MARKETS SPECTATOR: Caution prevails

Despite recent falls, traders and fund managers are wary of stock valuation levels, with bank stocks particularly on the nose.

A sense of caution about stocks is pervading some trading desks despite the S&P/ASX200 Index yesterday rising for the first trading day in six.

The index was up 10.795, or 0.2 per cent, to 4870.652. The index is down 4.3 per cent this month but has gained 6.9 per cent this year and 21 per cent over the last 12 months. Yesterday, 104 stocks rose and 83 declined, notably stocks in the energy, materials and utilities sectors.

One trader pointed out that the market’s performance this year is not so rosy in US dollar terms. The index has dropped 11 per cent and is now trading at levels last seen at the beginning of the year in US dollar terms, according to the trader.

Foreign fund managers continue to sell Australian stocks, says the trader. There is a sense that Australia has been insulated from the global economic currents because of voracious Chinese demand for commodities. Now that Chinese demand may be ebbing, the Australian economy has to now confront its high costs and questions as to whether it can create jobs outside the resource sector.

The iron ore spot price through the Chinese port of Tianjin was $US117.80 yesterday, a 2013 low and 25 per cent lower than the year high of $US156.90 on February 20, according to Bloomberg data.

The Bank of New York Australia ADR Index fell 0.3 per cent, according to the Bloomberg. BHP’s ADRs dropped 1.1 per cent and Rio Tinto’s ADRs fell 1.1 per cent.

Further dampening sentiment toward mining stocks is the drop in the price of gold. Bullion fell after topping $US1,400 an ounce on concerns the US Federal Reserve may curb monetary easing, Bloomberg News reported. Gold futures for August delivery slid 0.6 per cent to $US1,379 an ounce.

Bank stocks may find it difficult to attract investor interest. The S&P/ASX200 Finance Index is up 37 per cent over the last 12 months. Tom Millner, CEO of the $720 million BKI Investment Co, says he is not buying more bank stocks at these prices. BKI’s three biggest holdings as of April 30 were NAB, Commonwealth Bank and Westpac who collectively made up 28 per cent of the portfolio as of April 30.