Article / 28 July 2016 at 0:25 GMT

Today's Trade: BHP flags $1.3bn hit after Samarco dam disaster

Trading Desk / Saxo Capital Markets
  • Local markets opened higher led by mining stocks
  • The Federal Reserve left interest rates unchanged Wednesday
  • Facebook jumped more than 5% in after-markets trading 
  • EURUSD rallies as the FOMC statement interpreted as less hawkish

By Saxo Capital Markets (Australia)

Overnight and early trading

Local markets opened higher, led by mining stocks, particularly gold miners after gold rallied following the Federal Reserve's decision to keep rates on hold. At the start, the ASX200 was up 0.3% at 5554.

BHP Billiton announced this morning that it will record a provision of between $1.1 billion and $1.3 billion ($A1.46bn and $A1.73bn) for the Samarco dam disaster when it reports full-year financial results next month. The item will be recorded as an exceptional item, and represents BHP's share of contributions to a remediation and reparation package worth 9.2 billion Brazilian real ($A3.76 billion). BHP will report its financial results on August 16. 

 BHP announced it will record a provision of up to $A1.73bn for
last year's Brazilian mining disaster. Photo: iStock

Meanwhile overnight, Treasuries rose, the dollar weakened versus the euro, while US stocks were mixed after the Federal Reserve reiterated its intention to tighten monetary policy gradually, even as the economy shows signs of improvement.

Yields on 30-year Treasury notes fell seven basis points as two-year yields shed four basis points, as gold futures climbed for a second day. The greenback erased gains against a basket of
10 of its major peers after Fed officials reiterated that “economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.” 

The S&P 500 Index slipped as crude’s ongoing plunge weighed on energy stocks. Apple rose the most since 2014 and Facebook jumped in extended US trading.

The Federal Reserve left interest rates unchanged Wednesday, while saying risks to the US economy have subsided and that the labour market is getting tighter. The central bank is taking stock of the economy’s progress in the wake of the UK’s vote to leave the European Union, as well as the large swing from May’s soft labour report to June’s rebound. While Chair Janet Yellen has repeatedly stated that the Fed is likely to raise borrowing costs gradually, market volatility and the unexpected dip in job gains have delayed such plans.

The S&P 500 Index fell 0.1% to 2,166.58 in New York. Losses in the index initially deepened after the Fed’s statement, but they were pared as the dollar turned negative. The Nasdaq 100 Index climbed 0.7%, while the Dow Jones Industrial Average finished little changed.

US stocks spent most of the session mixed, with earnings reports setting the tone. Apple rallied 6.5% after saying late on Tuesday that iPhone demand picked up, forecasting fourth-quarter sales that may exceed analysts’ estimates. European suppliers Dialog Semiconductor Plc and AMS AG climbed at least 4%.

Twitter tumbled 15% after forecasting third-quarter revenue that trailed analysts’ projections. Coca-Cola dropped 3.3% on second-quarter sales that lagged behind estimates. McDonald’s capped its biggest two-day slide since August.

Facebook jumped more than 5% in after-markets trading as the social-network provider posted better-than- expected revenue and user growth. Earnings also dominated in Europe, with the Stoxx Europe 600 rising to a one-month high after four days of ending little changed. LVMH Moet Hennessy Louis Vuitton SE jumped after the world’s biggest luxury-goods maker reported stronger demand for its champagnes and cognacs. PSA Group surged, leading a gauge of automakers to the best gain among industry groups.

Futures on Asian indexes mostly fell, with contracts on Osaka-traded Nikkei 225 Stock Average foreshadowing a 0.7% drop and Kospi index futures in Seoul down 0.2%.

Odds of the Fed hiking rates by the end of 2016 dropped to 45% after the central bank’s statement, down from 47% a week ago, though well ahead of the 7.76% probability a month ago.
The yen weakened 0.7% to 105.40 per dollar after Japanese Prime Minister Shinzo Abe surprised markets with a fiscal-stimulus package exceeding ¥28 trillion ($265 billion), a bid to jump-start the country’s floundering economy.

