australian stocks move up sharply on fresh rate cut expectations from rba minutes 1168542015

Dovish minutes from the RBA’s last board meeting in March left the door open for a further interest cut in April, subject to inflation and employment data justifying the action. That encouraged investors to jump back into high yielding stocks in the financials and telecom sectors, which were the prominent gainers in Tuesday’s trading. Lending a hand was the energy sector, which discounted the effect of a small recovery in crude oil prices.

Though the RBA minutes released at 11:30, the market was already trending higher since its open, probably factoring in the sharp overnight gains on Wall Street. Most of the day’s gains were, in fact, locked in during the first half hour of yesterday’s trading session.

"Every time it appears as though the bears are about to drag the market lower, the bargain-hunting bulls – who must firmly believe the RBA will cut rates again – are there to bid the market back up," said Australian Stock Report head of research Chris Conway, as quoted by The Sydney Morning Herald.

Indices and sectors

The benchmark S&P/ASX 200 on Monday rose 44.4 points, or 0.8 per cent, and closed at 5,842.1, while the broader All Ordinaries index was up 41.3 points, or 0.7 per cent, at 5,811.

The significant gaining sectors were telecommunications services (+1.63 per cent), energy (+1.46 per cent), financials (+0.92 per cent) and utilities (+0.72 per cent). The only two losing sectors were real estate investment trusts (-1.14 per cent) and healthcare (-0.61 per cent).

Stocks

Telstra Corporation Ltd (ASX:TLS) jumped 1.79 per cent to AU$6.25, as investors resumed their chase of high yield blue-chip stocks.

Energy stocks did very well across-the-board, boosted by a small recovery in crude prices. Woodside Petroleum Limited (ASX:WPL) moved up sharply by 1.77 per cent to AU$34.59, Santos Ltd (ASX:STO) rose over 3 per cent to AU$7.18, Origin Energy Ltd (ASX:ORG) gained 2.02 per cent to AU$11.63, and Oil Search Limited (ASX:OSH) was up 0.79 per cent to AU$7.65. Karoon Gas Australia Limited (ASX:KAR) was the top gainer on the S&P/ASX 200, shooting up over 14 per cent to AU$2.60.

The prominent miners, with the exception of Fortescue Metals Group Limited (ASX:FMG), which lost 1.99 per cent to AU$1.97, all ended higher. BHP Billiton Limited (ASX:BHP) was up 1.26 per cent to AU$29.77, Rio Tinto Limited (ASX:RIO) rose 0.24 per cent to AU$57.84 and Atlas Iron Limited (ASX:AGO) jumped 3.33 per cent to AU$0.155. Mount Gibson Iron Limited (ASX:MGX) shot up 6.98 per cent to AU$0.230, and was the second biggest gainer on the S&P/ASX 200. Gold miner Beadell Resources Ltd (ASX:BDR) was the third largest gainer on the S&P/ASX 200, ending up by over 6 per cent at AU$0.260. BHP Billiton Limited (ASX:BHP) released its plans for the demerger of its South32 business, and investors were enthused by the assurance that shareholders in the new company would receive dividends as high as 40 per cent of its underlying earnings.

The dovish RBA minutes were very bullish for the financials, particularly the large banks, which all clocked gains above 1 per cent. Commonwealth Bank of Australia (ASX:CBA) was up 1.76 per cent to AU$93.41, Westpac Banking Corp (ASX:WBC) jumped 1.47 per cent to AU$38.54, Australia and New Zealand Banking Group (ASX:ANZ) gained 1.01 per cent to AU$35.91 and National Australia Bank Ltd. (ASX:NAB) rose 1.27 per cent to AU$38.42.

Retailers’ stocks closed mixed. Woolworths Limited (ASX:WOW) lost 0.20 per cent to AU$29.34, and Myer Holdings Ltd (ASX:MYR) fell sharply by 1.57 per cent to AU$1.57. The latest report on Myer Holdings Ltd (ASX:MYR) by Citi recommends that the retailer should shut underperforming stores and invest over AU$20 million to boost customer service and staffing levels, thereby driving better foot traffic in its stores. “To allow for an earnings reset, Myer would need a more flexible balance sheet,” said Citi retail analyst Craig Woolford. “A rights issue for AU$315m could pay off most of its debt. However, such a large equity issue issuance would need to be deeply discounted,” he added, as quoted by The Australian.

Economic news, currency and insight

The minutes from the Reserve Bank of Australia’s March meeting showed that the bank, despite being concerned about rising housing prices in Sydney and Melbourne, was willing to consider further interest rate cuts, subject to evidence that the earlier interest rate action in February was having the intended effect. "In considering whether or not to reduce the cash rate further at this meeting, members saw benefit in allowing some time for the structure of interest rates and the economy to adjust to the earlier change," the RBA said in its minutes, according to The Sydney Morning Herald. The RBA held off from a much-anticipated, second rate cut at its March meeting.

The RBA minutes also said that interest rate action by central banks in other countries had imbued strength to the Australian dollar "above most estimates of its fundamental value, particularly given the significant declines in key commodity prices." That had a bearish impact on the Australian dollar which slipped almost a quarter of a cent, reaching 76.19 US cents after the minutes were released, according to The Sydney Morning Herald.

The ANZ-Roy Morgan weekly consumer confidence survey showed that a drop in the unemployment rate had lifted consumers’ morale. The weekly confidence reading rose by 0.5 per cent to 110.8 points. "While rising house prices, relatively low petrol prices and low interest rates may be helping consumers feel more positive about their own finances, households remain concerned with the economic outlook in an environment of low wage growth, government budgetary strains and a soft labour market," ANZ chief economist Warren Hogan said, according to The Daily Telegraph.

The US Fed commenced its two-day monetary policy meeting on Tuesday. The meeting is likely to be crucial in interpreting the Fed’s interest rate strategy, and the US dollar strengthened against most currencies overnight. Understandably, the Australian dollar is under pressure, and at 07:00 this morning (AEDT), the Aussie was trading at 76.18 US cents, down from 76.29 US cents yesterday, as per The Australian.

Overnight on Wall Street, stocks nervously anticipated the results from the Fed meeting. The Dow Jones Industrial Average fell 128.34 points, or 0.71 percent, to 17,849.08, the S&P 500 lost 6.91 points, or 0.33 percent, to 2,074.28 and the Nasdaq Composite added 7.93 points, or 0.16 percent, to 4,937.44, according to Reuters.

The Australian stock market is likely to open flat today given that the March ASX SPI200 Index (AP) Futures was up just 1 point at 5,837.00 at 06:59 this morning (AEDT).