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Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 29 May 2017 at 0:57 GMT

Today's Trade: Falling iron-ore price weighs on miners

Trading Desk / Saxo Capital Markets
Australia
  • The ASX200 was off 0.4% at the start of trading at 5726
  • Gold hit its highest in nearly four weeks on Friday
  • Iron ore hit its lowest level since October on concerns about demand outlook 

By Saxo Capital Markets (Australia)

The ASX200 opened lower as the big banks and miners were sold off. The weakness in iron-ore saw the share prices of Rio Tinto, Fortescue and BHP fall between 0.7% and 2.4%

Overnight

  • Stocks headed for a mixed start in Asian trading and the yen strengthened, with trading at the start of this week likely to be subdued as many of the world’s largest markets are shut for holidays.
  • On Friday, the S&P 500 snapped a two-week losing streak as the index climbed to another record. Stocks were little changed overall in a quiet session Friday ahead of the long holiday weekend. It was the slowest trading day of the year, as measured by number of shares changing hands on major US exchanges.
  • The S&P 500 edged higher to its 20th record of the year and notched a weekly gain of 1.4%, its biggest since the end of April. The Nasdaq Composite also closed at a record.
  • Stocks have risen on stronger-than-expected first-quarter earnings, continued signs of a steady economy and expectations that the Federal Reserve will only raise rates gradually.
  • The Dow Jones Industrial Average edged down 2.67 points, or less than 0.1%, to 21080.28 on Friday. The S&P 500 added 0.75 points, or less than 0.1%, to 2415.82 and the Nasdaq Composite rose 4.94 points, or less than 0.1%, to 6210.19.
  • Companies that operate rail tracks or trains outperformed the broader market Friday. Kansas City Southern rose $2.88, or 3.1%, to $95.95, while Norfolk Southern added $2.56, or 2.1%, to $122.33.
  • Shares of Signet Jewelers fell for a second day in a row after missing earnings expectations. Its stock declined 99 cents, or 2%, to $49.31, putting its weekly loss at 16%.
  • The two sectors that led gains in the S&P 500 during the week were utilities and technology, with both adding more than 2%.
  • Utilities companies, often referred to as bond proxies because of their steady dividend payments, have climbed as inflation expectations have moderated.
  • Tech shares have risen 20% so far this year, as investors have scooped up companies that have outperformed the broader market in the years since the financial crisis.
  • Amazon.com , though classified in the S&P 500 as a consumer company, has risen alongside big tech companies. Its stock traded within a few dollars of $1,000 on Friday, closing up $2.40, or 0.2%, at $995.78.
  • Its price has soared from around $68 apiece a decade ago, a sign not only of the company’s growth, but also how fewer companies are choosing to “split” their stocks to boost the number of shares and lower prices.
  • Separately, energy shares were the biggest decliners over the past week, as the price of oil dropped. US-traded crude oil for July delivery climbed 1.8% to $49.80/barrel Friday, but ended the week down more than 1.7%.
  • Oil prices declined earlier in the week on disappointment that Opec didn’t take more aggressive measures to cut production at a meeting in Vienna.
  • Energy stocks in the S&P 500 closed 2.1% lower on the week.
  • The Stoxx Europe 600 declined 0.2% Friday, ending the week down less than 0.1%
Source: Bloomberg, TradingFloor.com

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 The weakness in the iron-ore price saw mining stocks lower at the start. Photo: Shutterstock

