Australia’s share market has jumped to its highest level ever — exceeding the 7,000-point milestone for the first time.
That was despite a lukewarm lead from Wall Street after the United States and China signed their long-awaited “phase one” trade agreement.
The ASX 200 closed 0.7 per cent higher at 7,041 points, while the broader All Ordinaries index gained 0.6 per cent to 7,158.
The gains build on a strong start to 2020 — the ASX has been the best performing developed economy market since the year began, having surged 5.3 per cent over the past fortnight.
“I think part of the reason [for the market rally] is that investors are getting excited about the central bank easing again … but not for the right reasons,” said Pepperstone’s head of research Chris Weston.
The Reserve Bank has aggressively cut interest rates to historic lows over the past few months, in an attempt to stimulate Australia’s slowing economy.
As a consequence, Australians have been earning lower interest on their savings — not much better than zero per cent.
So in the hope of earning a “decent” return elsewhere, they have increasingly been investing in the share market — driving its value to “overstretched” proportions, according to Mr Weston, with the ASX’s price-to-earnings ratio at a very expensive 18.2x.
He also explained the market has also been driven higher by a flood of “liquidity”, since lower interest rates have made it a lot cheaper for investors to borrow money.
Best and worst performers
The market was boosted, in particular, by the major banks (the Commonwealth Bank, Westpac, ANZ and NAB) which rose between 0.7 and 1 per cent each.
Technology and healthcare companies were some of the best performers, including Polynovo (+5.3pc), Mayne Pharma Group (+4.4pc), WiseTech Global (+4.1pc) and Altium (+4,3pc), while the top performing stock among the top 200 was Challenger (+5.6pc).
The most expensive stock on the Australian market, biotech company CSL, provided a major boost the healthcare sector. It closed at a fresh high of $300.89.
Fading levels of excitement
Wall Street briefly hit record highs after the preliminary trade deal was signed by US President Donald Trump and China’s Vice-Premier Liu He on Wednesday morning (local time).
But the major indices pulled back after that as investors got over their initial excitement.
The S&P 500 and Nasdaq briefly fell into the red in afternoon trade, but managed to recover by the closing bell — posting a 0.2 and 0.1 per cent gain respectively.
The Dow Jones index closed 0.3 per cent higher at 29,031 points.
“We had a historic signing but there is nothing in there that was fresh, so I think the theme is going to be [corporate] earnings,” said Andre Bakhos, managing director at New Vines Capital.
The centrepiece of this preliminary trade deal is a pledge by China to buy an extra $US200 billion worth of US farm products, and other goods and services, over two years.
Although the US agreed to roll back some of its punitive tariffs, the vast majority (on $US250 billion worth of Chinese goods) will remain, as Mr Trump wants to use that as leverage when negotiating a more substantial “phase two” deal with Beijing, later this year.
US markets were also dragged down by financial heavyweights Bank of America (-1.8pc) and Goldman Sachs (-0.1pc) after they announced disappointing quarterly results.
Bank of America Corp reported a better-than-expected quarterly profit, but warned of weak net interest income in the first half of this year.
Goldman Sachs reported a bigger-than-expected slide in profit as it set aside another $US1.1 billion money to cover legal costs related to the 1MDB Malaysian corruption scandal.
US-China tensions will return
Meanwhile, oil prices slid on doubts the much-hyped trade pact will spur world economic growth and boost demand for crude.
However, gold prices rose as details of the US-China deal failed to soothe investors’ concerns about future trade conflicts — particularly since the Trump administration has not completely removed its tariffs on Chinese goods.
“Since this deal is only a truce, without cutting import tariffs materially, the impact is limited,” said ANZ economist Hayden Dimes.
“As phase two negotiations will track the progress of phase one, uncertainty remains.
“We think the tension will re-escalate later this year.”