Big sectors lead the way

10:40 AEDT, Wednesday 25 January 2017

Big sectors lead the way

By Ric Spooner (Chief Market Analyst, CMC Markets)

A combination of record highs for the US S&P 500 and strong metals prices raises the possibility of animal spirits returning to the Australian stock markets after a couple of weeks on the sidelines.

Mining stocks are again leading the way higher today as investors scrabble to catch up with the positive impact of persistently higher metals prices. The ASX 200 index is also benefitting from support for bank stocks after a strong session for the financial sector on US markets last night. However, there are signs that investors are making way for materials stocks in their portfolio by reducing exposure to high growth stocks like CSL and Domino’s Pizza which have weekend in early trade

Rio’s sale of its thermal coal assets has helped improve the mood. The market is pleased with the price and timing of the sale which looks to have extracted good value from the resurgence in coal prices but is seen as a sensible exit from an industry in long term decline. Assuming the sale receives regulatory approval, it will also see further improvement in Rio’s balance sheet adding to the likelihood of funds being returned to shareholders.

BHP’s quarterly production report continues the trend of solid operational performance by the major miners. The need for unplanned maintenance at Olympic Dam and a 2% cut in copper guidance for the year is a minor blemish. The market is not fazed by planned reductions in oil production due to lower prices that are likely to pay off over the long term as oil prices improve.

Currency traders will have a watching brief on release of the Australian CPI data. Stronger than expected data in underlying measures of inflation would provide the RBA with comfort that inflation will return to its 2-3% target range. This would remove inflation as an impediment to the RBA beginning to lift rates if local and global growth rates improve as we move into 2018.

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