Investors around the world have a lot to thank Rio Tinto for.
The $A44 billion bid for Alcan, which looks like succeeding,changed sentiment in stock and credit markets late last week.
The gloom flowing from the dodgy subprime lending and the financial derivatives supporting them, changed with the Rio bid.
Stockmarkets jumped, especially in the US, where the gloom was greatest. In Australia sentiment switched, but our rebound on Friday was far more circumspect…although we still closed higher.
On Friday, the Dow ended at a record 13,907.25, the Standard & Poor's 500 index set a new high at 1,552.50. The Dow rose 2.2 per cent, the S&P 500 1.4 per cent and the NASDAQ gained 1.5 per cent.
The Australian market hit highs on Friday, the All Ords finishing up 0.66 per cent at 6,425, with the ASX 200 up a similar amount at 6,389.4.
Rio ended lower at $101.30.
The change in sentiment was dramatic: the gloomy outlook for the downgrading of billions of dollars of junky subprime-based financial derivatives and poor warnings from big US retailers like Sears and Home Depot all contributed.
US Government bond yields fell sharply as investors sought a bit of safety, and it looked like the outbreak of nerves we saw in early June was lining up again to rattle confidence.
But then came the old fashioned cash 'knock-out' offer from Rio, which forced Alcoa from the bidding duel, leaving it exposed to a possible bid for the likes of BHP Billiton, perhaps Xstrata, or CVRD of Brazil.
Investors liked the traditional market consolidating bid from a large listed company, instead of one from a private equity group, or groups, which would issue more junky bonds and remove the target from the exchange.
Disappointing US retail sales data on Friday had no real impact on the re-born optimism. That will be challenged this week with some important figures on inflation and testimony to Congress by Fed Chairman, Ben Bernanke.
Currency markets might be the place to keep a weather eye on this week. The Aussie dollar climbed past 87 USc on Friday night, the dollar fell to yet another low against the euro and was at a 26 year low against the pound.
US bonds rose back to 5.10 per cent, for the 10 year security, up from the day before, but still down 9 basis points on the week.
For US stocks it was the third straight up week.
The Rio bid for Alcan left Alcoa (and its 40 per cent affiliate, Alumina) exposed to possible corporate pursuit.
Alcoa hit an all-time high and company revealed $US49 billion in buybacks on Friday, with GE expanding its program to $14 billion and ConocoPhillips, the third-biggest US energy producer said it would buy back $US15 billion of shares. Johnson and Johnson will buy up to $US10 billion of its own shares.
Warren Buffett is a big investor in J&J and he was rumoured to be sniffing around Hovnanian Enterprises, a large US homebuilder.
Investors wondered if this was an example of Buffett calling the 'bottom' of the housing and market slump for housing and homebuilders. But he also has homebuilding interests and supplies companies in his Berkshire Hathaway group