Benchmark 10-year Treasury note yields fell six basis points, or 0.06% percentage point, to 1.50%, according to Bloomberg Bond Trader data. Ten-year yields set a record-low
1.318% on July 6.

Gains on shorter maturities were limited as policymakers said that “near-term risks to the economic outlook have diminished.” The statement also said officials expect “that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.” Treasuries have rallied in 2016 as the Fed held off on raising rates after liftoff from near zero in December, while central banks in Japan and Europe maintained unprecedented stimulus.

Oil extended losses at a three-month low in New York as government data showed that US crude stockpiles unexpectedly climbed last week, halting the longest streak of declines on record. West Texas Intermediate oil for September delivery dropped 2.3% to settle at $41.92/barrel in New York. It’s the lowest close since April 19.

Gold capped a second straight gain as the Fed reiterated plans to slowly tighten. Futures for December delivery advanced 0.5% to settle at $1,334.50/ounce.

Copper futures for delivery in September lost 1.8% to close at $2.185/pound on the Comex, the biggest loss since June 24. Silver futures for September delivery climbed 1.6% to end at $29.995/ounce.

Commodities will probably rebound next year as demand strengthens, according to the World Bank, adding its voice to those including Citigroup who’ve forecast that 2017 may be a better year for raw-material prices.

Source: Bloomberg,

US earnings

  • Thursday:, Alphabet, AstraZeneca, Bristol-Myers Squibb, Colgate-Palmolive, Celgene, Cigna, Total, MasterCard, Ford, Dow Chemical, Diageo, ConocoPhillips, Credit Suisse, Royal Dutch Shell, BNP Paribas, Hershey, HCA, Harley-Davidson, Marsh & McLennan, Marathon Petroleum, Potash, PG&E, TransCanda, Raytheon, Expedia, CBS, Samsung
  • Friday: Exxon Mobil, Chevron, Merck, AB InBev, UPS, UBS, Sanofi, Xerox, CBOE Holdings, Philips 66, Cabot Oil, Barclays, Eni, Tenneco, Lexmark, CNA Financial

