Article / 18 May 2016 at 1:16 GMT

Today's Trade: Big four banks, Fed hike jitters drive slump in ASX 200

Trading Desk / Saxo Capital Markets
Australia
  • The S&P/ASX 200 took an opening tumble
  • Crude oil has hit a seven-month high on talk of a fall in US stockpiles
  • Base metals were mixed as investors digested positive US data 
  • Iron ore moved up by a solid 2.6% yet traders remained cautious
  • Traders are now pricing in only a 6% chance the Fed will raise rates next month
  • Today's FOMC minutes (due out at 1800 GMT) may alter views of a Fed hike
  • The US dollar hit a three-week high against the yen

By Saxo Capital Markets Australia

Overnight and early trading

  • The S&P/ASX200 slipped heavily at the open; it was down 0.61% to 5,363.00 at 1115 AEST (0115 GMT).   
  • US stocks retreated and the Treasury yield curve flattened to the narrowest since 2007 amid growing speculation that the Federal Reserve sees firm enough economic growth to raise rates as soon as June.
  • The S&P 500 Index erased Monday’s rally as economic data showed higher consumer prices, with losses accelerating after a pair of Fed officials suggested higher rates may be warranted.
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 Brighter outlook ... the surge in crude prices that has seen oil hit a seven-month high is one of the few items of good news on markets at the moment. Photo: iStock


  • Two-year Treasuries, the coupon security most sensitive to expectations for Fed policy, underperformed longer maturities, reducing the extra yield that 10-year debt offers. Petroleo Brasileiro SA, the state-run oil producer, is offering record- high interest rates to entice investors to its first international bond sale in a year.
  • Global equities have been unable to extend gains after reaching a four-month high on April 20 as investors scrutinize data for clues on the timing of the Fed’s next policy move. Data Tuesday showed gains in consumer prices and new-home construction a day after manufacturing readings disappointed.
  • On Tuesday Atlanta Fed President Dennis Lockhart and San Francisco’s John Williams said two rate increases this year may be warranted. Dallas Fed President Robert Kaplan said a hike may come soon. Futures traders pushed the odds for an increase in June to 16% from 4% on Monday. “Currently my assumption is two, possibly three,” Lockhart said in Washington. He was joined at the Politico-hosted event by Williams, who said “gradual means two to three rate increases this year.”
  • The S&P 500 fell 0.9% to 2,047.16 after a 1% rally yesterday. The Dow Jones Industrial Average fell 1%. Following a 15% rally from a February low to a four-month high on April 20, the S&P500 has struggled to maintain momentum amid mixed earnings releases and signs of a lukewarm economic pickup. It’s down 2.2% since then.
  • Consumer-staples companies plunged, with Kraft Heinz Co. headed for its steepest decline in six months. After disappointing results from Macy’s Inc. sent chain-store shares tumbling last week, Home Depot Inc. slumped today following comments by executives that same-store sales gains shrank as the first quarter progressed. Utility shares also plunged as rising Treasury yields made their dividends less attractive. Apple retreated, down 0.4% following its surge from a day earlier (see Apple Call spread trade: https://www.tradingfloor.com/posts/saxostrats-apple-call-spread-looks-enticing-7636124)
  • Minutes from the Federal Reserve’s April meeting are due out on Wednesday at 1800 GMT. Traders are pricing in only a 6% chance the Fed will increase rates in June. December is now the first month with at least even odds of higher borrowing costs.
  • The Stoxx Europe 600 Index was little changed after two straight advances. Emerging-market equities climbed for a second day as Apple supplies advanced on news that Berkshire Hathaway Inc. took a stake in the iPhone maker.
  • Ten-year Treasury bonds advanced, while shorter-dated government debt fell, sending yields on two-year notes higher by two basis points to 0.82%. The extra yield that 10-year debt offers over two-year notes shrank to the smallest since 2007 on a closing basis.
  • Ireland emerged as America’s fourth-largest creditor following China, Japan and the Cayman Islands after the US government revised the way it reports the figures.
  • The US dollar rose toward a three-week high against the yen as the cost of living in the US climbed by the most in three years. The dollar rose 0.1% to ¥109.09, after reaching the highest level on a closing basis since April 27. It was little changed at $1.1317 to the euro.
  • The pound rallied the most in three weeks after a poll of UK voters released Monday showed people who support a campaign to remain in the European Union exceeded those saying they will vote to leave by a wider margin than last month.
  • Crude oil rose to a seven-month high on speculation that U.S. crude stockpiles declined last week while supply losses in Canada and Nigeria whittled away the global excess. West Texas Intermediate crude for June delivery rose 1.2% to $48.31 a barrel on the New York Mercantile Exchange, the highest close since Oct. 9. Prices are up 30% this year.
  • Gold gained a third straight session as mounting concerns over China’s debt boosted demand for the metal as a store of value. Miners including Barrick Gold Corp. rose after billionaire George Soros joined a slew of investors piling into bullion.
  • The CBOE Volatility Index (VIX) rose to trade near 15.6
  • Sources: Bloomberg, TradingFloor.com
Local markets
  • Bank of New York Australia ADR Index +0.9%. BHP Billiton ADR +3.1%. Rio Tinto ADR +1.5%
  • Spot gold has gained a little ground, up 0.3% to $1,279 on a weaker USD. Gold stocks are still in strong demand even as gold consolidates at these levels. U.S. regulatory filings yesterday showed George Soros bought in to gold through ETFS in the first quarter. Adding to this is Stan Druckenmiller public statement that he has been moving heavily into gold since last year. Druckenmiller has average returns of 30%p.a. for his fund. Gold stocks: NCM, NST, AQG, EVN, KCN, RMS, SAR, SLR
  • Crude oil has edged higher with both WTI and Brent rising 0.6% to $48.51 and $49.53 respectfully. Lingering threats over oil supply is holding prices firm. Canadian wildfires are shifting again and moving back towards the oil sands operations, removing 4,000 people from work camp. It’s quite possible that supply disruptions will run in to June. Nigerian exports have declined further making the physical market unusually light. Expectations for a fall in U.S. inventories could be expected this week. In all, oil is now trading at 7month highs. Oil stocks: WPL, STO, SEA, BPT, OSH, HZN, DLS, AWE, KAR, ORG, SXY
  • Iron ore moved a solid 2.6% to $55.78/tonne yet traders remained cautious. Steel futures were bought up more aggressively but the whipping action may be creating trading fatigue in iron ore. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, ARI, BCI, SDL
  • Base metals were mixed as investors digested positive US economic data against Chinese mounting debt. Aluminium continued to make ground after support from President Xi Jinping called for further capacity cuts in industries suffering from over capacity. Aluminium could very well be at a turning point after hitting lows in January where all Chinese smelters were operating at negative margins. Copper stocks: PNA, OZL, SFR; Nickel stocks: WSA, SIR; Aluminium stocks: AWC.
  • RBA says broad-based inflation weakness helped spur rate cut.
  • The Australian wage price index data for the first quarter of 2016 will be released at 1130 AEST (0130 GMT).
  • ANZ is under further public scrutiny after the corporate watchdog claims illustrates how the banks traders at times worked together to move the bank bill swap rate to their advantage: AFR
  • APN News (APN): News Corp., Fetch Plus among final bidders for regional unit, AFR reports.
  • AWE (AWE): Rated new outperform at RBC
  • Coca-Cola Amatil (CCL), Iluka (ILU): Annual meeting
  • Retail chain Coles is the brunt of cynical laughter after faint attempts to support the Australian Diary industry. Coles has donated $1m in to an independent dairy industry fund along with $0.20/litre from a new milk line to ‘provide direct support to farmers and invest in innovation’. But Victorian dairy farmer Marian MacDonald said “Now that Coles are killing the goose that laid the golden egg they’re saying we’d better get some grain under their nose to keep the head up.
  • PRR: Their lead product, IMP321 is in clinical development for the treatment of a range of cancer indications.
Earnings due out this week

