Today's Trade: ASX joins in global equities revival
- Like many markets overseas, ASX is now close to pre-Brexit levels
- BHP and Fortescue among the early gainers, as iron ore price stiffens overnight
- GBP was the loser overnight, hitting $.1.3311 but US equities stormed ahead
- Energy shares led advances gains in the quarter, rising 11% as crude surged
By Saxo Capital Markets
Overnight and early trading
The ASX/S&P 200 seems to have stripped itself of Brexit contagion much like other markets overnight and at the 1015 (0115 GMT) open the benchmark S&P/ASX 200 index jumped 21.4 points, or 0.41%, to 5,254.8, while the broader All Ordinaries index added 23.3 points, or 0.44%, to 5,333.7.
BHP was up 2.8% amid rumours it might be one of a number of potential suitors for Potash Corp, but a strong jump in the iron ore and a generally upbeat mood around commodities could also help explain the miner's gains this morning: Rio is 1.8% higher and Fortescue 2.6%.
The UK pound weakened, while global equities extended their rally after central banks in Europe signalled looser monetary policy, bolstering speculation officials will do all they can to prevent the UK secession from roiling financial markets. Bonds also advanced.
Sterling slipped 0.9% to $1.3311, capping its worst quarterly trouncing since 2008 after the Bank of England said it may need to cut interest rates within months. The euro fell as the region’s central bank indicated it may expand the scope of its bond buying.
The S&P 500 Index erased a monthly loss with its biggest three-day rally since February, while European stocks capped a surge of 6.8% since Monday, the most since 2011, as global shares erased a loss for the quarter. Brazil’s real had its best month since 2003.
The S&P 500 rose 1.3% to 2,098.86 capping a 5% rally over three days and a 1.9% gain in the quarter, a third straight advance. The Stoxx Europe 600 Index added 1% Thursday, with the bulk of the gains coming after Carney’s statement. The FTSE 100 Index climbed 2.3% to its highest level since August after erasing its post-Brexit losses late on Wednesday.
US stocks ended with a last-minute surge that wiped out a loss in June amid volume in S&P 500 stocks that was 33% above the 30-day average. The S&P 500 had climbed within 1% of its all-time high heading into the UK referendum amid signs global growth had stabilised and central banks would remain supportive.
It’s now 1.5% away from that May 2015 record. Analysts expect companies in the index to report a 5.3% drop in earnings for the quarter, a fifth straight decline.
Energy shares led advances gains in the quarter, rising 11% as crude surged. Utilities jumped 5.9%, while banks added 1.5%. Technology shares slipped 3.6% for the steepest drop. Takeover announcements also boosted equities on Thursday, with Lions Gate Entertainment agreeing to buy John Malone’s Starz for about $4.4 billion.
Dow Jones reported that Mondelez International made a bid for Hershey, which rose 17% before the candy company released a statement saying it unanimously rejected the offer which valued it at about $23 billion.
The Stoxx Europe 600 fell as much as 0.9% in early trading, before recovering to spend most of the session little changed, and then strengthening as Carney spoke. The gauge has now recouped more than half of the losses sparked by last Friday’s UK vote.
The MSCI Emerging Markets Index climbed 1.5%, building its three-day rally amid speculation central banks will take steps to support the global economy and that the Federal Reserve will keep key US rates lower for longer.
This week’s gains lifted the gauge to a 3.3% advance in June. The Hang Seng China Enterprises Index of mainland Chinese companies listed in Hong Kong jumped 1.7%, shrinking its first back-to-back quarterly loss in three years to 3.2%. Markets in the city will be closed on Friday for a holiday.
Asian index futures foreshadowed another day of gains for Friday, with contracts on benchmarks in Japan, South Korea and Australia up at least 0.6% in most recent trade.
Sterling has tumbled more than 11% since polls closed on June 23. While that’s a sign of a lack of confidence in the UK’s post-vote economy, a weaker currency may help cushion the effect of Brexit.
The GBPUSD sank the most on record as results of the referendum came in June 24. On June 27, the currency fell to $1.3121, its weakest point since 1985.
