ASX hits new high as US stock rally broadens; gold hits record

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The Australian sharemarket has soared to a new intraday record as investors, betting that the US Federal Reserve will start cutting interest rates sooner rather than later, rush into the riskier corners of the market.

The S&P/ASX 200 rallied 80.2 points, or 1 per cent, to 8079.5 at 1pm, led by sharp gains in the interest rate-sensitive sectors of real estate investment trusts (up 1.58 per cent) and information technology (up 1.63 per cent).

James Hardie (up 5.41 per cent) was the best-performing mega-cap stock, followed by plumbing and bathroom products supplier Reece Australia (up 4.42 per cent) and gold miner Northern Star Resources (up 4.19 per cent).

Seek fell 1.86 per cent, recording the sharpest drop among large-caps, followed by Yancoal (down 1.68 per cent) and JB Hi-Fi (down 1.33 per cent).

BHP fell 0.07 per cent at midday after chief executive Mike Henry told the market on Wednesday that the mining giant had achieved its 2024 financial year production guidance for all commodities.

Meanwhile, buy now, pay later (BNPL) operator Zip Co entered into a trading halt after announcing a $267 million capital raising to pay down its debt.

The local bourse was sitting comfortably over the 8000 mark on Wednesday after losses by miners, consumer discretionary companies, and technology firms dragged the market lower on Tuesday.

Overnight on Wall Street, the S&P 500 climbed 0.6 per cent to top 5660, setting its 38th record this year. The Dow Jones Industrial Average jumped 1.9 per cent, while the Russell 2000 small-cap index gained 3.5 per cent, having its biggest five-day run since April 2020. The Nasdaq 100 added 0.2 per cent.

Wall Street extended a pattern of money rotating into small caps and out of the mega-cap “safety” since last week’s soft inflation data. Over the past four sessions, the Russell 2000 index of small firms has beaten the Nasdaq 100 by almost 12 percentage points — a feat not seen since 2011. An equal-weighted version of the S&P 500 — where the likes of AI giant Nvidia carry the same heft as discount store owner Dollar Tree – outpaced the US equity benchmark. That index is less sensitive to gains from the biggest companies, providing a glimpse of hope the rally will broaden out.

“Rotation is the name of the game,” said Andrew Brenner at NatAlliance Securities. “This is consistent with the increased perception of cutting rates.”

To Solita Marcelli at UBS Global Wealth Management, if the Fed can cut rates significantly in the context of a soft landing of the US economy, there will be better prospects for a re-acceleration in earnings growth for lower-quality and cyclical segments of the market.

Jose Torres from Interactive Brokers cited another potential reason for the rally in smaller firms: they tend to be domestically oriented and perceived to benefit “disproportionately” if Donald Trump wins the election.

Treasury 10-year yields fell seven basis points to 4.16 per cent. Gold climbed 1.9 per cent, hitting a record high amid the growing hopes for Federal Reserve rate cuts and ramped-up bets on a second Donald Trump presidency, which could bring more geopolitical instability and boost safe-haven assets such as bullion.

Traders also waded through earnings. Bank of America rose after saying net interest income would climb by the end of the year. Morgan Stanley dropped as results from its wealth business fell short of estimates. Charles Schwab warned it would have to shrink to protect profits.

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The S&P 500 Index is barrelling toward its longest stretch without a 2 per cent decline since the 2007 global financial crisis. The index’s current bull run has added $US18 trillion ($26.7 trillion) in market value since it touched its nadir in October 2022.

Equity market strength has been underpinned by optimism that the economy has withstood the worst of Fed tightening. In this regard, Tuesday’s better-than-estimated US retail sales report was a “healthy” development, said Bret Kenwell at eToro. It’s better to see the Fed cutting rates on falling inflation than to see the central bank rushing to bolster a weakened economy, he noted.

While the broadening out in the US stock rally is seen as a positive sign, the surge in small caps in such a short span is showing signs of overheating. In only five days, the Russell 2000 has jumped over 10 per cent — hitting the most-overbought level since December.

Craig Johnson at Piper Sandler says it is too early to determine whether a sustainable rotation into smaller stocks can be maintained. More time and technical evidence are needed to confirm sustainable broadening participation that can lift the market higher is under way.