The Two Reasons Why Australian Stocks Went up Yesterday

What a day.

The S&P/ASX 200 index gained 1.5% yesterday.

The bull market is in full flow.

Only it isn’t. Even after yesterday’s big gain, the index is still 99 points below the recent April high. And the index was higher than this just last week.

So if you look at the market today and worry you’ve missed out, stop worrying. You haven’t missed anything. Remember, we’ve pegged this market to hit 7,000 points by January of next year. Now is exactly the time to buy before the market really hits its straps…

It was a big day for Australian stocks.

Wesfarmers [ASX:WES] gained 2.75%.

Rio Tinto Ltd [ASX:RIO] added 2.56%.

Macquarie Group [ASX:MQG] put on 1.71%.

And Australia & New Zealand Banking Group [ASX:ANZ] went up 1.67%.

What caused it all? Why would Aussie stocks go up after falling since last Friday?

If you read the mainstream press they’ll give you a reason. But here’s the real story — don’t tell anyone — it’s the same story as it has been all year: low interest rates.

It’s the interest rates in the West

We can’t help but chuckle.

Theories abound for why Australian stocks went up yesterday.

One theory we saw in the Australian was that it was all down to the higher-than-expected Aussie trade deficit.

Another was that it was because of the stronger Australian dollar (of course, in a few days you’ll probably see stories telling you that the market has gone up because of a weaker Aussie dollar).

But the reality is much easier and more obvious than that — interest rates.

It continues to amaze us that so few people get this. They keep looking for other reasons why stocks are going up — consumer confidence, unemployment, inflation, business confidence, and so on.

You name it, they’ve used it as an excuse.

But is there another reason for the Aussie market’s strong day? Does the rebound in China and emerging markets — or frontier markets as we call them — have anything to do with it?

Well, we can’t with a straight face say that Macquarie, ANZ and Commonwealth Bank of Australia [ASX:CBA] shares went up yesterday because of emerging markets.

These stocks and most others on the ASX went up because of low interest rates. And if we’re right about where interest rates are going (down) we’ll tell you right now that Aussie stocks will keep going up…all the way to 7,000 points.

But what about BHP Billiton [ASX:BHP] and Rio Tinto shares? That surely has to do with frontier markets, right?

No doubt.

China holding back ‘frontier’ markets

There is a big change happening right now in world markets.

This change is on a scale that few can comprehend. That’s why we’ve taken to calling it a megatrend. It’s why we’ve even organised a ‘short course’ to cover the details of this phenomenon.

You can check out the details and enrol for free here.

Although we have no doubt that this megatrend has benefited from low interest rates, it’s now reached the stage where it has its own momentum.

And you only have to read the report in yesterday’s Financial Times to get an idea of how much momentum is behind it:

‘[Macau] recorded per capita gross domestic product of $91,376 in 2013, behind Luxembourg, Norway and Qatar. The Chinese territory overtook Switzerland – which was worth $80,528 per person – with an 18.4 per cent jump that was driven by buoyant gaming revenues.

‘Since Macau was returned to China in 1999, its economy has grown 557 per cent as the territory of 607,000 people has been transformed into a gambling mecca.’

Macau isn’t the only booming market. And neither is China. In fact it’s our view that China is only a part (albeit an important part) of the overall emerging markets trend.

If anything, the Chinese market as a whole has held back ‘frontier’ markets.

You can get confirmation of that simply by looking at a one-year chart. The following chart shows China’s CSI 300 index (blue line) compared to the iShares MSCI Emerging Markets Index ETF [NYSEARCA:EEM] (red line):

In terms of its importance on world trade China is huge.

Read the rest of this article at Money Morning