Sterling dropped 0.7% on Thursday to 83.43 pence per euro. The dollar maintained losses Thursday after a reduction in bets on the Fed raising rates this year weighed on the currency.
The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, was steady after sinking 1% over the previous two days. It climbed 0.3% in the quarter, while dropping 1.4% in June.
Government bonds worldwide gained the most since December 2008 in June, according to Bank of America index data. The effective index yield is down to 0.5%, from 0.74% at the end of May, as investors bet that Brexit would scupper economic expansion and the Fed’s rate-hike plans.
Treasuries due in a decade rose Thursday, pushing the yield down five basis points, or 0.05%, to 1.47%. Rates on the notes fell 30 basis points in the second quarter, following a 50 basis-point slide in the first.
Italian and Spanish bonds extended their advance on news the ECB was considering loosening the rules for its debt purchases.
The Bloomberg Commodity Index slipped 0.5% on Thursday, paring its advance in June to 4.1%. The index entered a bull market this month as oil climbed above $50/barrel and prices of everything from soybean meal to zinc rallied. It’s still down about 50% from the high reached in 2011.
West Texas Intermediate crude oil fell 3.1% to settle at $48.33/b in New York, after surging almost 8% over the last two sessions on a drop in US stockpiles. Supply disruptions and falling American output have helped cut a global surplus in the commodity, sparking a rally of almost 85% since prices hit a 12-year low in February.
Gold futures slipped 0.5% to settle at $1,320.60/oz in New York. Prices for the precious have climbed 24% this year as investors piled into exchange-traded funds backed by the metal.
Silver futures for September delivery climbed 1.2% to $18.623/oz, gaining for the fifth time in six trading sessions.
Zinc capped its best quarter since 2010 amid forecasts for supply deficits, driving the London Metal Exchange LMEX Metals Index up 4.3% in the period, the most in two years.
Information sources: Bloomberg, TradingFloor.com
Local markets and commodities
- The S&P/ASX 200 Index futures +1%; futures relative to estimated fair value suggest an early gain of 0.8%.
- ASX 200 was down 2.7% in June which was its worst month since Jan. ASX gained 3% in the June quarter, is down 1.2% in 1H; and for the FY 2016: is down 4.1%.
- Bank of New York Australia ADR Index +2.2%. BHP Billiton ADR +2.9% to A$19.19 equivalent, 2.9% premium to last Sydney close, Rio Tinto ADR +4.5% to A$42.05 equivalent, 7.6% discount to last Sydney close.
- Gold prices settled lower on the day Thursday but logged its biggest two-quarter percentage increase since 2007, as investors piled into the metal amid global economic uncertainty and the UK’s vote to leave the European Union. Gold futures have risen about 24% over the last two quarters, the best two-quarter performance since the fourth quarter of 2007, and advanced nearly 7% in the second quarter. The strong gains come even as futures for August delivery, the most actively traded contract on Thursday, settled down nearly 0.5% on the day, to $1,320.60 a troy ounce on the New York Mercantile Exchange.
- The dip in prices on Thursday came as the Labor Department said the number of Americans filing for new jobless benefits rose last week, but remained historically low. Gold stocks: NCM, NST, AQG, EVN, KCN, RMS, SAR, SLR.
- Oil capped the biggest quarterly advance in seven years as falling US supply added to speculation the global surplus is easing. West Texas Intermediate oil climbed 26% this quarter, even after a 3.1% decline on Thursday. US crude supplies shrank a sixth week and output slipped to the lowest since September 2014, US government data showed on Wednesday. Markets have whipsawed after the UK’s vote to leave the European Union on June 23.
- Goldman Sachs Group said that a recovery in Nigerian production is a risk to its $50/b forecast for the second half of 2016. WTI fell $1.55 to settle at $48.33/b on the New York Mercantile Exchange. The contract slipped about $1 in the last 10 minutes of trading. Futures capped the biggest quarterly decline since June 2009. Total volume traded was 13% below the 100-day average.
