Article / 20 May 2016 at 2:15 GMT

Today's Trade: Energy gets spark from oil, M&A talk

Trading Desk / Saxo Capital Markets
  • ASX makes a positive start to Friday trade, driven by a rally in mining stocks
  • Energy sector alight with merger talk after Oil Search makes bid on rival
  • Big banks kept up, with all four moving up higher at the open

By Saxo Capital Markets

Overnight and early trading

The benchmark S&P/ASX 200 index was up slightly at the opening of trade, climbing 12 points, or 0.23%, to 5,335.3, while the broader All Ordinaries index lifted 11.9 points, or 0.22%, to 5,397.5.

The energy sector was abuzz with M&A talk after Oil Search made a $3 billion bid for PNG partner InterOil. The big banks also followed the positive trend, with the four major players all higher at the open.

In overnight trading:

Global stocks slid to a six-week low and commodities fell as markets braced for the possibility that the Federal Reserve will raise interest rates as soon as next month.

A gauge of the USD strength was little changed near a seven-week high. The S&P 500 Index pared losses, after erasing its gains for the year, while the Dow Jones Industrial Average capped a full year since its last record as Fed officials continued to signal a willingness to tighten in June. Treasuries were little changed.

Crude oil wiped out declines, while copper fell toward levels last seen in February. Gold and silver slipped. The dollar posted its third week of gains, the longest streak of gains in four months.

The Federal Open Market Committee minutes jolted markets that had until Monday all but ruled out the prospect of U.S. rates being raised in June.

Fed Funds futures show the odds of a move surged to 30%, after tripling to 12% on Tuesday as data on inflation, housing starts and industrial production beat forecasts. Markets reacted calmly when the Fed raised rates in December for the first time since 2006, reflecting investor conviction in the US recovery’s ability to withstand tighter monetary policy.

The MSCI All Country World Index fell 0.9% to its lowest level since April 7 in late trading in New York. The Bloomberg Dollar Spot Index rose 0.1%, after jumping 0.8% on Wednesday.

A Labor Department report Thursday showed filings for US unemployment benefits declined last week from a more than one-year peak, although they still came in higher than economists had estimated. The Philadelphia Fed business-outlook survey missed forecasts.

The latest shift in Fed policy comes ahead of a meeting of the Group of Seven finance ministers, where Japan is likely to push further fiscal spending as the answer to tepid global economic growth.

The S&P 500 lost 0.4% to 2,040.04, after tumbling as much as 1.1%. Wal-Mart surged after better- than-estimated Q1 results assuaged some fears that the retail industry is mired in a slump.

Cisco Systems rose after forecasting fourth-quarter sales and earnings that will top analysts’ estimates.

The Stoxx Europe 600 Index dropped 1.1%, with BHP Billiton and Rio Tinto Group leading miners lower as commodities retreated. The European equity gauge has gone a month without posting a daily gain of at least 1%, and is down 4.8% from its April 20 peak.

Bayer tumbled after Monsanto, the world’s largest seed maker, said it received an unsolicited takeover approach from the German company.

The MSCI Asia Pacific Index declined 0.9%, led by slides in raw material producers and energy stocks. Tencent Holdings posted its biggest drop in three months in Hong Kong after Asia’s biggest instant message company said uncertainty about China’s economy could cause near-term challenges for its advertising business.

The US currency strengthened versus most of its major peers as Fed Bank of Richmond President Jeffrey Lacker said a June interest rate increase by the US central bank is in order with global risks having “entirely dissipated.”

The Japanese yen added 0.2% to 109.97 per dollar, following a 1% slide in the last session. The pound gained 0.2% to 76.69 pence per euro, after touching the strongest level since February 4 earlier and climbing 1.8% on Wednesday. The UK currency climbed versus the dollar 1.6% this week.

It is no longer the worst-performing Group-of-10 currency of 2016, after surging this week as polls signalled a receding risk of a Brexit following the European Union referendum in June.

Sterling cemented its lead over the Australian dollar on Thursday as better-than-forecast retail sales data showed there’s still life in the UK economy.

