What Happened to the ASX today?
The ASX 200 rose by more than 2% today. All sectors performed well, with the materials sector performing the best, up over 4%. The energy sector also did well, up 3.5% while financials were up nearly 2%. There was no sector in the red for the day.
Why Did This Happen to Australian stock market?
Poor employment data out yesterday and a speech from RBA Governor Glenn Stevens this morning suggest the Aussie economy is very weak and you’re going to see more interest rate cuts this year. The stock market loves cheap money and ‘discounts’ these rates cuts into prices immediately. Unfortunately, stocks are not rising because the economy is improving. In fact, it’s getting worse.
What now for the Aussie share market and interest rates?
The lower interest rates fall, the higher the Aussie stock market will rise. As long as the economy doesn’t fall into recession and impact company earnings, it looks like the market could keep heading higher for now.
But this is turning into a very speculative market and the higher it goes without an improvement in the economy, the risker things will get. Investors are buying stocks for yield because interest rates are so low. This is a rational strategy in the short term but it simply makes the Australian share market an increasingly risky place to invest.
for The Daily Reckoning