Share market’s gains are second best in a decade

Since the beginning of July, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has risen over 6.4%, driven predominantly by the strong recovery in the mining stocks.

The benchmark index has recovered strongly from the market’s dip between May and June – largely caused by suggestions that the US Federal Reserve would start tapering off from its bond buying program, as well as concerns regarding Chinese growth – and is now sitting less than 150 points (or around 2.6%) below its peak of 5,249.6 points in May.

The index’s gain since the beginning of July marks the second best start to a financial year in a decade – second only to the gains seen in 2009, which saw the index climb 8% following a poor start to the year with the global financial crisis.

As reported by The Australian Financial Review, the mining companies were the standouts for the month with the sector gaining an impressive 9.32%, despite strong signs of a slowdown in Chinese growth and demand for commodities.

Julia Lee, an equity analyst for Bell Direct, stated that “the bearish iron ore scenario predicted by many in the market has not eventuated. In fact, for the month, it rose 13 per cent to finish above US$130 a tonne. This has helped iron ore miners to bounce back.”

Furthermore, with signs that the Reserve Bank of Australia will lower the nation’s cash rate next week (with some experts predicting a further three rate cuts by Christmas), it is likely that we will see the Australian dollar fall further compared to the US currency. This would likely result in even greater gains for the miners such as BHP Billiton (ASX: BHP) and Arrium (ASX: ARI), which have both indicated that their revenues will increase substantially as the dollar falls.

BHP has suggested that its revenues could increase by $100 million per cent that the Aussie dollar drops, whilst Arrium expects between $10-12 million for each cent the dollar falls.

Since the beginning of July, BHP, Arrium, Rio Tinto (ASX: RIO) and Fortescue Metals (ASX: FMG) have climbed 13.6%, 34%, 12.8% and 25%, respectively.

Foolish takeaway

Although the last month has seen a spark return to the mining sector, investors need to remain aware that demand for commodities remains volatile, and therefore mining shares could experience sharp drops at any sign of bad news. Furthermore, a number of analysts have suggested that iron ore’s price hike is likely only temporary as Chinese firms restock their inventories.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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