Article / 29 August 2016 at 1:00 GMT

Today's Trade: ASX opens in red; AUDUSD hits four-week low

Trading Desk / Saxo Capital Markets

  • After Fed comments, traders raised probability of US rates move next month
  • Iron ore price fell 3.8%, its most since June 14
  • AUDUSD hit a fresh four-week low, falling to 0.7546 early after rates comments
  • ASX 200 followed Wall St's lead to open with most sectors in the red

By Saxo Capital Markets 

Early trading and overnight

The ASX S&P 200 opened with most sectors in the red, following Wall St's lead, and the AUDUSD has found a new four-week low. 

US stocks slipped in a volatile session as remarks from Federal Reserve officials lifted optimism on the economy while also bolstering speculation interest rates could rise as soon as next month. 

A speech by Fed Chair Janet Yellen sparked an early surge in equities amid a bullish economic assessment, which included a lack of clear guidance on when a rate boost may come. Equities then tumbled after Vice Chairman Stanley Fischer said Yellen’s comments were consistent with a possible September increase, only to recover much of their losses in a final-hour rebound.

 Equities tumbled after Fischer said Yellen’s comments were consistent with a possible September increase, only to recover in final-hour rebound. Photo: iStock

Utilities and phone companies led the declines, while banks, technology and healthcare shares climbed.

The S&P 500 Index fell 0.2% to 2,169.04, after rising as much as 0.7%. The gauge extended a monthly slide and capped its first back-to-back weekly drop in two months. The Dow Jones Industrial Average lost 53.01 points, or 0.3%, to 18,395.40, after wiping out a 123-point gain. The Nasdaq Composite Index rose 0.1%. About 6.6 bn shares traded hands on US exchanges, 3% below the three-month average.

Expectations for a rate increase climbed after Fischer spoke, with traders pricing in a 42% probability of a move next month, from 32% after Yellen’s remarks. Odds are now nearly 63% the central bank will act by December, up from 42% two weeks ago, based on fed fund futures data compiled by Bloomberg.

The rally that drove the S&P 500 to a series of records since early July lost momentum amid the recent hawkish remarks from Fed officials and uneven economic data. The benchmark posted its first three-day slide in two months, interrupting a period of calm that had the CBOE Volatility Index on track for its lowest mean level for any August since 1994. 

The measure of market turbulence known as the VIX held at a seven-week high, little changed on Friday after swinging between an 11% drop and a nearly 10% jump. 

With policy makers assessing data to guide their rate decisions, a report today showed the US economy grew less than previously reported last quarter, capping a sluggish first-half performance propped up mainly by consumer spending. A separate measure showed consumer confidence eased in August to a four-month low as Americans become less optimistic about their finances for the year ahead.

As the earnings season wraps up, almost 80% of S&P 500 companies have beaten profit estimates, while 55% topped sales expectations. Analysts estimate third-quarter income for the gauge’s members will contract for a sixth straight quarter, forecasting a 1.3% decline.

In Friday’s trading, seven of the S&P 500’s 10 main industries retreated. Stocks perceived as defensive were hardest hit, continuing a recent about-face among this year’s leaders as utilities and phone companies slumped more than 1%, while consumer staples lost 0.5%. Raw-materials producers lost 0.6% as a gauge of the dollar surged the most in two months.

Among shares moving on corporate news, Autodesk Inc. jumped 8.1% to a record after surprising investors with a quarterly profit, and forecasting a narrower-than-estimated loss in the current period. Ulta Salon Cosmetics & Fragrance Inc. sank 6.1%, the most since November, as its current-quarter outlook disappointed.

Herbalife Ltd. declined 2.3% to a six-week low, after losing as much as 7.8%. Hedge fund manager Bill Ackman told CNBC that top investor Carl Icahn is trying to sell his stake in the nutrition company. Herbalife declined to respond to Ackman’s comments, while representatives for Icahn and Ackman didn’t immediately respond to requests for comment.

