Local Earnings, US GDP | Rio Tinto Rallies

30 July 2021

Global markets were higher overnight, (S&P 500 index +0.4%) with US markets absorbing another wave a healthy result, bolstering the markets despite weaker than expected economic data.

US GDP figures for the second quarter came in at up +6.5%, missing expectation but an indicator the economy is still performing well, while 400,000 people filed initial claims for unemployment benefits for the week ended July 24.

Paypal and Facebook fell -6.2% and -4% after guiding that growth would start to slow down. Yum Brands (+5.8%), Mastercard (+1.7%) and Ford (+3.4%) traded higher on better earnings results – while mobile chip make Qualcomm jumped +5.8% after a strong earnings result and reassured investors that chip supply will improve by the end of 2021. 

The Hong Kong Market (Hang Seng Index +3.3%) continued to rebound, as investors bought the recent dip from the recent sell off. European stocks were higher (Stoxx 600 index, up +0.5%) as investors welcoming corporate earnings and positive economic data – with Eurozone economic confidence index rising to 119.0 beating consensus. 

Rio Tinto (RIO:ASX)

Iron ore miner Rio Tinto jumped +1.5% yesterday reaching a new record high as the market reacted to its bumper profit and record dividend for the first half of the 2021 financial year. Elevated iron ore prices helped the miner deliver a record US$12.2 billion first half underlying profit and broke another record with a US$5.61 per share dividend – we forecast RIO is paying a 7% yield. 

Currently the global economic rebound and heightened demand from China (with supply challenges in Brazil) is likely to fuel elevated iron ore prices for some time that will likely remain favourable for RIO even at current operating levels. While there is commodity price related risk when investing in mining companies, on balance we maintain our BUY rating given our optimistic view on the global economic recovery and RIO's healthy cash generation and dividend pay-out ability.


Australia & New Zealand Market Movers

The Australian market rallied yesterday (ASX 200 index +0.5%) following a number of strong company updates – led by the tech sector was the strongest followed by materials.

Buy now pay later heavyweight After pay helped the tech sector rising +3.1%, followed by Next DC rose +3.3% after revealing it acquired another site in Sydney to build a datacentre, offering optionality to expand its offering to key Hyperscale customers.

IRESS, a financial technology business surged +13.9% after revealing it had received a rebuffed and a sweetened second takeover bid from EQT.

Macquarie was a touch higher following their AGM highlighting that its 2022 first quarter was ‘significantly up’ on the same corresponding period last year, and lowered its dividend payout rate. 

The New Zealand market (NZX 50 index, up +1.1%) climbed higher as investor sentiment improved.
Mainfreight led the market higher jumping +4.6% following their AGM, announcing trading conditions across the business was strong.

A2 Milk was up +2.5%, as the stock attracts buyers given the business is still profitable and has plenty of cash reserves. Fast food retailer Restaurant brands was up +0.7% after reporting second quarter sales were up more than +50% on the previous period which was heavily impacted by pandemic.

Currency Watch NZD/USD
The Kiwi recently rejecting lows below 69 cents has been a positive sign for bulls looking to stay in charge of this trade, as the US dollar also lost ground post a dovish FED. Bulls also cheered the Chinese headlines with significant weekly losses and Australia being in headlines for Covid woes.

The 4 hour time frame pictured below shows the recent consolidation on the pair, and volatility around the 70 cent mark, as investors wait for near-term direction, weighing up recent declines in the Confidence Index against prospects for inflation cooling in the US and possibly then a weaker US Dollar towards year-end. The chart illustrates key resistance areas bulls could target to build positions above 70 cents, with the first being confirmation of a break, close above 70.472c and then 70.986c.

Until we see a break of these areas, markets could remain undecided for a short time longer. 

3 Things Markets will be Watching this Week

  1. Key events this week include huge week for earnings in the US with 180 members of the S&P 500 index  scheduled to provide quarterly updates including Tesla, Apple, Microsoft, Alphabet, Amazon, PayPal and Caterpillar.
  2. The latest US Federal Reserve decision Wednesday. Economic data; CPI (inflation) prints in the Eurozone and Australia, 2nd quarter economic growth (GDP) data in the US and Eurozone.
  3. Locally, earnings season kicks off with Rio Tinto’s 1st half result along with a host of quarterly production reports and AGM’s to be held including Macquarie Group, Mainfreight and Ryman Healthcare.
Global markets were higher overnight, (S&P 500 index +0.4%) with US markets absorbing another wave a healthy result, bolstering the markets despite weaker than expected economic data.

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