Article / 05 February 2017 at 23:38 GMT

Today's Trade: Banking surge drives S&P/ASX200 rebound

Trading Desk / Saxo Capital Markets
  • Oil capped a third weekly gain as Washington imposed fresh sanctions on Iran
  • Trump's push to roll back financial regulation boosted US bank stocks
  • The AUDUSD rally has met resistance level at the 0.77 handle
  • But a break higher is possible if the USD continues to wane
By Saxo Capital Markets Australia

Overnight and early trading
  • The S&P/ASX200 was up by a hefty 0.65% to 5,657.90 at 1033 AEST (2333 GMT on Sunday).
  • The Dow Jones Industrial Average posted its biggest one-day advance in nearly two months as the potential for regulatory rollbacks injected new enthusiasm for financial stocks. A one-day rally in financial stocks on Friday helped push US equities into positive territory for the week after the S&P500 Index spent most of the period fluctuating between gains and losses against the backdrop of a slew of executive orders by President Donald Trump.
  • The S&P500 added 0.1% to 2,297.42 on the week as the Dow Jones Industrial Average lost 0.1% to 20,071.46. Both gauges trailed the Russell 2000 Index as small-cap shares added 0.5 percent for the fourth gain in five weeks. The VIX tumbled below 11 to 10.97.

Crude capped a third weekly gain as Washington imposed fresh sanctions on Iran. Photo: Shutterstock

  • On Friday, President Donald Trump took action on rolling back financial regulation, boosting bank stocks. He signed executive actions to scale back the 2010 Dodd-Frank financial-overhaul law and to roll back a retirement-savings rule that would hold brokers and financial advisers who work with tax-advantaged retirement savings to a fiduciary standard. Shares of banks with large brokerage units rose sharply. Morgan Stanley jumped $2.30, or 5.5%, to $44.43, Wells Fargo climbed 1.52, or 2.7%, to 57.27, and Bank of America added 57 cents, or 2.5%, to 23.29. Goldman advanced 10.54 to 240.95 (adding 72 points to the Dow), and the KBW Nasdaq Bank index gained 2.2%. The index of big banks is up 24% since the US election, partly on the belief Trump will lighten banks’ regulatory load.
  • A pickup in hiring in January also fueled stocks’ gains on Friday. Jobs outside farms increased 227,000 in January, the best gain since September, the Labor Department reported Friday. The unemployment rate ticked up to 4.8% from 4.7% a month earlier, and workers’ wages rose only modestly.
  • The gains by major stock indexes followed a recent slowdown in the market’s rally. Stocks have wobbled in recent sessions after reaching fresh highs as investors digested policy comments from the new administration, including pronouncements on trade and immigration. But many traders expect shares to perform well if the economy can maintain its upward momentum.
  • In earnings news, Visa rose 3.78, or 4.6%, to 86.08 after the credit-card company posted a 6.7% rise in fourth-quarter profit from a year earlier. fell 29.75, or 3.5%, to 810.20, however, after the retail giant’s revenue was below analysts’ expectations. Macy’s shares climbed 1.97, or 6.4%, to 32.69 after the Journal reported Canada’s Hudson’s Bay has approached the retailer about a takeover. There are about 75 S&P 500 companies reporting earnings in the week ahead and marks the last major week of earnings season.
  • In other markets, the Stoxx Europe 600 rose 0.6% Friday, though it ended the week down 0.6%.
  • Source: Bloomberg,
International earnings this week
  • Monday: Toyota Motors, Hasbro, CNA Financial, Diamond Offshore, Tyson Foods, Sysco, Ryanair, 21st Century Fox, Tesoro, Boardwalk Pipeline.
  • Tuesday: Disney, Gilead Sciences, BP, General Motors, Archer Daniels Midland, Cardinal Health, Statoil, BNP Paribas, Intercontinental Exchange, Michael Kors, Vulcan Materials, Tenneco, Wellcare Health, Mondelez International, Buffalo Wild Wings, Plains All American, Pioneer Natural Resources, Panera Bread, Zillow.
  • Wednesday: Time Warner, Glaxo SmithKline, Whole Foods, Prudential Financial, Carlyle Group, Alaska Air, Humana, Allergan, Rayonier, Suncor, Lions Gate, Owens Corning, Sanofi, Level 3 Communications, Jacobs Engineering.
  • Thursday: Coca-Cola, Kellogg, Twitter, Yum Brands, Beazer Homes, Cummins, Total, Agrium, Occidental Petroleum, Nissan, Borg Warner, Dunkin Brands, Expedia, News Corp, Nvidia, Pandora Media, Activision Blizzard, Thomson Reuters, KKR.
  • Friday: Aon, Calpine, Buckeye Partners, ArcelorMittal, Ventas, Nippon Telegraph, Interpublic.