Alere Inc. slipped 2.8% after suing Abbott Laboratories to compel the completion of their pending $5.8 bn takeover deal, claiming the medical-device maker failed to get US antitrust clearance in an effort to scuttle the contentious transaction. Abbott was little changed.

Over in Europe, European stocks climbed for a fourth day last week: The Stoxx Europe 600 Index rose 0.5%, erasing a decline of as much as 0.3% and taking its weekly advance to 1.1%. 

Yellen said the case to raise interest rates is getting stronger as the US economy approaches the central bank’s goals, though she didn’t discuss the specific timing of a move. Traders now see a 34% chance that the central bank will raise borrowing costs next month.

Source: Bloomberg,

Key earnings

AU: Beach Energy Ltd, Bega Cheese Ltd, Liquefied Natural Gas Ltd, Regis Healthcare Ltd
AU: Ramsay Health Care Ltd
AU: Independence Group NL
AU: Energy World Corp Ltd

Local markets

  • Bank of New York Australia ADR Index down 1.2%, BHP Billiton ADR down 0.8% to A$21.23 equivalent, 1.7% premium to last Sydney close, Rio Tinto ADR down 0.9% to A$41.74 equivalent, 14.5% discount to last Sydney close.
  • After swinging between gains and losses on Friday after a speech by Federal Reserve Chairwoman Janet Yellen, gold futures for December delivery rose 0.1% to settle at $US1325.90 an ounce on Comex in New York, logging a weekly drop of 1.5%, the most since mid-July. Low interest rates are a boon for gold, which pays its holders nothing and struggles to compete with yield-bearing assets such as treasuries when borrowing costs rise. Analysts have also noted that other catalysts to drive gold higher, such as economic uncertainty and negative interest rates around the world, remain in place. Gold stocks: GOR, NCM, NST, AQG, EVN, KCN, RMS, RRL, SAR, SLR.
  • Oil closed higher after swinging between gains and losses as investors parsed the speech by Yellen for signs of when the central bank will raise interest rates. Futures climbed 0.7% on Friday, trimming a weekly loss. Crude rose 2.4% earlier while the dollar slipped, boosting the appeal of commodities as an investment. Saudi Arabian Energy Minister Khalid Al-Falih said an output freeze will signify that producers are content with the market situation. All oil and gas facilities in Saudi Arabia are safe and operating normally, Saudi Arabian Oil Co. said. A projectile from Yemen caused a fire in a power relay facility, state-run Saudi Press Agency reported. 
  • West Texas Intermediate for October delivery rose 31 cents to settle at $47.64 a barrel on the New York Mercantile Exchange. Total volume traded was 10% below the 100-day average. The October contract fell 3% this week. Brent for October settlement increased 25 cents to $49.92 on the London-based ICE Futures Europe exchange. Prices slipped 1.9% this week. The global benchmark crude closed at a $2.28 premium to WTI. Oil stocks: WOR, WPL, STO, SEA, BPT, OSH, HZN, DLS, AWE, KAR, ORG, SXY.
  • Iron ore price fell 3.8%, their most since June 14. Iron ore has been caught in a technical sell-off, along with other metals, as speculation linked to steel-output cuts had led to excessive gains in the raw material according Chinese brokerage houses. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, ARI, BCI, SDL.
  • Zinc rallied to a 15-month high in London on signs of an emerging shortage that’s made the metal the best-performing commodity this year. Prices in Shanghai surged to the highest since 2011. Zinc for delivery in three months rose 0.7% to settle at $2,314.50 a metric ton on the London Metal Exchange, after touching $2,333, the highest since May 2015. The metal is up 44% for the year. Zinc for October delivery on the Shanghai Futures Exchange posted the highest closing price since August 2011. 
  • Aluminum dropped 0.1%to $1,642.50 a ton on the LME. Lead and tin gained in London. Copper futures for December delivery added 0.1% to $2.0845 a pound on Comex. Copper stocks: PNA, OZL, SFR; Nickel stocks: IGO, WSA; Aluminium stock: AWC
  • Aurizon (AZJ), Ooh!Media (OML), Woodside (WPL), Wesfarmers (WES): Trades ex-div.
  • Austal (ASB): Scheduled to release FY results; NOTE: Adj. net income est. A$24.3m (3 analysts)
  • Beach Energy (BPT): Scheduled to release FY results; NOTE: Adj. net income est. A$30.8m (8 analysts)
  • BHP Billiton (BHP): Samarco to present dam burst probe results on Aug. 29
  • Crown Resorts (CWN): Consolidated Press said to sell 35m
  • Crown shrs: AFR; NOTE: Co. holds 53% stake in Crown ~386m shrs
  • Downer EDI (DOW): Won’t retender for fiber work with Chorus
  • Estia Health (EHE): Scheduled to release FY results; NOTE: Adj. net income est. A$55.3m (7 analysts)
  • Mercury NZ (MCY): Mike Allen to step down from board
  • QBE Insurance (QBE): Fitch affirms QBE Lenders’ Mortgage Insurance at AA-/stable
  • Reliance Worldwide (RWC): Scheduled to release FY results; NOTE: Adj. net income est. A$50.6m (6 analysts)
  • Rio Tinto (RIO): Defends iron ore miners in face of mooted $5.5b tax; To make India its services hub over next 5 years

