Sterling has been blasted lower after BoE governor Carney cast doubt on a previously pretty-much-expected UK May rate hike. The EU's rejection of Britain's latest Brexit-Irish border plan only served to deepen the rot.
Article / 04 August 2016 at 0:37 GMT

Today's Trade: ASX boosted by energy stocks

Trading Desk / Saxo Capital Markets
  • Local markets opened higher, led by energy and material stocks
  • US stocks rose overnight as crude oil gained the most in three weeks
  • Rio Tinto's reporting was in line with market expectations
  • Markets are awaiting the BoE's rate-cut decision tonight 

By Saxo Capital Markets (Australia)

Overnight and early trading

Local markets opened in the green, buoyed by leads from overseas and the rally in oil prices. At the start, the ASX200 was up 0.6% to 5499. Energy stocks led the charge. Miners were also higher: BHP Billiton was up 3.1% and Rio Tinto was up 1.1% despite posting its weakest profit since 2004 after market close yesterday. 

 Revving up ... the rally in oil prices helped the local market open in the green. Photo: iStock

US stocks advanced, with the S&P 500 Index halting a two-day decline, as crude oil’s biggest gain in three weeks spurred a rally in energy producers while corporate earnings helped boost financial companies. A late-day surge pushed equities higher, with oil and gas companies rising the most in three weeks as crude jumped 3.3% on weekly supply data. 

American International Group posted its biggest gain since 2011 after its profit beat estimates. Consumer-staples shares slumped and healthcare fell for a second day, with Biogen losing 2.7% amid doubts it could be a takeover target. Pfizer and Merck slid at least 1.1%.

The S&P 500 rose 0.3% to 2,163.79, rebounding after its steepest decline in almost a month yesterday. The gauge traded in the narrowest range in two weeks. The Dow Jones Industrial Average gained 41.23 points, or 0.2%, to 18,355.00, snapping a seven-session losing streak. The Nasdaq Composite Index added 0.4%. A Goldman Sachs Group basket of most shorted shares saw the biggest gain in five weeks, rising to a nine-month high.

At 18.3 times this year’s projected earnings, the S&P 500 is still trading near its highest multiple in more than a decade. Some stronger-than-estimated financial results and speculation that central banks will maintain loose monetary policies have helped underpin equities near record levels. But investors are looking for clearer signs of economic progress after last week’s disappointing growth report, and will continue to assess data for clues on the strength of the US. 

A gauge today of private-payroll growth last month indicated the labour market was holding up in spite of broader growth numbers that indicate a slowing in the economy. A separate report showed growth at service providers cooled in July after reaching a seven-month high.

Amid the uncertainty, traders have pushed back their expectations for the next Federal Reserve interest-rate increase. The first month with at least even odds for a hike is June 2017, compared with February a week ago. Chicago Fed President Charles Evans said higher borrowing costs could be warranted this year as the economy picks up steam, even though he’s still worried that inflation is too low. 

Earnings also remain in focus. S&P 500 companies posting results this week include Kellogg, Viacom and Priceline Group. About 57% of index members that have reported so far beat sales projections, while 79% topped profit estimates. Analysts estimate net income at S&P 500 companies fell 3.2% in the second quarter.

Among shares moving on corporate results, Qorvo dropped 10%, the steepest in a year, after its gross margin view for the current quarter trailed estimates, even as its profit and sales outlooks exceeded forecasts. Kate Spade plunged 18% after its quarterly profit missed estimates and the handbag maker cut its full-year outlook. Intercontinental Exchange jumped 5.3% to a record as its results topped estimates. Time Warner added 2.7% as its profit exceeded analysts’ predictions and the company bought a 10% stake in Hulu.

Six of the S&P 500’s 10 main industries advanced, led by gains of more than 0.9% in financial and energy stocks. Consumer staples, utilities, healthcare and phone companies all declined. About 6.7 billion shares traded hands on US exchanges, 6% below the three-month average.

The CBOE Volatility Index fell 3.8% to 12.86. The measure of market turbulence known as the VIX yesterday capped its biggest two-day climb since the UK’s vote to leave the European Union. 

Insurers paced gains in the financial group after AIG’s results and its plan to buy back $3 billion of stock. MetLife and Prudential Financial climbed more than 2.9%. Lenders marked their strongest session in three weeks as Bank of America and Citigroup increased at least 2%.

