6 June 2020
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Big stock sell off averted! Can it last?

Peter Switzer
13 July 2017

Today is bound to be a good day for stocks and, as I pointed out on my TV show, we needed a positive night on Wall Street because we finished with the S&P/ASX 200 index around the support levels of 5673.8. If the Yanks woke up on Wednesday and went negative on us, we could expect a biggish sell off on our market today.

And how did it happen? Well, the most important woman in the world has spoken and gave financial markets what they wanted to hear.

The most important woman in the world? Angela Merkel? The Queen? The IMF’s Christine Lagarde? The richest woman? Gina Rinehart.

Nope, the woman who can make or break our stocks and our super funds, create booms or recessions and encourage or discourage the real world investment that creates growth and jobs for the jobless is the Fed boss, Janet Yellen.

And overnight she got it right, well, at least from the markets’ points of view.

Janet made her official testimony to Congress and the message was simple — interest rates will be raised, gradually. And there’s no intention to sell bonds too quickly, which would not only raise interest rates but take away money from the economy.

This is how CNBC summed up the market response: "We're getting a positive reaction to her testimony," said Jeff Kravetz, regional investment strategist at the Private Client Reserve at U.S. Bank. "What happened was she was more dovish than the market expected in her prepared remarks."

Meanwhile, the stock market certainly agreed with the Dow Jones, hitting a record intraday high, though it finished short of its all-time closing high. The most talked about market index in the world was up 123 points (or 0.57%) but the more important index, the S&P 500 Index, which looks at the USA’s top 500 companies, was up 17 points (or 0.73%).

But wait, there’s more.

The hi-tech Nasdaq index, which houses the great US company names of the online and computer world, rose 1.1%!

Yep, Janet got it right. Even Donald Trump, who’s not a Yellen fan, would have to have tweeted positively on her work.

She also inferred that rate rises won’t have to go as high as in the past because the world, post-GFC, has changed.

On Tuesday night on my TV show on the Sky News Business channel, I talked to John Edwards, who was once on our Reserve Bank board. He’s a respected economist and because of our higher indebtedness, I asked him whether interest rate rises would be more impactful on the economy, and whether that meant that we might not see rates go as high as they used to.

He was categorical in saying “Yes”. So it might be safe to guess that home loan rates might not go to 8% or 9% in this economic cycle. The top rate might be 6% or so, which means fears that our banks have over-lent and could face problems with the over-borrowed, as rates rise, might be overblown.

Proving she pleased the market was the fall in Treasury yields. It has been the rises over recent weeks that haven’t helped stock prices. Once again, this is good news for stocks and should help our market today.

If it doesn’t, even this positive optimist could start getting a bit worried about our stock market.

Janet leaves her top of the world money job in February. This first woman of finance (ever) looks set to end her term as an absolute winner!

Helping our market today could also be the news from other stock markets, with European markets rising strongly, as energy, construction, healthcare and mining stocks led the way. The Euro STOXX 600 index rose by 1.6%, with the UK FTSE up by 1.2%, while the German Dax gained 1.5%. Also, in London trade, shares in Rio Tinto rose by 0.8% and shares in BHP rose by 2.0%.

As I say, if our stock market doesn’t have a good day, I’ll be a little bit worried tonight. And that’s not my MO!

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