The MSCI Emerging Markets Currency Index fell 0.5%, taking its retreat in May to 3%. Russia’s ruble and Indonesia’s rupiah led declines on Thursday, weakening at least 1.2%.

China’s yuan declined as much as 0.1% in Shanghai’s onshore market. It was more volatile in offshore trading, rebounding 0.3% after a 0.5% loss on Wednesday that marked its biggest decline since January.

Government bonds were mixed after falling across major economies in Asia and Europe. Yields on 10-year Treasuries slipped one basis point to 1.85%, after surging eight basis points in the last session as the Bloomberg US Treasury Bond Index slid 0.7%.

The Fed is steering the market into line with its views, said John Gorman, head of US debt trading for Asia and the Pacific at Nomura Holdings in Tokyo.

German 10-year bund yields were little changed at 0.17%, having earlier reached 0.21%, their highest since May 5. The yield on similar maturity UK gilts held at 1.44%, after rising seven basis points on Wednesday.

West Texas Intermediate crude was little changed at $48.16 a barrel, near a seven-month high, after the dollar rally eased and a flurry of headlines about Nigeria’s oil industry bolstered concern about supply.

Data yesterday indicated US crude stockpiles unexpectedly increased, keeping supplies at the highest level in more than eight decades.

Gold slid to a three-week low on concern the Fed is moving closer to raising interest rates. Metal for June delivery slid 1.5% to $1,255.4 an ounce.

The CBOE Volatility Index (VIX) traded higher around 16.4 after earlier hitting 17.65, its highest since March 15. See VIX Bull Call Spread trade idea.

Sources: Bloomberg,

Local markets and commodities

  • S&P/ASX 200 Index futures -0.1%; futures relative to estimated fair value suggest an early gain of 0.2%
  • Bank of New York Australia ADR Index +0.4%. BHP Billiton ADR little changed. Rio Tinto ADR +1.2%.
  • Spot gold fell 0.3% to $1,255 to a three-week low on Thursday, extending the previous day's decline, after minutes from the Federal Reserve's April policy meeting signalled that it could raise US interest rates as soon as next month. Gold is highly sensitive to interest rate hikes, which increase the opportunity cost of holding non-yielding bullion while boosting the dollar, in which it is priced.
  • Crude oil gained ground, with WTI and Brent up 1.4% and 1.5% to $48.16 and $48.78 respectively. Last month, deliveries of petroleum rose by 3.6% from a year ago to 19.7 million barrels per day, marking the highest April deliveries in eight years, the American Petroleum Institute reported on Thursday. Qua Iboe crude oil terminal, Nigeria's largest which typically exports more than 300,000 barrels per day, was reportedly closed due to militants' threats
  • Iron ore tumbled, down 5.8% to $53.47. Port inventories rose to now be above 100m/t. After last month’s speculative rally, iron ore is likely to extend declines because of rising supply from the major producers and faltering demand in China, the biggest buyer. Iron ore has retreated from a 15-month high after widespread predictions the frenzy in China that propelled prices upward in April wouldn’t endure as regulators clamped down and the rallies induced higher production.
  • Base metals were down across the board on a firm US dollar and concerns about China’s property market are weighing on them. Copper touched three month lows. Goldman raised its price forecasts for zinc as a bullish exception in metals. It increased its six- and 12-month estimates for zinc to $2,100 a ton from $1,700 a ton previously, according to a report dated Thursday.
  • In other news:  Ausdrill (ASL): Robit to buy Ausdrill unit Drilling Tools Australia for EU42m; Centuria (CMA), GPT Metro (GMF), Growthpoint (GOZ): Centuria takes stake in GPT Metro Office Fund: Australia; Seven Group (SVW): Caterpillar April machine sales fall 12% vs March 13% decline; Spark Infrastructure (SKI): Annual meeting; NOTE: Co. in Feb. saw 2016 distribution at least A$0.125, 2017 at least A$0.13; Sydney Airport (SYD): Annual meeting scheduled; NOTE: Co. in Feb. forecast FY16 distribution A$0.30/shr; Capex ~A$400m; Ten Network (TEN), Telstra (TLS): Telstra, News Corp. may consider allowing Ten to acquire Foxtel in reverse takeover: AFR

Earnings this week

Friday:Campbell Soup, Deere, Foot Locker, The Buckle

Stock to watch: China Molybdenum (03993:xhkg)

Niobium, named for a Greek goddess who became a symbol of the tragic mourning mother, is used to produce stronger, lighter steel for industrial pipes and aircraft parts. It is mined in only three places on earth (Brazil and Canada), and the price of every kilogram is seven times higher than copper at around $40/kg.