Local markets
  • Bank of New York Australia ADR Index -1.5%, BHP Billiton ADR -3.8%, most since September 13, to $A25.62 equivalent, 2.2% discount to last Sydney close, Rio Tinto ADR -4.4%, most since July 19, to $A55.50 equivalent, 14% discount to last Sydney close.
  • In early reporting, National Australia Bank reported its first quarter earnings, which fell 1% year on year to A$1.6 billion. Unaudited cash profit, which excludes one-time items, fell in the three months ended December 31 from $A1.7 billion in the same quarter last year. The bank’s bad-debt charge fell 23% to $A164 million as charges on mining, mining-related and agriculture sectors weren’t repeated. Expenses in the quarter rose about 5 percent, mainly due to increased wages and regulatory costs.
  • Gold futures rose, capping the biggest weekly gain in more than seven months, as slower U.S. wage growth eased concern that rising inflation will spur the Federal Reserve to move more aggressively in boosting interest rates. Gold futures for April delivery added 0.1% to settle at $1,220.80/oz. Bullion has rebounded in 2017 after the biggest quarterly drop in more than three years, helped by speculation that the Federal Reserve will be more cautious in raising interest rates amid uncertainty over the impact of  Trump’s policies. Traders see a 28% chance that policymakers will tighten monetary policy in March. That’s down from about 30% before the US data was released, Fed fund futures data showed. Gold stocks: GOR, NCM, NST, AQG, EVN, KCN, RMS, RRL, SAR, SLR.
  • Oil capped a third weekly gain as the US imposed fresh sanctions on Iran after a missile test and OPEC reached about 60% of its output-cut target. WTI for March delivery increased 29 cents to $53.83/barrel. Prices rose 1.2% this week. Brent for April settlement advanced 25 cents, or 0.4%, to $56.81/bl. Opec pumped 32.3 million barrels a day last month, according to the Bloomberg survey. The 10 members of the cartel that pledged to make cuts implemented 83% of those reductions on average, but their efforts were offset by gains from Iran, Nigeria and Libya. Oil stocks: WOR, WPL, STO, SEA, BPT, OSH, HZN, DLS, AWE, KAR, ORG, SXY.
  • Iron ore slumped with steel futures in China as a measure of factory activity missed estimates, and as the country’s central bank raised some interest rates, signalling less monetary stimulus this year. News that the US Commerce Department concluded that Chinese stainless steel imports were receiving subsidies of over 74% didn’t seem to impact traders. However, it does raise the risk of further trade battles. Spot prices dropped 1.15% to $82.19. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, BCI, SDL.
  • Benchmark copper on the LME closed down 1.9% at $US5772 a tonne, the weakest since January 23 and the third straight loss. It fell nearly 1% on Thursday. Nickel prices also fell, but were still on track for a 7% weekly gain after the Philippines said it would permanently close half its nickel production. LME nickel ended 1.6% weaker at $US10,225 a tonne, recovering from a low of $US10,025, as Chinese markets reopened after a week-long break. Aluminium added 0.3% to close at $US1835, lead declined 0.6% to $US2325 and tin, untraded in closing rings, was bid down 0.4% to $US19,765. Zinc dropped the most in a month amid tighter monetary policy and weaker-than-expected factory data in China as business resumed following holidays. Copper stocks: PNA, OZL, SFR; Nickel stocks: IGO, WSA; Aluminium stock: AWC.
  • Australia decoupling from global stocks as rate paths diverge.
  • Beach Energy (BPT), Origin Energy (ORG): Beach preparing bid for Origin upstream assets: AFR.
  • BHP Billiton (BHP): Yawning gap separates BHP and Chile workers as wage talks resume.
  • Bionomics (BNO): To get $A10mln Milestone payment from MSD.
  • Boral (BLD): Headwaters holders approve merger.
  • Cromwell Property (CMW): Investa remains open To continuing talks.
  • Crown Resorts (CWN): Holds 24.6% passive stake in Melco Crown.
  • Eclipx (ECX): Ironbridge sells final 5% stake in co.: AFR.
  • National Australia Bank (NAB): 1Q unaudited results expected.
  • Nufarm (NUF): Said to be looking at acquisitions; Basta unit from Bayer may be worth as much as $1.5b: Australian.
  • QBE Insurance (QBE): Deal or no deal: Allianz CEO faces $A3.2bn M&A choice.
  • Rio Tinto (RIO): Bolstering payout a ‘real possibility,’ says Credit Suisse.
  • Westpac (WBC): Plans to release formal sales documents for Ascalon Capital in April: AFR.
  • Woolworths (WOW): Put volume jumps; Credit Suisse sees margin pressure.
Broker upgrades, downgrades
  • Alumina (AWC): Alcoa raised to buy at BofAML on more positive aluminum outlook.
  • Graincorp (GNC): Cut to neutral vs outperform at Credit Suisse.
  • Independence Group (IGO): Raised to outperform vs neutral at Credit Suisse.
Australian releases due out this week
  • Monday:National Australia Bank Ltd: Trading update.
  • Transurban Group & Shopping Centres Australasia Property Group: Earnings call, Macquarie Group Ltd: Operational results.
  • Tuesday: Ltd, CIMIC Group Ltd & Genworth Mortgage Insurance Australia
  • Wednesday:BWP Trust, Rio Tinto Ltd, AGL Energy Ltd, BWP Trust, SKYCITY Entertainment Group Ltd, & Suncorp
  • Thursday:AMP Ltd, Henderson Group PLC, AMP Ltd, News Corp
  • Friday:REA Group Ltd
Trendline to support Dollar index

