- The ASX200 was down 1.7% at the start as $27bn was slashed off sharemarket value
- The CBOE Volatility Index jumped about 40% to 17.50, its highest since late June
- Oil prices fell Friday on a stronger dollar and concerns over the drop in inventories
- AUDUSD extended losses to 0.7490 as the US dollar continues to rally
By Saxo Capital Markets (Australia)
Overnight and early trading
The local market followed overseas leads to open lower and look set for its worst day since Brexit. Losses were across all sectors – a result of Friday's comments that put a September rate rise back on the table. At the start the ASX200 was down 1.7% at 5248. Miners and energy stocks were feeling most of the heat.
The local market looks set to record its worst day since Brexit following overseas leads. More than $A27 billion in shareholder value was slashed at the open. Photo: iStock
- Major markets had one of their worst days in months, as doubts over central banks’ willingness or ability to stimulate economic growth sent stocks and bonds tumbling. The Dow Jones Industrial Average fell nearly 400 points, and sinking bond prices pushed yields on government debt to their highest levels since early summer.
- The yield on Germany’s 10-year bund, which had been negative almost without exception since Britain voted to leave the European Union on June 23, popped into positive territory Friday. The wave of selling shattered weeks of summer torpor and was a reminder of the extent to which long-running rallies in stocks and bonds are reliant upon continued support from central banks.
- The European Central Bank dampened market sentiment on Thursday by deciding to leave its bond-buying and interest-rate policies unchanged, rather than expanding them as some investors had hoped. An official with the Federal Reserve deepened concerns by suggesting Friday that the Fed still might raise interest rates even after a week of relatively weak US economic data.
- The Fed has begun preparing for a September 20-21 policy meeting and faces a close decision about whether to raise rates at that meeting or wait until later in the year to move. Eric Rosengren, who has tended to support keeping rates low in the past, helped push markets into a deeper rout. The Dow industrials plunged 394.46 points, or 2.1%, to 18085.45. The S&P 500 declined 53.49 points, or 2.5%, to 2127.81. The percentage drop was the biggest for both indexes since June 24. The Nasdaq Composite Index lost 133.57 points, or 2.5%, to 5125.91.
- Yields on 10-year Treasury notes jumped to 1.671%, their highest level since June 23. Bond yields rise as prices fall.
- Some traders called the retreat a rational breather after a long period of relative stability. Mixed economic data means major central banks are likely to maintain their easy-money policies. Still, the reaction shows how jittery investors can be when that support faces any uncertainty.
- Federal-funds futures, which are used by traders to place bets on central bank policy, on Friday showed a 24% chance of a US interest-rate rise in September, compared with an 18% chance as of Thursday, according to CME Group. The expectation for a rate rise by December rose to 55%, from 51% on Thursday.
- Investors pushed down prices across a range of sovereign debt Friday. German 10-year government bond yields rose into positive territory. That means that investors buying these securities will once again get paid to hold them to maturity.
- Yields on British government bonds rose more than those of Germany’s. Ten-year Japanese yields moved back up toward zero, having spent the bulk of the year in negative territory.
- The CBOE Volatility Index, which is based on S&P 500 options prices and measures investors’ expectations for stock swings in the next 30 days, jumped about 40%, to 17.50, its highest level since late June.
- European stocks also closed sharply lower on Friday after Wall Street stock indices dropped and data showed Germany's exports fell in July. The UK's FTSE 100, French CAC index and German Dax all closed down by around 1% or more on the day. Data from Germany showed exports fell 2.6% in July. This was the latest piece of bad news about Germany's economy, following disappointing manufacturing data earlier in the week.
- Italian banks were in focus for investors following heavy news flow from the sector. Banca Monte dei Paschi di Siena's chief executive, Fabrizio Viola, stepped down on Thursday as the bank seeks an emergency rescue plan. The troubled Italian lender said it would find a replacement quickly. BMPS shares closed lower by more than 2%.
- The Bank of Italy has given the green light to the merger between Banco Populare and Banca Popolare di Milano. Shares in Banco Populare finished up nearly 1%. Unicredit shares were in negative territory after the bank said on Thursday it had sold its a portfolio of bad loans worth €570 million ($640 million) to Balbec Asset Management. Shares in the bank finished down around 1.5%.
Source: Bloomberg, TradingFloor.com
Local markets and commodities
- Bank of New York Australia ADR Index -2.8%, biggest decline since July 5, BHP Billiton ADR -1.6% to $A20.39 equivalent, 1.9% discount to last Sydney close, Rio Tinto ADR -2.3% to $A40.77 equivalent, 16% discount to last Sydney close
- Gold fell for the third day in a row Friday, under pressure from a stronger US dollar and concerns that the Federal Reserve may raise interest rates sooner than expected.
- Gold for December delivery settled down 0.5% at $1,334.50/troy ounce on the Comex division of the New York Mercantile Exchange. Federal Reserve Bank of Boston President Eric Rosengren spoke Friday in favour of raising rates, sparking speculation that an interest-rate increase could come as early as September.