- Brent for August settlement, which expired Thursday, fell 93 cents, or 1.8%, to $49.68 a barrel on the London-based ICE Futures Europe exchange. Prices increased 25% this quarter. The more-active September contract fell $1.61 to $49.71/b. Front-month Brent futures closed at a $1.35 premium to WTI. Oil stocks: WPL, STO, SEA, BPT, OSH, HZN, DLS, AWE, KAR, ORG, SXY
- Steel futures in China climbed to a seven-week high on railway plans. Steel rebar for October delivery rose as much as 3.7% to 2,324 yuan/mt on the Shanghai Futures Exchange, the highest for most active contract since May 9.
- Iron ore rose $1.77, or 3.3%, to $55.66/tonne, according to a price index compiled by Metal Bulletin. China’s plan to expand the railway network and reduce steel-making capacity is "bullish in the long-term”, Wei Junyi, analyst at Huatai Futures, said by phone from Shanghai yesterday. Wei added that “In the near-term, low inventory also helps somewhat to offset weak seasonal demand”. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, ARI, BCI, SDL
- Copper prices swung between small gains and losses in U.S. trading on Thursday as investors continued to assess the impact of the UK’s vote last week to leave the European Union. Copper futures for September delivery rose 0.4% to $2.1955/pound on Comex taking its quarterly gain to just under 2.5%. Copper, aluminium, nickel and lead gained in London, while tin dropped. Copper stocks: PNA, OZL, SFR; Nickel stocks: WSA, SIR; Aluminium stocks: AWC.
- In other news: Goodman Group (GMG): Blackstone buys A$640m industrial assets; News Corp (NWS): Agrees to buy UK radio broadcaster Wireless Group;Oil Search (OSH): InterOil reviewing rival to $2.2b bid.
Broker upgrades and downgrades
- Henderson (HGG): Cut to equal weight vs overweight at Morgan Stanley
- BHP Billiton (BHP): raised to buy vs neutral at Haitong
- Clydesdale (CYB): Cut to underweight vs equalweight at Morgan Stanley
- Automotive Holdings (AHG): Raised to overweight vs neutral at JPMorgan
- OZ Minerals (OZL): Raised to neutral vs underperform at Credit Suisse
- Vocus (VOC): Cut to neutral vs buy at UBS
XAUUSD and XAGUSD
The silver price (XAGUSD) has been surging to a 21 months high, up about 9% since last Friday, while the gold price (XAUUSD) still remains subdued just above $1,300/oz which is the 50% retracement from the Brexit high $1,359/oz.
While the gold is yet to climb back to the Friday’s high $1,359/oz, the silver has already broken and closed above the Brexit high of $18.31/oz which was the 100% extension of the rounding bottom that was created during November 15 to February 16.
This could indicate that the gold to silver ratio has been tumbling in the last two days, which leaves an upside potential on the gold as it appears to be cheaper than the silver.
We are quite confident about our bullish bias on the gold, although the silver could continue to outperform the gold in the near term as the downside momentum of the gold-silver ratio still looks strong.
XAUUSD monthly chart
XAGUSD monthly chart
Source: Both charts, Saxo Bank
AUS200.i & US500.i
The VIX plunged below the previous resistance level of 16.50 and the positive sentiments of the global equity markets were boosted by the Carney’s comments on the rate cut in the near term.
The US 500 has now recovered more than three-quarters of the sell off from the Brexit. The interim resistance level remains at 2,100 and the support level would be 2,059 which is the 50% retracement of the Brexit sell off.
We are expecting daily close below 2,100 tonight as the profit taking is likely ahead of the long weekend in the US due to the 4th of July.
Yesterday, the AUS 200 extended the gains for three consecutive days but it fell short of the 61.8% retracement level of 5,279 which also coincides with the downtrend (from May). Given the recent rally has been aggressive, the further upside is expected to be limited. The support levels are 5,233 and 5,200.
US 500 monthly chart
AUS 200 monthly chart
Source: Both charts, Saxo Bank - create your own charts with SaxoTrader. Click here to learn more
Today's Trade Information sources: AFR, SMH, CNBC, BBG, WSJ, The Australian, Reuters
-- Edited by Adam Courtenay
Today’s Trade is compiled by the Sydney trading desk at Saxo Capital Markets. Watch the recording of this Week’s Macro Monday Call