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China's shift on yuan to push stocks up

The Australian share market will make modest gains in opening trade as investors digest China's exchange rate policy shift and fund managers shore up investment positions as the financial year ends.

China's decision to end the yuan's two-year-old peg to the US dollar one week before the Group of 20 summit will defuse tensions at the summit and shift the spotlight back onto Europe's sovereign debt issues, CommSec chief economist Craig James said.

The decision, communicated in a statement on Saturday, would have more impact on the local equity market if China had disclosed the timing of the policy shift, he said.

"But it is a vote of confidence in the Chinese economy that they're likely to accept a stronger currency," he said.

"Potentially it also means good news for Australia because if the Chinese currency does strengthen it will improve their ability to buy metals and commodities generally from Australia."

The local equity market will probably open between 20 and 25 points higher on the news and then take its direction from US futures and Asian markets when they open around midday, he said.

The benchmark S&P/ASX200 index closed 24.6 points, or 0.54 per cent, higher on Friday at 4551.9 points, while the broader All Ordinaries index added 27.1 points, or 0.6 per cent, to 4574.1 points.

Offshore markets offered a mixed lead for the local market, with base metals easing by up to two per cent across the board in the US on Friday, oil rising and gold finishing at a fresh record high.

On Wall Street, the Dow Jones Industrial Average climbed 16.47 points, or 0.16 per cent, to 10,450.64 points, while the broader Standard & Poor's 500 index firmed 1.47 points, or 0.13 per cent, to 1,117.51.

The tech-laden Nasdaq composite added 2.64 points, or 0.11 per cent, to 2,309.80 points.

Local resources stocks will likely make modest gains on cautious optimism toward China's decision, Mr James said.

The final week of the quarter and financial year is likely to see stocks edge higher as fund managers put some window-dressing around their portfolios to improve the year-end returns, he said.

"With the share market up 16 per cent, if fund managers are mostly in cash they may get the wrath of their investors."

The UK government is expected to hand down a tough emergency budget on Tuesday to address that country's debt concerns.

As well, European leaders will this week release the results of stress tests undertaken on European banks.

"That will be very important as we will get a concrete assessment of the state of the European financial system," Mr James said.

Major local economic news will be sparse in the week ahead, with highlights confined to the Australian Bureau of Statistics (ABS) release of new motor vehicles sales data for May on Monday along with import figures, he added.

The Open Market Committee of the US Federal Reserve will hold a two-day meeting starting on Tuesday to review its interest rate policy.

In local corporate news, a raft of annual meetings will be held for mostly mid to small-cap companies, including Sigma Pharmaceuticals Ltd on Monday, Envirogold Ltd on Tuesday and Queensland Mining Corporation on Thursday.

Aphrodite Gold Ltd and Golden Iron Resources Ltd will both list on the local bourse on Friday.

Join the CIO Australia group on LinkedIn. The group is open to CIOs, IT Directors, COOs, CTOs and senior IT managers.

More about: ABS, Australian Bureau of Statistics, CommSec, Dow Jones, Open Market, Sigma, Sigma Pharmaceuticals, US Federal Reserve, Wall Street

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