Local markets and commodities

  • Bank of New York Australia ADR Index -0.8%, BHP Billiton ADR -1% to A$24.07 equivalent, 0.2% premium to last Sydney close, Rio Tinto ADR -1% to A$55.06 equivalent, ~ 13% discount to last Sydney close
  • Gold hit its highest in nearly four weeks on Friday in response to a weaker dollar and political uncertainty that led investors to shun riskier assets in favour of bullion. Leaders of the world's richest nations faced difficult talks with US President Donald Trump at a G7 summit in Sicily on Friday after the US president criticised NATO allies for not spending more on defence and accused Germany of "very bad" trade policies. 
  • Spot gold was up 1.02% at $1,268.21/ounce. US gold futures gained $11.70 to settle at $1,268.10/ounce. Gold stocks in Toronto rose 0.54% on Friday. Gold stocks: GOR, NCM, NST, AQG, EVN, KCN, RMS, RRL, SAR, SLR
  • Oil recovered some of its mojo as investors tempered their disappointment over Opec's output agreement. Futures rose in New York after slumping on Thursday. While many were frustrated by the accord to prolong current output levels through March, without deeper cuts or an exit plan, Saudi Arabia’s Energy Minister Khalid Al-Falih said the strategy is working and stockpiles will drop faster in the third quarter. 
  • Producers have more tools to support prices if needed, Russia’s Energy Minister Alexander Novak said in a Bloomberg television interview. West Texas Intermediate for July delivery settled 1.8% higher at $49.80/barrel on the New York Mercantile Exchange. Prices slumped 4.8% on Thursday. 
  • Brent for July settlement closed at $52.15/barrel on the London-based ICE Futures Europe exchange. The contract lost 4.6% on Thursday. The global benchmark crude traded at a premium of $2.35 to WTI. Oil stocks: WOR, WPL, STO, SEA, BPT, OSH, HZN, AWE, KAR, ORG, SXY
  • Iron ore prices fell below $60/t to hit the lowest level since October as traders continued to fret about the outlook for demand. Steel and futures prices in China fell over concerns the peak in construction activity has passed. Spot iron ore lost $2.33 to close at $57.91. The price has dropped 27% year-to-date. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, BCI, SDL
  • Copper pulled back from the previous session's three-week high on Friday as momentum sparked by a strike at one of the world's biggest copper mines, Indonesia's Grasberg, eased ahead of a long weekend break in China, the US and Britain. London Metal Exchange copper closed at $5657.50/tonne, down 1.1%. Prices hit their highest since May 3 on Thursday at $5768.50. 
  • LME nickel posted a 3% weekly loss after trade data this week showed that the Philippines is ramping up ore exports to China, fuelling oversupply concerns. Nickel closed up 0.4% at $9075/tonne. LME aluminium ended the day down 0.4% at $1952 a tonne, while tin was up 0.1% at $20,425. 
  • Zinc closed up 0.2% at $2639/tonne, while lead finished up 1.8% at $2122. Copper stocks: OZL, SFR; Nickel stocks: IGO, WSA; Aluminium stock: AWC
  • BHP Billiton (BHP): CEO tells investors options for US shale unit under review
  • Commonwealth Bank of Australia (CBA): Tyme has less than two weeks to seek South African bank license: SARB
  • G8 Education (GEM): Annual meeting scheduled
  • Rio Tinto (RIO): Western Australia may ask BHP, Rio to cash out iron ore levy

Broker upgrades and downgrades

  • Westpac (WBC): Raised to buy at Morningstar
  • Healthscope (HSO): Cut to underperform at Credit Suisse, PT A$2.10
  • Macquarie Atlas (MQA): Cut to neutral at Credit Suisse, PT A$5.90
  • Medibank Private (MPL), NIB Holdings (NHF), Ramsay Health (RHC), Healthscope (HSO): Private health insurance rebate may be abolished and hospital funding plans altered under new govt proposals, Fairfax Media reports; Medibank Private Cut to sell at Shaw and Partners, PT A$2.65; Ramsay Health cut to neutral at Credit Suisse, PT A$73
  • Nine Entertainment (NEC): Raised to buy at Morningstar

US Dollar Index, USDCAD, XAUUSD, AUDUSD and USDCHF

Losses were eased in the past week for the US Dollar Index as it logged a 0.3% gain over the course of the week. The RSI ticks nicely off oversold territory. The US dollar currently looks to be caught in a bear flag continuation pattern so for the week ahead we mark the upper flag trendline as resistance territory and our focus will be whether the lower flag trendline will hold losses. 

A successful break and 2 prints of settlement above the upper flag trendline will completely discount the continuation theory. But for now, probability is heightened that losses are temporarily pausing for the US dollar before the next leg down.
 
US Dollar Index monthly
1
Source: SaxoTrader
 
Losses over USDCAD are surrendered at two technical support lines, however we feel that it is still premature to explore long opportunities over USDCAD. We prefer to be patient and look for another flush, and explore 1.3288 or just below the 200DMA as levels to enter long positions. 

We note the noise this level has enjoyed in the past, as well as coinciding with a 38.2% retracement between the 2016 low to the recent 2017 high and also a 61.8% retracement between the 2017 swing low to the recent high so there are strong alignments of support here. 

Any long positions taken here at 1.3288 would have a stop loss of anywhere between 40 to 50 pips and the first profit target would be seen at the 1.34 handle or 112 pips.
 
USDCAD monthly
2
Source: SaxoTrader
 
We have an extremely bullish set up over gold: last week was gold's opportunity to pull back to test the 200DMA yet every attempted selldown was extremely shallow and after consolidating in a mini pennant formation, broke higher on Friday. The immediate topside target is at 1276 or the 76.4% retracement between the 2017 high to this month's low and above here the ultimate test would be to break the 2017 high we saw in April to go on to test new 2017 levels.
 
XAUUSD monthly
3
 
AUDUSD is expected to remain under selling pressure as iron ore continues to decline and the bond yield spread (AU 10-year – US 10-year) plunges.  The AU 10-year bond has already broken the April high while the US 10-year bond failed to make a new high. Last week’s low happened to be a 50% retracement of the May low of 0.7329 and the May high of 0.7517, thus selling might pause temporarily. Capex will be the major focus this Thursday.

AUDUSD monthly
4
Source: SaxoTrader

After a 400-pip selloff that began early this month, USDCHF seems to have found a solid support level at 0.97 handle as it repeatedly bounced off 0.97 last week. Equity indices are looking strong and volatilities are staying low, so we would look to add bullish exposure on USDCHF by buying any dips near 0.97.
 
USDCHF monthly




Source: SaxoTrader. Create your own charts with SaxoTrader; click here to learn more 

Today's data 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. Follow the team on Twitter at: twitter.com/SaxoAustralia.

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