The S&P/ASX200 index is in the midst of a rally, albeit a modest one. Yesterday was the benchmark index’s eighth consecutive day of gains, though the biggest single day rise during that period has been just 0.6 per cent. Since June 25 however, the benchmark index is up 8.5 per cent.
The rise in share prices has not been accompanied by good news, either from industry or the economy. An expected rate cut as soon as next week has over the last 30 days dragged the bulls kicking and screaming back into the market. They have returned to back their old favourites: the banks and Telstra.
Commonwealth Bank of Australia yesterday rose to an all-time record stock price of $74.90. It is up 14 per cent since June 7. Westpac and ANZ Banking Group shares have also both gained 12 per cent since June 12, while National Australia Bank’s stock has added 11 per cent over the same period. Telstra is up 11 per cent since June 24.
This rally seems to be a repeat of earlier gains this year following the hunt for stocks whose businesses are seemingly impervious to competition and economic slowdown – and pay good dividends.
UBS Australia strategist David Cassidy calls the rise in the S&P/ASX200 index a “retracing of the correction” that saw the index drop 11 per cent between May 14 and June 25. Cassidy says the rise in stock prices has been driven by global factors including easing of concerns about an end to US monetary stimulus, settling bond yields and a boost to miners from the 18 per cent rise in the Tianjin spot iron ore price in the last two months.
The spot price for iron ore imported through the northeast Chinese port city of Tianjin was $US110.40 per dry metric tonne on May 31. Yesterday it was at $US129.90, according to Bloomberg data. As a result, BHP Billiton shares have increased 12 per cent since June 25, while Rio Tinto's stock has risen even further, by 14 per cent.
Can such a rally continue? Perhaps not for the miners. Few expect their earning to impress, and many analysts warn their spending plans should be further curtailed. The Tianjin iron ore price has been falling for three days in a row now, and Goldman Sachs says the iron ore market is bulging with oversupply. It remains suspicious of benefits to Rio Tinto from expanding its annual iron ore production to 360 million tonnes per annum from 290 million tonnes. The miner's shares yesterday fell 20 cents, or 0.4 per cent, to $57.51.
However, Goldmans has a buy recommendation on BHP Billiton shares, and says the stock is trading at a 14 per cent discount to its net present value of $40.05. Yesterday BHP Billiton shares fell 31 cents, or 0.9 per cent, to $34.64.
The US Federal Reserve seemingly stands behind market with its $US85 billion a month bond buying program, and few investors want to fight the Fed or Glenn Stevens, the Reserve Bank of Australia governor, who indicated this week another rate cut was possible. For the optimists, such easy money policies are working – at least in the US.
US gross domestic product rose 1.7 per cent in the second quarter on an annual basis, up from 1.1 per cent in the first three months of this year. That may be enough to encourage the bulls to stick around.