- Recent disappointing US economic data, including nonfarm payrolls and ISM non-manufacturing reports, buoyed gold prices and diminished expectations for a rate increase in September. However, the precious metal has also been susceptible to remarks from Fed officials, leading to sharp price swings in a thin market. Goldies in Toronto sank 4.50% on Friday. Gold stocks: GOR, NCM, NST, AQG, EVN, KCN, RMS, RRL, SAR, SLR
- Oil prices fell Friday on a stronger dollar and scepticism that a large drop in US inventories last week marks the beginning of a trend. But prices still posted a weekly gain following the biggest one-week stockpile decline in about 17 years and indications that some major producers are willing to cooperate on a production freeze.
- US oil for October delivery settled down $1.74, or 3.7%, at $45.88/barrel on the New York Mercantile Exchange. Prices rose 3.2% this week. Brent, the global benchmark, fell $1.98, or 4%, to $48.01/barrel on ICE Futures Europe. The contract rose 2.5% on the week.
- Prices surged Thursday after the Energy Information Administration said US crude supplies fell by 14.5 million barrels last week, the biggest weekly drawdown since 1999. Crude inventories around the world stand near record levels, keeping prices subdued, and traders are closely watching inventories for signs that the global glut of crude is shrinking.
- Oil prices rose early in the week after Saudi Arabia and Russia signed an oil-cooperation agreement, though the two countries didn’t commit to production limits. The Organisation of Petroleum Exporting Countries and Russia are continuing to talk about a possible production freeze ahead of a meeting on the subject in Algeria later this month. But any deal would have to overcome major obstacles. Many countries already are producing near record-high levels, and Iran has refused to consider a production cap until its production grows further. Oil stocks: WOR, WPL, STO, SEA, BPT, OSH, HZN, DLS, AWE, KAR, ORG, SXY
- Iron ore lost 0.62% to $57.78/tonne. According to Chinese brokerage houses, iron ore’s prospects look increasingly bearish, especially toward year-end when seaborne supply is set to increase. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, BCI, SDL
- Zinc ended a run of three straight weekly gains as Bank of China International warned the metal’s surge this year may have gone too far. Used to coat steel, zinc has outperformed all other industrial metals on the London Metal Exchange this year as traders bet dwindling mine production and buoyant demand will leave a shortfall.
- Investors should prepare to short zinc as this year’s 42% rally looks overdone when compared with copper, Bank of China’s head of commodity strategy Xiao Fu said in an interview. Zinc fell 1% to settle at $2,291.50/tonne on the London Metal Exchange. A 3.1% weekly decline is the steepest since June. Copper lost 0.7% on Comex. Copper stocks: PNA, OZL, SFR; Nickel stocks: IGO, WSA; Aluminium stock: AWC
- Trades ex-dividend: Cimic (CIM), Orora (ORA), Qube (QUB), Steadfast (SDF)
- Mineral Resources (MIN): Reports completion of Wodgina mine assets purchase
- Orica (ORI): two workers died in explosion at plant in Chile
- Origin (ORG): New CEO Calabria to focus on cutting $6.9bn debt
- Qantas (QAN): Poised for first Aussie bond sale since ratings upgrade
- Westpac (WBC): Prices $A75mln increase to June 2026 bond
Broker upgrades and downgrades
- Brickworks (BKW): Raised to buy vs hold at CCZ Statton Equities
- Ramsay Health (RHC): Raised to buy vs hold at Morningstar
- Sonic Healthcare (SHL): Raised to buy vs hold at Morningstar
Stock to watch: Commonwealth Bank (CBA.xasx)
CBA remained weak throughout all September and at the last weekly close was below $71. The major support level is $70, which CBA failed to have a daily close below in the last three years. We saw a breakout in early April this year but it proved to be a false break. The downward momentum can carry the prices below $70 today as there could be stops below it so we would rather wait and see the reactions after the break then determine to see if it is a false break.
Source: Saxo Bank
AUS200 and AUDUSD
S&P500 ended almost two months of tight ranges as it did its first daily move of greater than 1% for the first time in over 40 sessions. The major support levels are between 2,100 and 2,120, which have served as key resistance levels since early 2015, therefore we expect some retracements off these levels in the next coming days. AUS200
has already looked weak in the last couple of weeks and the sentiments are likely to remain negative today but it is now approaching the 200 DMA near 5,200, which should be the next support level.
Source: Saxo Bank
extended losses to plunge towards the August double bottom of 0.7490 as the US dollar continued to rally. The downside momentum seems strong due to the risk-off sentiments but selling could be limited to the interim support levels of 0.7490-0.75. The price actions are expected to be subdued today but the major focus for AUDUSD would be the employment data on Thursday.
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. Watch the recording of this week’s Macro Monday Call here. Watch our daily morning call on Periscope at 0945: #SaxoStratsAPAC. Follow us on twitter.com/SaxoAustralia