Stocks back in style

The ASX seems to be in the midst of a rally that may gain traction on expectations of a rate cut.

After much wailing and gnashing of teeth, is the S&P/ASX200 Index in the midst of a minor rally? Since June 25 the index has gained 4.9% after falling 11% between May 20 and June 25. Concerns about the ending of monetary stimulus in the US and increasing evidence the Chinese economy is slowing have been trumped by expectations of easier monetary conditions at home. Combined with a weaker currency – the Australian dollar has dropped 13% since April 11 – that may help underpin economic growth.

Certainly business could use some help as yesterday’s National Australia Bank survey showed. Business conditions, as measured by hiring, sales and profits, fell to -8, a four-year low. Yet like many statistics that are digested by the market, the NAB survey prompted not gloom but optimism.

UBS interest rate analyst Andrew Lilley says the market reckons there is a 60% chance of a rate cut at the next Reserve Bank of Australia’s monetary policy committee meeting next month. Even Citigroup’s Paul Brennan, who doesn’t think there will be any change in the level of the cash rate this year from 2.75%, admits yesterday’s NAB survey has “increased the risk of a rate cut”.

The turmoil in bond markets caused by rising yields has caused many to flee from fixed-income assets (see Chris Black's A turning point in the bond market). Could they be dipping their toes back into Australian stocks? It may be so. Their targets could be miners where predictions of a prolonged period of low commodity prices has yet to eventuate – or perhaps has already been factored in by some. Citigroup may have cut its forecast for China's economic growth to 7.4% this year and 7.1% next year but steel mills in the world’s second-largest economy and Australia’s biggest trading partner seem to continue to want iron ore.

The spot price for iron ore imported through the northeast Chinese city of Tianjin has gained 12% since May 31 when it was at $US110.40 a tonne, according to Bloomberg data. Yesterday the price rose $US1.80, or 1.5%, to $US123.70 per tonne. Even gold is staging a revival. The spot price of gold is up 4.2% since June 27 when it was at $US1200.65 an ounce, according to Bloomberg. At 0818 AEST the spot price of gold was $US1251.25 an ounce.