Niobium is hard to find and hard to value. Global demand for niobium is about 90,000 to 100,000 metric tons annually.

China Molybdenum outmanoeuvred at least 15 companies last month to purchase Anglo American’s niobium and phosphate unit in Brazil, agreeing to pay $1.5 billion.

The buying frenzy that included South 32, Vale SA, Apollo Global Management LLC and X2 Resources showcased the growing appeal of a market that may be worth $4 billion for a soft, silvery metal. See Bloomberg article here: The Commodity That No One Knows About But Everybody Wants to Buy

On a technical level, China Molybdenum found a strong floor at $1 as it consolidated from 2011–2013. In the short term the stock has found support at $1.25 and is threatening to hold above it recent downward trend.

 Nobium is one the rarest minerals on earth, but everyone wants a piece of it. Photo: iStock

If the stock holds, a growing awareness of Niobium may see multiples be made on its share price from this specific investment. Strategically the likes of Alcoa may be interested in Niobium for its growing value-add business, not to mention the many plays that participated in the bidding process that CM won.
China Molybdenum monthly chart
China Molybdenum yearly chart

Source: Both charts, Saxo Bank

Broker upgrades and downgrades

- James Hardie (JHX): Cut to sell vs neutral at Citi
- Mantra (MTR): Raised to buy vs hold at Bell Potter
- Metcash (MTS): Raised to outperform vs neutral at Credit Suisse

Open positions

The USD is on pace to rise for a third week, the longest streak of gains in four months, on speculation the Federal Reserve will raise interest rates as early as next month.

The US currency strengthened versus most of its major peers as New York Fed President William Dudley said June was a live meeting and Richmond Fed President Jeffrey Lacker said the case for hiking would likely be “very strong.”

The AUDUSD settled below the 200 Day Moving Average for two days in a row now however yesterday’s support at the downtrend line (orange) was decisive as it rallied off this trendline.

The AUDUSD settled above the 61.8% Fibonacci retracement (Jan 2016 low to the April 2016 top) which is also supportive of a potential move higher. First level of resistance would be met at the 200 DMA (0.7254) and above would be 0.7329.
AUDUSD monthly chart

Source:  Saxo Bank


The EURUSD broke below the interim support level 1.12 handle which is the 38.2% Fibonacci retracements between the December low 1.0525 and the May high 1.1615, as the US dollar index extended the gains and continued to trade above the previous resistance level 95.

In the near term, it is possible to see some short covering to the upside as the EURUSD is trading in an oversold territory due to the sharp sell off in May.

EURUSD monthly chart
Source: Saxo Bank

The AUS200.i has formed an intra-day double bottom just above the 5300 level which was the level of support during the day session yesterday.

The AUS200 is indicating slight losses on the open and we see gains on the close to be a low probability event today given we are heading into the weekend. The AUS200.i pushed higher on the open yesterday and this pattern could repeat today so the level of resistance to watch would be the 5350 level as marked on the hourly chart below.

Should the downward momentum continue in overseas markets this would drag our AUS200.i down with it and the level of support to watch would be the 5270-5280 area as marked in the daily chart.

AUS200 daily chart
AUS 200 monthly chart

 Source: Both charts, Saxo Bank

The US500 looked to have made a genuine break out below 2,040 in the early opening of the US equity markets as the April low 2,033 was broken but the US500 reversed to recover majority of the losses into the close on the back of the rebound in the price of crude oil.

Although the overnight price actions seem to indicate the false breakout for now, the US500 has been making lower lows and lower highs in the last two weeks, therefore the selling pressure is expected to remain under the next resistance level 2,060.

US500 monthly chart

Source: Saxo Bank - create your own charts with SaxoTrader. Click here to learn more 

-- Edited by Adam Courtenay

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


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