Global markets were higher overnight with the Dow Jones Index at record levels, after US Federal Reserve Chair Janet Yellen said interest rates hikes would be gradual and will not have to rise much further to reach a neutral level.
Yellen, in a prepared testimony delivered to Congress, said the Fed would wind down its massive bond portfolio while keeping a close watch on the low inflation. Overall the announcement was slightly dovish, which saw a favourable reaction across share markets.
As we touched on yesterday, US earnings season kicks off at the end of the week. Earnings will be as important as ever against the backdrop of rising interest rates, as without earnings growth it is hard to see valuation multiples staying at current highs (which would imply prices will likely fall).
While both the ASX and NZX lost ground yesterday, the mining sector held up relatively well as iron ore continued to rebound.
Stock in Focus: Rio Tinto (RIO.AX) / Iron Ore
Iron Ore (Australia’s largest export) prices plunged from two-year highs in February this year (as seen below). Over the last month, Iron ore has recovered and is expected to stabilise around this level.
Iron Ore Price
Mining giant Rio Tinto (RIO.AX) has seen it shares recover after iron ore prices look to have bottomed out in early June – Iron Ore makes up about 60% of Rio’s revenue. There was also positive investor sentiment as the market is expecting significant growth from reinvestment of the proceeds from sale of RIO’s Australian Coal assets to Yancoal for a total price of $2.69 billion. Rio’s balance sheet also continues to be strengthened with gross debt reduced by another $2.5 billion to reduce future finance costs, in the midst of rising interest rates.
We are currently HOLD rated and believe RIO is more or less fairly priced at the moment reflecting the stabilisation of commodity prices.
We updated our views on RIO yesterday and members can login to read our latest reports on Rio Tinto.
Australia & New Zealand Market Movers
The Australian share market was sharply lower yesterday (ASX 200 index -0.96%) in a broad based sell-off following a choppy session in global markets.
The New Zealand market fell on Wednesday (NZX 50 index -0.56%) led lower by Chorus and Air New Zealand, while Ryman Healthcare and NZX shares were higher. The NZ market followed the Australian index lower, and trading has been lighter as institutional news is scarce ahead of the August financial reporting season. In stock news, Kiwi Property Group was halted at $1.385. Retail investors took up half the shares available to them in their component of a planned $161 million capital raise, which the property investor wants to help fund expansion projects in Auckland.
3 Things Markets Will be Watching this Week
1. How the US Technology sector trades following recent volatility.
2. Fed Chair Janet Yellen will give her testimony to the House of Representatives late in the week
3. US Earnings season kicks off on Friday.
Have a Great Day,
Team