Local markets and commodities

  • S&P/ASX 200 Index futures up 0.2%; futures relative to estimated fair value suggest an early gain of 0.5%
  • Bank of New York Australia ADR Index -0.1%, BHP Billiton ADR +1% to $A19.86 equivalent, at par with last Sydney close, Rio Tinto ADR +1.3% to $A43.81 equivalent, 12% discount to last Sydney close
  • Gold gained for a second straight day after US durable-goods orders dropped. Gold futures for December delivery advanced 0.5% to settle at $1,334.50/ounce on the Comex in New York, the first consecutive gain in a week. Gold then went on to make a new high on the Federal Open Market Committee statement, rallying $11.39 after Fed held rates steady. The day’s high was at $1,333.69. Gold stocks on Toronto rallied 4.37% overnight. Gold stocks: GOR, NCM, NST, AQG, EVN, KCN, RMS, SAR, SLR
  • Oil dropped to a three-month low in New York after government data showed that US crude stockpiles unexpectedly climbed last week, halting the longest streak of declines on record. West Texas Intermediate oil for September delivery dropped $1 to settle at $41.92/barrel on the New York Mercantile Exchange. It’s the lowest close since April 19. Total volume traded was down 15% from the 100-day average. 
  • Brent for September settlement fell $1.40, or 3.1%, to $43.47/barrel on the London-based ICE Futures Europe exchange, the lowest close since April 18. The global benchmark ended the session at a $1.55 premium to WTI. Crude extended losses and the dollar briefly spiked after the Federal Reserve struck a more hawkish tone while leaving interest rates unchanged. 
  • US crude inventories climbed to 521.1 million barrels in the week ended July 22, leaving supplies at the highest seasonal level in decades, EIA data show. Stockpiles at Cushing, Oklahoma, the delivery point for WTI and the biggest US oil-storage hub, increased by 1.11 million barrels to 65.2 million. Crude production in the US rose by 21,000 barrels/day to 8.52 million last week, marking the longest series of gains since January. Nationwide output would be lower if not for a 33,000-barrel/day increase in Alaska. 
  • US oil explorers have boosted the number of active rigs by 55 since the start of June to 371, with 14 added last week, Baker Hughes said July 22. Oil stocks: WOR, WPL, STO, SEA, BPT, OSH, HZN, DLS, AWE, KAR, ORG, SXY
  • Iron ore advanced for a third day in China to the highest level since April on bets that oversupply of the steelmaking raw material will ease amid reconstruction and restocking following floods in northern China. Prices on the Dalian Futures Exchange climbed 4.5% to close at 466 yuan ($70) a tonne, just short of the daily limit and the highest since April 25.
  • Futures have gained 8.8% this week on speculation flood-hit regions will need steel for reconstruction and mills will buy ore to replenish inventories. Iron ore delivered to Qingdao in China added 2.2% to $58.08/ton on Tuesday, the highest in more than a week, according to Metal Bulletin. 
  • Prices are up more than 30% this year, defying warnings that new supply from Australia and Brazil would keep the market under pressure. Prices will trade at $50 in three months and $40 in six months, Goldman Sachs Group analysts said in a report dated July 27. That’s up from $45 and $35 previously. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, ARI, BCI, SDL
  • In other metals, aluminium, nickel and tin were little changed, while lead fell. Copper and zinc retreated overnight, with copper settling down 1.1% to $4,875/tonne on the LME, near the lowest in a week while zinc fell as much as 0.9% on the LME. Losses on copper continued following the Federal Reserve’s policy decision. Copper stocks: PNA, OZL, SFR; Nickel stocks: IGO, WSA; Aluminium stock: AWC
  • Bapcor (BAP): Agrees to buy Baxters, Roadsafe Automotive for at least $A22mln
  • Centuria (CNI): Macquarie Park in Sydney sold for $A101mln
  • Charter Hall Group (CHC): Appoints Karen Moses as independent director
  • Macquarie Group (MQG): Scheduled to hold annual meeting
  • Medusa Mining (MML): June quarter cash costs $A512/oz vs $A466 y/y
  • MyState (MYS): Said to be considering acquisition, capital raising, AFR reports
  • Virgin Australia (VAH): Set to release Q4 update

Broker upgrades and downgrades

  • Origin Energy (ORG): Cut to neutral from outperform at Credit Suisse
  • Spark Infrastructure (SKI): Cut to neutral from overweight at JPMorgan
  • Independence Group (IGO): Cut to sector perform from outperform at RBC

Pending orders

EURUSD and US500

EURUSD rallied as the FOMC statement seems to be interpreted as less hawkish, although it sounded quite optimistic about the global economic outlook and its own labour markets. EURUSD is now trading at the intersection of 200 DMA and the 50% retracement level 1.1070, which should be the interim resistance level. We would remain short on EURUSD unless we see a daily close above 1.11 handle.

EURUSD monthly
 Source: Saxo Bank
US500.i continues to show resilience as it is extending the consolidation that begun two weeks ago. It is quite obvious to see that US500 is going sideways between 2,175 and 2,158 although it made a record high 2,178 earlier this week. 

These price actions suggest that US500 is forming either rectangle or head and shoulders. If it is a rectangle, then it could be either continuation or reversal, therefore the ideal trade would be to sell/buy the break. We favour sell stop below the key support level 2,158 with stop above 2,178 as we witnessed the decent spikes in the safe haven assets such as bonds (ZN) and gold (XAUUSD) earlier this morning. 

The Shanghai Composite Index is also interesting to monitor today as there was a heavy selloff in the first half session of trading yesterday.
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. Listen to this week's Monday Macro Call here.


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