Global markets were little changed overnight as volatility remains depressed. A recovery for US banking stocks and a decent gain in Apple shares helped support the US markets.
Closer to home the ASX market index has broken out of a trading range to a 5-month high, led by a surge across mining stocks. Mining stocks had lagged in recent times, but positive comments around growth from Chinese officials over the weekend and strong Chinese import data saw the mining sector rally. The news also supported the price of iron ore (Australia’s largest export), which has been volatile in 2017 as illustrated by the chart below.
Iron Ore Price: USD/t
Stock in Focus: Rio Tinto (RIO:AX)
Mining giant Rio Tinto generates the majority of its revenues from Iron Ore, and hence its profits are linked to the iron ore price. Iron ore has traded around 3-month lows as investors worried over demand ahead of steel production cuts during the winter as China battles smog, as part of Beijing's campaign against air pollution. However, there was some relief over the weekend as data showed China's imports rose by a stronger-than-expected 18.7% in September, with iron ore volumes hitting a record.
Rio Tinto shares jumped +3.4% yesterday, leading gains across the major miners. Interestingly a growing number of short sellers are targeting mining heavyweight Rio Tinto as overvalued, and short positions (betting that the share price will fall) in Rio last week had risen to 9%, the highest level on record, according to ASIC's short position data, which dates back to 2010.
While the majority of Rio’s revenues are generated from iron ore, the mining giant's share price has held up relatively well. We believe this is in part due to Rio’s new focus on share buybacks and dividends, as we discussed earlier this month. We continue to prefer the larger more efficient and diversified miners such as Rio Tinto & BHP in terms of mining stock picks.
We are currently HOLD rated on Rio Tinto.
Australia & New Zealand Market Movers
The Australian share market started the week by adding to recent gains (ASX 200 index +0.56%) as the ASX broke out of its multi-month trading range on Monday as mining stocks sizzled on more indications that the Chinese economy remains robust. Resources jumped from the open and continued to rally through the day, with the sector buoyed by a sharp rise in the spot iron ore price on Friday night. The Energy sector was also well supported, as crude oil prices rallied for a second session. Banks climbed as well, providing a solid foundation for the ASX's gains on Monday.
The New Zealand market was basically flat on Monday (NZX 50 index +0.02%) as stocks including New Zealand Refining, Fletcher Building, and Spark New Zealand helped buoy the market, offsetting declines from half the benchmark index. There looked to be some profit taking across recent market darlings A2 Milk and Synlait. In company news, Fonterra downgraded its forecast milk collection in New Zealand due to the wet winter. Its Australian collection continued to track ahead of the 2017 season having picked up farmers unhappy with Murray Goulburn
3 Things Markets Will be Watching this Week
1. Quarterly US corporate profit announcements, with the level of the market making the current earnings season as important as ever.
2. Australian employment data is published on Thursday.
3. Minutes from the last Reserve Bank of Australia meeting are released on Tuesday.
Have a Great Day,
Team