Broker upgrades and downgrades

  • Corporate Travel Management (CTD): Cut to hold from buy at Bell Potter
  • Retail Food Group (RFG): Cut to sell vs buy at UBS
  • Regis Healthcare (REG): Raised to buy vs neutral at UBS
  • Duet Group (DUE): Cut to neutral vs buy at Goldman Sachs
  • Breville Group (BRG): Cut to hold vs buy at Wilsons

Stock to watch
Regis Resources (RRL:xasx)

Despite breaking an uptrend (from April 16) last week, we saw a weekly close above it. The extension of the rounding bottom that was formed back in 2015 indicates RRL may retrace down to 3.33 if gold continues to tumble but we would look for a buying opportunities if RRL fails to crack the July support level of 3.46.

RRL daily chart
AUS200, US500 & AUDUSD

The US500.i failed to push to new highs last week and the outside weekly candle bar gives us signals that markets may be prepared to retrace lower. Friday’s outside bar is also a big giveaway so we will be look at selling any rallies this week.

 US500.i daily chart
First level of interest to initiate a sell is the half retrace mark between the all-time highs to Friday's low and this level is at 2176.5. Above here we look for the market to fail at the 76.4 retracement level at 2185.5 given the struggles the US500.i has had at these levels all throughout August. Stops on any shorts taken out this week would lie above 2200
We note the exhaustion over the AUS200.i as it looks to peel back lower to retest the red trendline which the ASX index broke above in July. The Aussie index has its first lower swing high and given the signals we have seen over the S&P, we obviously expect our Aussie stocks to follow their direction.

We expect any rallies to be capped at the 5570 level, first support to come in at 5450 which is where the ASX would kiss this red trendline as well as it trading at the July swing lows. Support below here for the week is May’s previous double top at 5430.

AUS200.i daily chart
The initial reactions to Yellen’s hawkish comments on rate hikes at Jackson Hole were quite surprising as the US dollar weakened but this was massively reversed when the US Federal Reserve vice-chair Stanley Fischer came on to emphasise the Fed‘s intentions on this year’s rate hike depend on data. 

The 10-year treasury bond (ZN) broke a key support level to touch the long-term uptrend (from 30 Dec 15 low) while the gold and silver came all the way down to the last week’s support level. 

AUDUSD could not even test the 0.77 handle and broke a key uptrend (from May's low), therefore we expect AUDUSD to remain under selling pressure although it is likely to see some retracement to the upside today.

AUDUSD daily chart

US 10 Year bond chart
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Today's trade information sources: AFR, SMH, CNBC, BBG, WSJ, The Australian, Reuters

-- Edited by Susan McDonald

Today’s Trade is compiled by the Sydney trading desk at Saxo Capital Markets. Watch the recording of this week’s Macro Monday Call at 1030 AEST. Please join us for our Weekly Macro Call at 10:30 EST:

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