  • Wednesday earnings: Target, Lowe's, SAB Miller, Cisco, Hormel, Staples, Booz Allen,L Brands, Salesforce.com, Analog Devices, Burberry, Take Two Interactive.
  • Thursday earnings: Wal-Mart, Gap, Applied Materials, Dick's Sporting Goods, Autodesk, Advanced Auto Parts, Ross Stores, Shoe Carnival, Mentor Graphics, Brocade.
  • Friday earnings: Campbell Soup, Deere, Foot Locker, The Buckle.

Stock-to-Watch: Santos (STO)

Oil and gas company Santos has been trading in an upward channel and has held above a key level of $4 in May after its initial break last month. STO has also broken its downward trend that had been forming since 2014.

With oil prices remaining at these levels over supply concerns that will go in to June, STO offers to continue to trade in its channel with upside to come.
 
Santos' share price trend
3
 
Broker upgrades, downgrades
  • AWE (AWE): Rated new outperform at RBC

Open positions
1
 
AUDUSD kicks higher

The AUDUSD enjoyed a rise yesterday being supported by the 200 day moving average and also on the back of the RBA minutes which showed that Reserve Bank considered delaying the rate cut earlier this month.

The minutes showed the board considered for further evidence for weakening inflation; and this boosted our local currency immediately following its release. The gains however were capped at the green uptrend line it broke earlier this month. Support for the day would be at the 200 day moving average level (~0.7257) and resistance could be met at the first Fibonacci retracement level of 0.7377. Stops would sit above 0.7405 for any new intraday shorts being taken today.

AUDUSD rebounds
2
 
 
EURUSD breaks out

Since EURUSD made a break out below the ascending wedge, it has been struggling to retrace. After the US monthly CPI came out strong (0.4%) beating estimates of 0.3%, EURUSD maintained weakness but continued to hover above the interim support level 1.13 handle.

The Dollar index (DX) found a solid resistance level at 95 throughout April, therefore the potential break out above this level would trigger a sharp rally in the US dollar.
 
EURUSD trend4

 
S&P/ASX200 under pressure

Following gains for our local index during our day session, price actions followed global stocks lower overnight as the US500.i was under pressure (see comments below). Recent resistance came in just below 5,400 these past several trading sessions and this level also overlaps with the October 2015 high, and the double bottom support from June / July 2015.

The S&P/ASX200 (AUS200.i) is indicated to open lower by 0.5% and early premarket auction is showing pressure in consumer staple names (consistent to US losses) however we are seeing solid bids in the industrial sector. Energy was the only sector in the green in the S&P500 overnight and we expect our energy names to continue its previous day’s gains, however, the magnitude of the gains would be subdued given the negative leads overnight.

S&P/ASX200 trend
5
 
Choppy price action in S&P500 (US500.I)

Last night, the e-mini S&P500 futures wiped out almost all the gains from the previous day on volumes that was the highest since May. The neck line of the head and shoulders once again become a key support level at 2,040, but we are anticipating a break out by the end of this month as the US500 has been making lower highs below the downtrend line.

The overnight high 2,072 should be the interim resistance, and currently there are little signs of pull back in the rally of the crude oil, therefore the volatility could remain subdued and it is possible to see further choppy price actions above 2,040.
 
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Sources: AFR, SMH, CNBC, BBG, WSJ, The Australian, Reuters

– Edited by Robert Ryan

Today's Trade is compiled by the Sydney trading desk at Saxo Capital Markets. Watch our daily morning call on Periscope at 9:45am: #SaxoStratsAPAC



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