RBA rate cut would see yield stocks return to favour

Resource stocks lead the way but RBA rate cut would see yield stocks return to favour

By Ric Spooner (Chief Market Analyst, CMC Markets)
4 June 2013

In what has been common behaviour for the Australian stock market recently, resource stocks have moved in the opposite direction to “defensive, dividend yield stocks”. In today’s case investors have been switching out of yield stocks and into the major mining companies. The net result has been to leave the overall index reasonably balanced and fluctuating around yesterday’s closing level.

Today’s rally in resource companies is being driven by US monetary policy and, ironically, by a significant weakening in the US, ISM manufacturing index. While a weaker manufacturing index in the world’s largest economy might normally trigger concerns about commodity demand, in this case it has cast doubt on the possibility that the Fed will begin to taper monetary policy in the near term. The net result was a rally in commodity prices based on a weaker US Dollar.

Domestically, the RBA looks likely to leave rates on hold this afternoon given a trend improvement in building approvals and retail sales over the past few months and with the Aussie Dollar falling at long last. However, the Bank will maintain an easing bias in light of the slack to be picked up in other areas of the economy as spending on mining investment tapers off.

Looking at the range of possibilities from this afternoon’s decision the only real scope for surprise comes from the possibility that rates are cut today. Although that outcome would indicate the Bank is more concerned about the outlook than many currently they are, the likely market impact would be higher stock valuations based on lower yields on interest bearing investments.

www.cmcmarkets.com

ENDS

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