The US Dollar index last week claims its first weekly settlement below the 2015 breakout level, which were the levels to hold losses. The technical picture does not look pretty for the US dollar bulls and, on continued selling, we mark the next set of support to be offered at the trendline, which connect the swings lows throughout 2016 and this week that come in at around the 98 handle.

Dollar index chart

Looking at the daily chart, the intra week low happened to bounce off the 38.2% retracement between the May 2016 lows to recent highs.

So the next retracement level would takes us to the 50% retracement mark at 97.85 which is close to that 98 handle as mentioned previously.

Dollar index daily chart2

Now we are potentially seeing quite an interesting development. At this stage, this is pure speculation: should last week's lows over the US dollar index hold, and we see a higher move from here, the formation of the final shoulder of a head and shoulder pattern may be in play.

If we get a retracement to the upside that fails to take out recent highs or at least fails below 102.50, then it is possible that a head and shoulder reversal could be in play. However again this is pure speculation for now, but not an entirely impossible scenario.
Dollar index trend

Divergence between S&P/ASX200 and S&P500

We noticed wide divergence between the S&P500 (US500) and S&P/ASX200 (AUS200) as better than expected Non farm payroll seems to have lifted sentiments. The financial sector in the US is looking to push higher and AUS200 has been failing, to break below the key support level at 5,600 in 2017.

So AUS200 looks undervalued, although we are seeing a descending triangle from the price actions perspective. Mining stocks are expected to weigh on AUS200, but we look to consider going long on the break of the recent downtrend (from January 17 high).
S&P/ASX200 chart
AUDUSD breakout possible

Initial reactions from strong nonfarm payroll figures were not surprising, as US dollar spiked immediately. But it soon reversed to the downside pushing up AUDUSD and gold (XAUUSD).

The AUDUSD rally was limited to the recent resistance level a the 0.77 handle, but a breakout is possible if the US dollar continues to wane. Copper was the only commodity that sold off heavily, breaking recent uptrend therefore this may distract the upward momentum on AUDUSD.
AUDUSD trend
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Sources: AFR, SMH, CNBC, BBG, WSJ, The Australian, Reuters

– Edited by Robert Ryan

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Today's Trade is compiled by the Sydney trading desk at Saxo Capital Markets.

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