Saxo Bank Head of FX Strategy John Hardy reports that the euro continues its ascent despite Italian yields continuing to rise with key EURUSD flashpoints at 118.25, 119.25, and of course 1.20.
Article / 03 August 2016 at 0:35 GMT

Today's Trade: ASX200 lower on overseas lead

Trading Desk / Saxo Capital Markets
  • US shares fell to their lowest in four weeks
  • Investors sought out safe havens such as gold and JPY
  • Local shares were lower at the open following falls overseas

By Saxo Capital Markets (Australia)

Overnight and early trading

Local shares fell at the open following falls overseas. The ASX200 was down 0.7% to 5500 at the start. Banks and retailers were hit while gold miners were benefitting from the gloomy mood. Meanwhile, Rio Tinto approved a $338 million iron-ore mine development in Australia and was up 1% before its interim results are released tonight.

 Not everything's on the way down ... gold stocks are benefitting from investor fears. Photo: iStock

Overseas, investors turned risk averse, sending US stocks to their biggest drop in four weeks amid a selloff in equities from Japan to Europe as oil’s plunge into a bear market rekindled global growth concerns. Gold climbed with the yen amid demand for havens.

The S&P 500 Index notched up its first back-to-back declines since the aftermath of the Brexit vote, while the Dow Jones Industrial Average’s losing streak hit seven days, its longest slump in a year. Retailers tumbled as data showed US consumers tapped into savings to boost spending last month, while automakers plunged on concern the market may have peaked in 2015. 

MSCI’s All-Country World Index fell the most since July 5 as oil extended losses below $40/barrel. Gold futures rose for a sixth straight day as the yen hit a three-week high after Japanese government’s fiscal plans underwhelmed investors.

The four-week advance in global equities has faltered as crude’s 22% rout since June rekindles anxiety over the global economy at the same time as European lenders come under scrutiny over the strength of their balance sheets. While central banks and governments around the world are bolstering stimulus to shore up growth, Japan’s state support package, which boosts spending by ¥4.6 trillion ($45 billion) fell short of expectations. 

US data Tuesday also reinforced concern that the American consumer is losing power amid sluggish wage gains. The S&P 500 fell 0.6% to 2,157.03 in New York, its lowest close since July 13. The index hasn’t moved more than 0.5% on a closing basis in 12 sessions, a two-week period where it advanced 0.3% after rallying 8.2% in the previous three weeks, data compiled by Bloomberg show.

US economic data out Tuesday provided a mixed picture, with incomes rising a less-than-projected 0.2% in June, while the savings rate declined to a more than one-year low. Consumer purchases rose more than was anticipated.

Pfizer fell the most since November after leaving its full-year earnings forecast unchanged, even as quarterly profit and sales exceeded predictions. Retailers had the steepest drop in five weeks as Kohl’s and Macy’s slumped at least 7%. July’s strongest performers – technology shares – fell as Apple lost 1.5%.

The Stoxx Europe 600 Index lost 1.3% for its steepest decline since July 6. Commerzbank tumbled 9.2%, while UniCredit slid 7.2% as Il Messaggero reported that the lender may consider a capital increase. The MSCI Asia Pacific Index dropped 0.4% amid a 1.6% decline in Japan’s Topix gauge.

Futures foreshadowed more declines for Asian shares, with contracts on the Nikkei 225 Stock Average falling at least 1.4% in Osaka and Chicago. Futures on stock gauges in Australia and South Korea retreated at least 0.5%. Trading was cancelled in Hong Kong Tuesday as a tropical storm hit the city.

The yen jumped 1.5% to 100.89 per dollar as Japan’s government announced a fiscal package that was about a quarter of the total spending amount flagged by Prime Minister Shinzo Abe last week. The currency touched its strongest level since July 11. The New Zealand and Australian dollars jumped 1%, rising with the euro and the Swiss franc.

Odds on the Federal Reserve raising interest rates this year have dropped, and are hovering below 40% after a weaker-than-expected report on US economic growth on Friday. The pound advanced, strengthening 1.4% to $1.3357. The Bank of England delivers its second post-Brexit rate decision on Thursday, with some investors seeing the risk of policymakers disappointing the market, which is pricing in the near certainty of a rate reduction.

Germany’s 10-year bonds fell for a second day and similar maturity Treasuries retreated as a selloff in Japan’s government debt filtered across global sovereign securities. Bill Gross, the 72-year-old bond fund manager, reiterated his warning on government debt after yields from the US to Australia touched record lows in the past month. The danger of the unprecedented rally, as Gross sees it, is that any reversal will be painful for investors. 

Ten-year Treasury yields increased by three basis points, or 0.03 percentage point, to 1.56%, after rising seven basis points on Monday.

West Texas Intermediate crude erased a gain of more than 1% to fall below $40/barrel for a second day. WTI for September delivery declined 1.4% Tuesday to settle at $39.51/barrel, its lowest price since April 7. While American crude and gasoline inventories are forecast to have declined last week, they’ll likely remain around their highest seasonal level in at least two decades. 

Nigeria has also resumed payments to former militants as the government seeks to establish a ceasefire after attacks cut the country’s oil output to the least since 1989. Factions in Libya have reached a deal to reopen oil terminals. 

Gold futures due in December rose 1% to $1,372.60/ounce, capping their longest run of gains since June. Zinc for delivery in three months rose 0.4% to $2,275/tonne in London, after touching $2,299, the highest level since May last year.

