Wall St post record highs, Why Rio Tinto is a buy: ASX to rise

Market Reports

by Melissa Darmawan

The Australian sharemarket is set to rise with the SPI futures pointing to 1.1 per cent gain.

Rebound led by economically sensitive stocks

Global stocks staged a comeback on Friday as investors shrugged off concerns about the economic recovery. Market participants rushed to buy back the dip after Thursday’s slump amid the US government bond yields easing. Wall St saw the major indexes hit record highs as economically sensitive sectors led the way. Europe and UK markets also bounced back as punters searched for bargains. In Asia, a mixed closed emerged on dampening sentiment over the spread of the highly transmissible Delta variant.

To the S&P 500 sectors, the advance was mainly across the board with Financials added 2.9 per cent followed by Energy, up 2 per cent and Real Estate then Technology. Materials weighed 1.4 per cent lower followed by Healthcare, down 0.5 per cent as the only two sectors in the red.

Bond yields recover from multi-month lows

US government bond yields clawed back losses on Friday following four sessions of declines as they plummeted to multi-month lows. The 10-year US treasury bond yield climbed to its largest day rise by 6 basis points to 1.36 per cent compared with 1.3 per cent on Thursday. Over the week, the 10-year yields rose by 7 points and 2-year yields lost 2 points.

Yields which fall when bond prices rise have trended lower since March pressured down by investors assessing their optimistic forecast. With Covid-19 headlines looming, reduced expectations for support from the Federal Reserve and mixed economic data, investors bought back into bonds which saw yields fall even further last week.

Wall St notches new high

The Dow Jones gained 1.3 per cent to close at 34,870, the S&P 500 added 1.1 per cent to 4,370 and the Nasdaq closed almost 1 per cent higher at 14,702 posting new highs. Over the week, the Dow rose 0.2 per cent while  the S&P 500 and Nasdaq both gained 0.4 per cent.

Major banks rose ahead of earnings this week with Goldman Sachs jumped 3.6 per cent while JP Morgan Chase rose 3.2 per cent. Apple climbed 1.3 per cent to set its first all-time high since January.

Pfizer added 1 per cent on news that the biotech is working on a booster for its Covid-19 vaccine to target the Delta variant. Chinese ride-hailing provider Didi Global rebounded 7.3 per cent. The company has been targeted by China’s cyberspace watchdog after they launched an investigation to crackdown on data security issues.

European and UK markets enjoy gains amid bargain hunting

Across the Atlantic, London’s FTSE closed 1.3 per cent higher, boosted by Financials and Miners. Paris gained 2.1 per cent and Frankfurt closed 1.7 per cent higher. Britain’s economy expanded by a slower-than-expected 0.8 per cent growth in May when compared to April. BHP rose 4.3 per cent while Rio Tinto gained 4.1 per cent. Travel stocks took off as Britain plans to scrap quarantine for fully vaccinated arrivals. Though in Europe last week, the World Health Organization has warned that a new wave of Covid-19 is inevitable, with cases of the Delta variant on the rise.

Asian markets mixed amid Covid-19 spread

In Asia, low vaccination rates amid worries on the spread of the delta variant grew. Japan’s Nikkei fell 0.6 per cent, Hong Kong’s Hang Seng added 0.7 per cent and China’s Shanghai Composite closed flat on Friday. The People's Bank of China said it will cut the reserve requirement ratio for major commercial banks by 50 basis points. This means it will allow them to lend more to offset the rising price of raw materials.

ASX tumbles on tougher Sydney restrictions

On Friday, the Australian sharemarket lost 68 points or 0.9 per cent to close at 7,273 tumbling to its worst session in nearly three weeks as lockdown restrictions tighten in Sydney. Over the week, it closed 0.5 per cent or 35.3 points lower.

The best performing stock taking off defying odds is Sydney Airport (ASX:SYD) soared 33 per cent. Last week the airline operator received a surprise $22 billion takeover bid from a consortium of infrastructure investors which represents a 42 per cent premium to its closing price prior to the offer.

The worst performing stock over the week is medical device company Polynovo (ASX:PNV), dropped 13.4 per cent on no major company announcements.

Iron ore slips, gold and oil gains

Gold has gained $10.40 to US$1811 an ounce and silver added $0.25 US$26.23 an ounce. Oil has added $1.62 to US$74.56 a barrel.

Iron ore fell 1.5 per cent to $US214.77 a tonne, its futures are pointing to 2.8 per cent gain. Over the week, iron ore lost 0.4 per cent.

Local economic outlook

This week June jobs data, business and consumer confidence surveys are set to take the spotlight.

In May, jobs jumped by 115,200 blowing expectations as unemployment dived to pre-pandemic lows. It will be interesting to see on Thursday the numbers from the Australian Bureau of Statistics if the trend can be continued given Sydney’s extended lockdown.

Looking at NAB business conditions in May, operating conditions hit a record high for the second straight month with growth spread across the industries and the country. While Westpac/Melbourne Institute consumer sentiment is expected to be pressured down by Covid-19 events though tends to bounce back when restrictions ease.

Other things to watch include building activity and overseas travel statistics on Wednesday and consumer inflation expectations on Thursday.

Local earnings season underway, AGM’s

The annual general meeting of AusNet Services (ASX:AST) is scheduled for 2:00pm (AEST) on Thursday.

Woodside’s (ASX:WPL) second quarter results are also slated on Thursday while Rio Tinto’s (ASX:RIO) second quarter operations review is penciled in on Friday.

US earnings kicks-off, overseas economic outlook

The US earnings season kicks off next week with several big banks to release their second quarter results.

Investors will also keep an eye on the June US consumer price data on Tuesday for insights on inflationary pressures. Federal Reserve Chair Jerome Powell’s appearance before the Senate Banking Committee to deliver the semi-annual Monetary Policy Report to Congress on Thursday will also get some attention.

Elsewhere, China’s second quarter GDP growth numbers, Eurozone and UK inflation figures will also be in the spotlight. Bank of Japan is expected to keep its policy interest rate at -0.1 per cent when they hold their meeting this week.

Broker moves

Credit Suisse rates Rio Tinto (ASX:RIO) as a buy with a price target of $133. Into 2022, the broker believes the global iron ore market will remain reasonably tight and upgrades forecasts to US$179 per ton from US$149 per ton in 2021. For 2022, the broker increased forecasts to US$144 per ton from US$120 per ton in 2022.

However, Credit Suisse maintains a downward forecast price trajectory as record-high iron ore price incentivises more supply, especially from China. This could lead to further pricing pressure in the medium to long term and lifts the target price to $133 from $131 and maintains its rating.

With the spot prices for the company’s major revenue drivers still ahead of consensus, a consensus earnings upgrade is expected to remain a potential positive catalyst.

Shares is Rio Tinto (ASX:RIO) closed 0.7 per cent lower at $125.40 on Friday.

Ex-dividend

ICSGlobal limited (ASX:ICS) is paying 23 cents unfranked.

Commodities

Iron ore fell 1.5 per cent to $US214.77 a tonne.
Iron ore futures are pointing to 2.8 per cent gain.
Gold has gained $10.40 to US$1,811 an ounce.
Silver has gained $0.25 US$26.23 an ounce.
Oil has added $1.62 to US$74.56 a barrel.

Currencies

One Australian Dollar at 7:50 AM was buying 74.91 US cents, 53.95 Pence Sterling, 82.49 Yen and 63.10 Euro cents.


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