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From the Floor: Metals melting down on China fears — #SaxoStrats

   • FOMC leaves rates unchanged, hawkish tone boosts June hike chances to 94%
   • Equities gain on statement, market 'giving Fed the green light' to hike: Garnry
   • US unit labour costs release at 1230 GMT key for wage, inflation outlook
   • EURUSD heading lower towards 200-day MA at the 1.0833 area: Garnry
   • Facebook earnings post beat on revenue, EPS, shares unchanged
   • 'We are seeing a bit of a meltdown in the metals sector': Hansen
   • Iron ore futures plummet on renewed fears concerning Chinese demand
   • Chinese housing demand slowing, impact of infrastructure spending waning
   • Platinum discount to gold near record, silver hits four-month low

By Michael McKenna

We are seeing “a bit of a metals meltdown” in markets, says Saxo Bank head of commodity strategy Ole Hansen in the wake of an 8% plunge in Dalian iron ore futures overnight.

The steep decline comes as investors react to increased fears of a growth and demand slowdown in China, where housing demand is visibly waning and the impact of last year’s bout of infrastructure spending retreats from view.

“At the moment we see silver hitting four-month lows as the metal continues on its longest losing streak since 2001,” says Hansen. Meanwhile, he adds, gold has broken its support band to the downside on yesterday’s Federal Open Market Committee outing that spurred the chance of a June hike to 94%, boosting both USD and US equities.

“The recent ADP employment figures augured well for Friday’s nonfarm payrolls release, and the key data point today will be the US unit labour costs print at 1230 GMT,” says Saxo head of equities strategy Peter Garnry.

According to Garnry, the labour costs release will point to the progress of US wages and thus, in the longer term, provide a key signal as to the country’s inflation outlook.

US inflation
Source: Federal Reserve Bank of St. Louis

Wednesday saw Facebook release its first-quarter earnings with revenue coming in at $8.03 billion versus estimates of $7.83bn and earnings-per-share at $1.04 versus $0.87 expected. 

Facebook shares, however, dipped by 2.50% from a record high in the after-hours session as investors fretted over the company’s outlook, as its Q1 release contained a statement about rising costs in 2017.

In Europe, Peter Garnry reports that he sees opportunity in GlaxoSmithKline stock, currently trading at 1.576.50 pence/share London.

According to Garnry, Saxo’s equities model is tracking 19 healthcare stocks in Europe with Denmark’s Novo Nordisk appearing as the weakest of the group and GSK analysed as the strongest.

The model’s result, Garnry says, may seem counterintuitive in light of Novo Nordisk’s recent earnings beat and 7%-plus rally, but Saxo’s equities head points to an interesting upcoming risk event as having the potential to create an interesting entry point for GSK.

“GSK shares have been under pressure of late as a generic alternative to the firm’s Advair asthma drug is on its way, and while Mylan failed to get US Food and Drug Administration approval for its generic version, the next potential approval comes on May 10,” says Garnry.

“If this generic is also rejected, it could be a catalyst for analyst upgrades as gains as it would give GSK more time to roll out its Advair replacement, Breo.”

For more on Garnry’s idea to enter GSK June 16, 2017 calls with a strike at 1,550 pence, read his trade view here.

Meanwhiile, EURUSD is attempting to retrace upwards following the European bell while gold prices continue to trend lower. Traders may want to watch the UK services PMI at 0830 GMT for its impact.

Steel mill, Beijing, China: The ongoing slowdown in Chinese industrial growth and demand is producing massive weakness in metals. Photo: Shutterstock

Michael McKenna is an editor at Saxo Bank


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