Source: Bloomberg,

US earnings

  • Wednesday: Time Warner, Tesla Motors, Allstate, Agrium, Continental Resources, Virtu Financial, Clorox, Transocean, Marathon Oil, Kate Spade, Iamgold, Occidental Petroleum, Herbalife, Tesoro, Delphi Automotive, MetLife, 3D Systems, Sunoco Logistics, Noble Energy, Humana, HollyFrontier
  • ThursdayKraft 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
  • FridayWeyerhaeuser, Allianz, Virgin America, Buckeye Partners, Liberty Interactive

Local markets and commodities

  • Bank of New York Australia ADR Index -0.2%, BHP Billiton ADR -0.1% to A$19.19 equivalent, broadly in line with last Sydney close, Rio Tinto ADR +0.3% to A$43.10 equivalent, 13% discount to last Sydney close
  • Gold prices closed at their highest level in nearly a month Tuesday, buoyed by expectations that the Federal Reserve will hold off from tightening monetary policy while other central banks continue to ease. 
  • Gold for December delivery closed up 1% at $1,372.60 a troy ounce on Comex, the highest settlement price since July 6. Prices for the metal are up more than 4% from their July lows, as soft US economic data and a dovish message from the Fed last month have convinced some investors that the central bank is unlikely to raise rates in September. 
  • Expectations of lower rates tend to buoy gold, which pays its holders nothing and struggles to compete with yield-bearing investments when borrowing costs rise. Goldies in Toronto rallied 2.88% overnight. Gold stocks: GOR, NCM, NST, AQG, EVN, KCN, RMS, SAR, SLR
  • Oil traded near $40/barrel in New York following a drop in US stockpiles as global growth concerns resurface. West Texas Intermediate for September delivery was at $39.69/barrel on the New York Mercantile Exchange, up 18 cents at 0743 Tokyo time. 
  • Futures on Tuesday lost 55 cents to settle at $39.51, the lowest since April 7. Total volume traded was about 35% below the 100-day average. Brent for October settlement closed 34 cents lower at $41.80/barrel on the London-based ICE Futures Europe exchange on Tuesday. The global benchmark settled at a premium of $1.50 to WTI for October. Oil stocks: WOR, WPL, STO, SEA, BPT, OSH, HZN, DLS, AWE, KAR, ORG, SXY
  • Iron ore lost 0.5% to $61.94/tonne. Meanwhile this morning, Rio Tinto Group, the world’s second-biggest mining company, approved a $338 million iron-ore mine development in Australia, expanding a glut that’s more than halved prices for the steel-making raw material in the past five years. Production capacity at the Silvergrass mine will be increased by 10 million tonnes after the investment that will lower mining costs, London-based Rio said Tuesday in a statement. 
  • The cost of the investment will be paid back in less than three years and has an internal rate of return “well in excess of 100%”, Rio said. Rio Tinto (RIO): Scheduled to release 1H results after market closes; NOTE: 1H underlying profit est. $1.56bn (7 analysts); Preview; Approves $338mln iron-ore mine amid supply glut. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, ARI, BCI, SDL
  • Most industrial metals retreated for a second day in London after oil futures fell into a bear market, signalling lower mine production costs. Copper, aluminium and zinc all lost close to 0.2% on the London Metal Exchange after the LME index of six metals declined 0.4% a day earlier, while lead gained. Copper rose 0.5%. Copper stocks: PNA, OZL, SFR; Nickel stocks: IGO, WSA; Aluminium stock: AWC
  • ANZ (ANZ), Westpac (WBC), Commonwealth Bank (CBA), National Australia Bank (NAB): Squeezed Aussie banks give more to savers even as RBA cuts rates
  • Crown (CWN): Says gets legal challenge to Barangaroo applications
  • Fonterra (FSF): Whole milk powder avg. price rises to $2,265/t
  • Genworth Australia (GMA): Scheduled to release 1H results; NOTE: 2-analyst adj. EPS est. $A0.20
  • LendLease (LLC): Eyeing Risanamento’s Milan Santa Giulia area: Corriere
  • Northern Star (NST), Saracen Mineral (SAR): Among speakers at Diggers & Dealers conference
  • Regis Resources (RRL): Says co. has firepower for big acquisitions
  • Seven Group (SVW): Scheduled to release FY results; NOTE: FY adj. net income est. $A150.6mln (5 analysts)
  • Yday: Seven West falls 15% as profit forecast misses estimates

Broker upgrades and downgrades

  • Bapcor (BAP): Cut to hold vs add at Morgans Financial
  • Santos (STO): Raised to overweight vs equalweight at Morgan Stanley
  • Seven West (SWM): Cut to neutral vs outperform at Credit Suisse

Pending orders

US500.i and XAUUSD

US500 extended its losses to break below the bottom of the rectangle pattern 2,158 and the trading volume was high. It retraced back up to 2,158 into the close but we expect further selling pressure to exist, therefore we would look to sell anywhere near 2,158 which is likely to act as an interim resistance level. We are targeting 2,110 as a support level with the next resistance levels at 2,165 - 2,169 which should be the stop loss.

Entry: sell

Price: market

Target 1: 2110

Target 2: 2040 (Targeting gap fill)

Stop loss: 2170
Source: Saxo Bank
As the US dollar index (DX) continues to weaken, gold (XAUUSD) is looking strong as the upside momentum seems to be increasing to test the July high 1,375. The rise in VIX supports our bullish exposure on gold, therefore we consider buying gold on any pullback with stop below 1,346 and profit target at 1,387-1,403. Tonight’s focus would be on the ADP nonfarm employment change.
 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


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