AN encouraging start to the US corporate reporting season sparked a rally on world equity markets yesterday.
Investors took it to be a sign of stability in the global economy and possibly the turning point they have been looking for to bring back optimism.
The Australian sharemarket and dollar both rose after the first US companies to post their second-quarter earnings beat the market's expectations, boosting investor sentiment.
The benchmark S&P/ASX 200 index climbed 82.1 points, or 1.87 per cent, to 4462.4, while the broader All Ordinaries index rose 77.3 points, or 1.76 per cent, to 4477.3.
The local currency finished the session at US88.17c, up from Tuesday's close of US87.04c.
Yesterday's performance was helped by the federal government's announcement that the budget was on track to return to a surplus of $3.1 billion in 2012-13, compared with a forecast of $1bn in the May budget.
The sharemarket's gains followed a strong lead from Wall Street, where the Dow Jones Industrial Average surged 1.44 per cent to 10,363.02, marking the sixth-straight daily gain.
But sceptics were quick to point out that trading volumes had been low, suggesting there was a lack of conviction behind the rally.
Still, Wall Street's gain provided a shot of confidence for regional markets, with Japan's Nikkei 225 index up 2.71 per cent and Hong Kong's Hang Seng rising 0.64 per cent.
Nomura Australia chief economist Stephen Roberts said while it was still early days for the US reporting season, the tone so far had boosted optimism globally.
"The earnings reports we have had so far have almost all beaten expectations," he said.
"People have been watching the outlooks on those statements as well and so far . . . it has not been overly cautious, which is great."
In the US on Tuesday, Alcoa's second-quarter performance beat the market's forecast, after the aluminium producer experienced stronger demand in almost all of its markets, suggesting a possible improvement in the global manufacturing sector. Railroad-operator CSX also reported a pick-up across all major markets, with a 47 per cent profit increase.
The positive news continued after the market closed yesterday, with computer chipmaker Intel reporting a record quarter amid rising demand from businesses around the world.
RBS equities strategist Greg Goodsell said positive results from US companies augured well for Australia's profit reporting season next month. "Historically, the lead we get from the US reporting season often follows through down here," Mr Goodsell said.
"We are looking for a pretty good set of numbers -- consensus is looking for about 13 per cent earnings per share growth for the 2010 year."
Wavestone Capital principal Ian Harding said a "half decent" reporting season was likely to spark a rally in the local market.
"There is plenty of bad news already built into our market ahead of reporting season and if it is half decent then we could see some relief coming through on stocks," Mr Harding said.
He said the local market appeared "unusually underpriced", given how mild most of the domestic issues were compared with some of the other major economies.