Marathon Petroleum and Valero Energy advanced more than 4.5% as crude rose for just the second time in 10 days. A weekly report showed gasoline inventories fell the most since April and refineries increased operating rates. Williams Cos rallied 7.1%, bringing its two-day gain to
14%. Raymond James Financial upgraded the shares to the equivalent of buy from neutral. Consumer-staples companies retreated for a second day, with Altria Group down 1.4% while General Mills sank 1.7%, the most in more than two months. The group is seeing signs of investor pessimism. 

Short interest on the SPDR Consumer Staples Select Sector ETF is at 7.9% of shares outstanding, the highest in more than a year. Traders also pulled $606 million from the fund in July, the second-biggest monthly outflow since March 2015.

European equities hovered near a three-week low as scepticism about the region’s growth overshadowed a rebound in banks. The Stoxx Europe 600 Index added less than 0.1%, after jumping as much as 0.4% and falling 0.4%, with trading of companies on the gauge about 20% lower than the 30-day average.

Source: Bloomberg,

US earnings

  • Thursday: Kraft Heinz, LinkedIn, Toyota, Siemens, Regeneron, Church & Dwight, Alcatel-Lucent, Apache, SeaWorld, Time Inc, Motorola Solutions, Priceline, Symantec, Activision Blizzard, FireEye, Zillow, Weight Watchers, Lionsgate, El Pollo Loco, Zynga
  • Friday: Weyerhaeuser, Allianz, Virgin America, Buckeye Partners, Liberty Interactive

Local markets and commodities

  • Bank of New York Australia ADR Index +0.1%, BHP Billiton ADR +2.3% to A$19.69 equivalent, 3.1% premium to last Sydney close, Rio Tinto ADR +0.7% to A$43.52 equivalent, 12% discount to last Sydney close
  • Gold fell, halting its longest rally in six weeks, after a private report showed the US job market remained resilient, curbing demand for a haven. Gold futures for December delivery slipped 0.6% to settle at $1,364.70/ounce on the Comex in New York. Through Tuesday, prices gained for six straight sessions in its longest rally since June 16. 
  • Traders took note of solid jobs data that showed private payrolls rose by 179,000 in July, in line with expectations and signaling stability in the US labour market. Gold prices have been influenced by economic data this year, as investors look for signs on the health of the global economy. Gold stocks on the Toronto Stock Exchange dropped 1.17% overnight. Gold stocks: GOR, NCM, NST, AQG, EVN, KCN, RMS, SAR, SLR
  • Oil prices made their biggest gains in three weeks Wednesday with help from a surprisingly large draw on gasoline stocks and a bear-market rebound. Oil plunged into a bear market this week, but the low prices have lured in bargain-buyers and convinced some bearish traders to close out and lock in profits, leading to sporadic rebounds. That is likely responsible for a large part of Wednesday’s gains, along with some help from data showing a drain on US gasoline stockpiles that was 10 times as large as expected, traders and brokers said. 
  • Light, sweet crude for September delivery settled up $1.32, or 3.3%, at $40.83/barrel on the New York Mercantile Exchange. It was the largest gain since July 12 and brought the US benchmark within 16 cents of exiting bear-market territory. Brent, the global benchmark, gained $1.30, or 3.1%, to $43.10/barrel, snapping a five-session losing streak. So many have been betting against oil prices in recent weeks because of a persistent glut, that when they buy contracts to close out their position it can send the market higher, brokers and analysts said. Many investors have also said they are more interested in buying oil and less interested in selling the further it falls from $50/barrel. 
  • Many US producers can now break even at prices near $50, but many fewer can do that at $40, traders said, leading them to believe prices around $40 or below can reduce supply. Data released Wednesday by the US Energy Information Administration also showed gasoline stockpiles fell by 3.3 million barrels, compared with expectations of just a 300,000-barrel draw. Gasoline has drawn special attention from traders in recent weeks as stockpiles are at near-record levels and cargoes have been backed up world-wide. Oil stocks: WOR, WPL, STO, SEA, BPT, OSH, HZN, DLS, AWE, KAR, ORG, SXY
  • Iron ore lost 0.4% to $61.67/tonne as high stockpiles at ports continue to put pressure on prices. In Rio’s reporting yesterday after the ASX close was pretty much in line with market expectations, with first-half underlying earnings coming in at $1.56 billion  vs $2.9 billion for the first six months of 2015. Rio declared a dividend of 45¢, in-line with estimates, however a big reduction compared to August 2015 when shareholders were paid $1.075. 
  • In separate news overnight, Brazil's Vale is considering raising as much as $10 billion from the sale of up to 3% of future iron ore output to undisclosed Chinese companies, two sources with direct knowledge of the matter said. Under terms of the deal, Vale, the world's biggest iron ore producer, would receive streaming financing from the companies, said the sources. The idea is to sell part of the company's future output over a 30-year period. Vale has not yet reached a decision to complete the iron ore streaming financing deal, the sources said. The deal, along with a series of planned asset sales, could help chief executive officer Murilo Ferreira reach his goal of reducing Vale's $27.5 billion net debt by one-third over the next 18 months. Vale's preferred shares accelerated their rise after the Reuters report. Vale shares closed higher by 5.5% in Brazil. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, ARI, BCI, SDL
  • Copper fell as other industrial metals slipped amid mounting signs that global demand is slowing. Copper futures for delivery in September declined 0.5% to settle at $2.1985/pound on Comex. Copper, which is highly sensitive to the housing market, was largely moved last night as MBA mortgage applications index fell 3.5% last week, a third straight decline, while purchases also dropped, data from the Mortgage Bankers Association show. 
  • The US dollar rebound following US labour strength also pressured copper. Copper, zinc, lead and tin declined on the London Metal Exchange, while aluminum and nickel rose. Copper stocks: PNA, OZL, SFR; Nickel stocks: IGO, WSA; Aluminium stock: AWC
  • BWP Trust (BWP): Scheduled to release FY results; Note: Operating profit est. $A131.3mln (4 analysts)
  • Downer EDI (DOW): Scheduled to release FY results; Note: Adj. net income est. $A167mln (8 analysts)
  • Duet Group (DUE), Santos (STO): Duet likely among bidders for 30% Santos-owned GLNG pipeline should it come onto market: Australian
  • Flexigroup (FXL): Said to be in sights of offshore buyers: AFR reports in Street Talk column, without providing any further details
  • Macquarie (MQG): Likely among bidders for stake in UK gas network stake
  • Suncorp (SUN): Scheduled to release FY results; Note: Adj. net income est. $A1.13b (7 analysts)
  • Tabcorp (TAH): Scheduled to release FY results; Note: Adj. net income est. $A182.6mln (10 analysts)

