Here’s why rising US bond yields should help propel the Australian share market even higher

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Everything you need to know about the Australian share market today in less than three minutes… from The Capital Club

What’s the big deal?

The ASX 200 Index is enjoying a strong day, up 45 points or 0.74 per cent in early Thursday afternoon trade.

The gains in the Australian share market today are coming largely off the back of the Dow closing at another all time high, and a lower Australian dollar.

The US economy is humming along very nicely. Federal Reserve chairman Jerome Powell said the current combination of low inflation and low unemployment may last for some time.

Directionally, where the economy goes, so does the stock market, hence the Dow’s new record high.

Of course, it’s not all stars and stripes, because a booming economy raises expectations the Fed may be forced to accelerate its pace of interest rate hikes to ward off inflationary pressures.

That’s why US 10-year bond yields have jumped to a 7-year high at 3.18 per cent.

By comparison, the equivalent Australian bond yield is 2.71 per cent, reflecting our slower economic growth and that our interest rates are expected to remain on hold for up to two more years.

What does this mean?

Higher bond yields ultimately mean increased borrowing costs, which is why the share prices of companies that rely on the debt markets for funding — like Sydney Airport Holdings (ASX:SYD) and Transurban Group (ASX:TCL) — are weaker in this strong market.

Companies that derive their revenue from the US are beneficiaries of a lower Australian dollar. BHP Billiton (ASX:BHP) shares have been on a tear in recent times, up around 13 per cent in the last 3 weeks, now trading above $35. That said, not everyone will be pleased with the rise in BHP shares.

Bigger picture, a strong US economy is good for the global economy, including China.

Australia sends a lot of iron ore and coal to China, and China sends a lot of cheap goods and high-spending tourists to visit our country. A strong China is good for Australia.

What should you do?

Carry on.

Enjoy the somewhat rare upswing in the ASX 200 index.

While the Dow has been partying, hitting record highs, it has been tough going for the Australian share market.

So far in 2018, the S&P/ASX 200 Index has gained less than two per cent. I’m not surprised, given the headwinds bank shares are facing on multiple fronts. Earlier this week Westpac Banking Corp (ASX:WBC) shares fell to a 5-year low.

Ben Griffiths, co-founder of small and mid cap fund manager Eley Griffiths, recently said he sees plenty of upside for the share market.

Mr Griffiths says small cap stocks often rally late in the stock market’s advance. Click here to find a selection of shares to buy taken from some of the country’s top stock pickers.

BHP Billiton shares don’t look cheap, but these 3 shares do…

Combining countless hours of research with over 30 years of hands-on stock market investing experience, The Capital Club’s founder Bruce Jackson has just published his definitive list of 3 Cheap and Good ASX Stocks for 2018.

BHP Billiton was not one of them, but the list does include one tiny gold mining stock, and the company one top fund manager calls the cheapest stock in the ASX 100.

Find out why these 3 Cheap and Good Stocks could be better buys than BHP Billiton. But you better hurry… these stocks may not stay cheap for long.

See the 3 stocks

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Contributors to this article may own shares in some of the companies mentioned in this article. The Capital Club has a thorough disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
Bruce Jackson has 30 years of hands on investing experience. He is passionate about stock market investing, running his own portfolio and SMSF. His focus is on small cap growth stocks. You can contact Bruce at brucej@thecapitalclub.com.au