The weekly wrap: NAB leads bank stock rally

Over the last few weeks, Australian banks have taken a back seat to volatility in commodity prices and resource sector stocks. As commodity prices rose, peaked, and fell again, sparking a similar response in resource sector stocks, the big banks underperformed the ASX 200 on the upside and outperformed on the downside.

By last week a general feeling of nervousness descended over global stock markets as signs of an economic turnaround, particularly in the US, began to wane. Investors hastily exited risky sectors and returned to defensive sectors.

Then on Monday in the US, popular US financial sector analyst Meredith Whitney lifted what was once America's leading investment bank (but is now a commercial bank by government duress), Goldman Sachs, to a Buy rating. Suddenly, all hell broke loose.

Whitney's upgrade was significant to Wall Street, given she had gained notoriety as being the leading bank analyst bear right from the beginnings of the sub-prime crisis, and correctly so. Thus such a change of heart was a milestone. To top things off, Whitney even declared Bank of America - a "too big to fail" money centre which would have indeed failed without government intervention - to be looking inexpensive given the value of its underlying assets.

This was indeed a turnaround.

Wall Street responded frantically, not just in buying Goldman Sachs, BofA or US banks in general, but in returning in general to risk sectors. With many on Wall Street having been set for a move lower, a short-covering rally was precipitated, and this carried on to Wednesday's trading. In the meantime, Goldman Sachs posted a very positive profit result for the second quarter. Further positive results within the first crowded week of second quarter earnings reports provided impetus across other sectors. In short, the stock market was on the move back up again, and quickly. Arguments raged that the move reflected no more than short-covering, but genuine buying was also noted.

For Australia - an economy already deemed to be in significantly better shape than that of the US - it was as if someone had strapped the stock market to a rocket ship. Adding to the enthusiasm was a report showing the Australian business community has had an equivalent leap in confidence to the consumer community, and the release of the second quarter Chinese GDP, which confirmed an astounding jump to 7.9 per cent growth (annualised). Within four days, previous June highs are once again in sight. But while commodity prices and thus resource stocks have surged higher, this time the move was indiscriminate. There was joy across the market in general.

The ASX 200 finished the week (ended Thursday) up 6.2 per cent. The four major banks averaged a 6.3 per cent gain. ANZ Bank and Westpac jumped five per cent and the irrepressible Commonwealth Bank six per cent. Previous laggard National Bank, deemed to be the most risky of the big four, leapt 8.5 per cent.

ANZ and NAB are now around four per cent above average broker price targets. Westpac is about square, but CBA, deemed most overbought by brokers, is now close to nine per cent above.