Broker upgrades and downgrades

  • Fortescue (FMG): Raised to equalweight vs underweight at Morgan Stanley
  • Genworth Australia (GMA): Cut to neutral vs buy at Goldman Sachs
  • Harvey Norman (HVN): Cut to neutral vs overweight at JPMorgan
  • South32 (S32): Raised to overweight vs equalweight at Morgan Stanley

Stock to watch: Square Inc. (SQ:xnys)

Square, an electronics payment company listed on the NYSE, forecast third-quarter earnings that topped analysts' estimates, as the company processed more transactions and gained new and larger businesses. In reporting overnight, second-quarter adjusted revenue rose 54% to $171 million from a year earlier, compared with analysts’ average estimates of $159.4 million and its shares surged 11% to $11.56 in extended trading. 

Year to date, shares were down 20% this year through the close Wednesday however, it has spent the best part of three months since May consolidating in a rounding bottom formation which is a bullish set up. The first test off its lows was at the 23.6% retracement level (See chart below) at 10.17, however as of yesterday has comfortably settled above here which opens up 11.26 as the next target for this stock. The gap created at 12.86 is expected to close and would serve as final profit target on any long positions.
Source: Saxo Bank
Pending orders

GBPUSD and WTI crude

Since GBPUSD made the July low 1.28, which was the lowest in 31 years, it has been quietly making recoveries in the past month. The downtrend (from March 15) has been acting as a resistance level during June and July, therefore we expect similar price actions and if this line holds, then bearish pennant could be confirmed. 

The Bank of England failed to deliver an anticipated rate cut last month, but it is likely to happen tonight. The uptrend (from last month) has been valid but a breakout below this line would signal further sell off towards 1.30-1.28.

GBPUSD monthly  
Source: Saxo Bank
Crude oil (CL) appears to have made an outside day reversal as it made a lower low, but it made a higher high last night. Furthermore, it also managed to close above the 200DMA and the RSI is indicating it has bounced off the oversold level 30, therefore we see a buying opportunity with the stop below the overnight low 39.19 with the first target 42. This served as a double top back in March and April this year but the major resistance level would be 44.30.
Crude oil
Source: Saxo Bank. Create your own charts with SaxoTrader; click here to learn more 

Today's information sources: AFR, SMH, CNBC, BBG, WSJ, The Australian, Reuters

– Edited by Gayle Bryant

Today's Trade is compiled by the Sydney trading desk at Saxo Capital Markets. Listen to this week's Monday Macro Call here.


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