

SG Hiscock portfolio manager Rob Tucker said traders who had been bearish on China were seriously reassessing things, after report that the Chinese government planned to boost activity.

The rally in resource stocks was a reminder that the market had been hit by a double whammy in the past few weeks, he said, as fears about the euro debt crisis fed concerns about Chinese growth.

"That helped accelerate the negative view on China, with shorting of China-linked stocks widespread," Mr Tucker said.

"We have had a very long-term structural view on China, which has been positive. In the last six to

12 months we've become more cautious, because China's steel mills still have a lot of inventory to work through, so we're not reacting to this news today of further stimulus measures just yet."

Shaw Stockbroking senior dealer Jamie Spiteri said stocks had been oversold in recent weeks, and traders were starting to look at the fundamentals more closely.

"Despite the fact that markets have been very skittish and volatile, there comes a point where you've got to assess the risk profile of present prices and recognise that most of our large corporates have had their share prices discounted in comparison to present and forecast earnings," he said.

The big banks all moved ahead. Westpac rose 15? to $20.55, NAB 16? to $23.81, Commonwealth 60? to $49.88 and ANZ 36? to $20.94.

Suncorp gained 13? to $7.81 after it said its insurance business was improving, though other areas of the business would take longer to meet growth targets.

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Frequently Asked Questions about this Article…

Why did the ASX 200 rise on the latest trading day?

Talk that China planned to do more to boost economic activity prompted traders to reassess positions, lifting resource and energy stocks. The S&P/ASX 200 added 46.4 points to 4114.4 and the market rose about 2.1% over two days after three straight weeks of falls.

Which sectors led the market rally and which companies jumped?

Resource and energy stocks led the rally. Fortescue Metals surged, while major miners BHP Billiton and Rio Tinto also moved higher (BHP to $32.37 and Rio Tinto up about $1.24 at $58.14 in the report).

What drove Fortescue Metals' sharp share price move?

Fortescue jumped for a second day after reports China might restart some infrastructure projects, which forced short-sellers to cover their positions. The article also notes Fortescue had been targeted by well-known short-seller Jim Chanos in recent months.

Did short covering influence the recent stock moves?

Yes. The article says short-covering helped accelerate gains—particularly in China-linked resource stocks—after traders reassessed bearish positions in response to the China stimulus talk.

How are analysts advising investors to view the China stimulus headlines?

Analysts quoted in the article urged caution. Rob Tucker said he wasn’t yet reacting to the news of further stimulus measures, noting a long-term positive view on China but increased caution over the past 6–12 months because Chinese steel mills still have high inventories. Jamie Spiteri said many stocks had been oversold and traders are starting to refocus on fundamentals.

How did Australia’s big banks perform during the rally?

The big banks all moved ahead. The report showed Westpac at $20.55, NAB at $23.81, Commonwealth Bank at $49.88 and ANZ at $20.94 on the day of the rally.

What did Suncorp report and how did its shares react?

Suncorp gained to $7.81 after saying its insurance business was improving, though the company said other parts of the business would take longer to meet growth targets.

What risks are still weighing on resource stocks despite the bounce?

The article highlights persistent risks: fears about the euro debt crisis have fed concerns about Chinese growth, and Chinese steel mills still have a lot of inventory to work through—factors that have made some analysts cautious despite the short-term rally.