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Investors welcome a return to 5500

The ASX 200 index looks likely to top 5500 today. It last saw this level just under a year ago, on 11 August 2015. This seems a modest result but it also represents a gain of around 17% from the February low and will be a welcome relief for many investors.

Stock markets are being driven higher by the US profit reporting season and by the potential for yet more central bank stimulus.

While quarterly US earnings are down on the same period last year, they are yet again outperforming analyst expectations. The US stock market ran up in advance of this possibility but positive surprises are allowing the S&P 500 index to grind higher, providing a positive lead for international markets.

A 10 year bond yield of 1.93% is also driving investors into stocks. This morning’s statement by the Reserve Bank of New Zealand makes a rate cut at its August meeting highly likely. Markets are anticipating more stimulus at next week’s Bank of Japan meeting and have a watching brief on tonight’s ECB meeting where it may signal future stimulus.  This global context of central bank stimulus has investors contemplating the possibility that Australian interest rates may yet fall by 0.5 to 0.75 % from current levels. That’s a context in which further upside in stock valuations is becomes a real possibility

The chase for yield is also lifting the stakes for next week’s Australian CPI release. It looms as a potential source of market volatility. Market outcomes could range from selling on dashed hopes of a rate cut if the inflation data is strong to buying in expectation of an Australian cash rate of 1-1.25% if inflation is particularly weak.

It’s been a great week for shareholders in supermarket stocks with Metcash up 7%; Woolworths up 4.6% and Wesfarmers up 2.5%. The upcoming announcement on the sale of Woolworth’s hardware assets is clearly a key event for investors in this sector.   

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