Article / 24 May 2016 at 2:04 GMT

Today's Trade: Iron ore cracks, ASX to follow

Trading Desk / Saxo Capital Markets
  • A quiet early trading day could turn if volatility on commodity markets returns
  • The market started lower weighed by weakness in retail and energy stocks
  • Weakness in the big banks and supermarkets also dragged the market lower

By Saxo Capital Markets

Early trading

Shares were a little lower in early trade as the miners managed to rise despite the steep fall in iron ore overnight. There was some weakness in the big banks and supermarkets in early trade, which were dragging the market lower.

At 1030 AEDT, the ASX 200 was 10 points lower, or 0.2%, at 5309. BHP was up 0.4% and Rio 0.5%, although Fortescue was off 0.5%. Woodside is down 0.2%.


US stocks slipped, as investors awaited more clarity on the timing of the Federal Reserve’s next increase in interest rates and the outlook for inflation, while crude capped its longest slide in more than a month.

The S&P 500 Index finished lower, with the losses accelerating in the final 15 minutes of trading after a lackluster session that saw equities swing between gains and losses. The dollar advanced against the Canadian and Australian dollars, while gold posted its longest slump in more than two months.

Oil dropped as Canadian producers worked to resume operations. Brazilian companies are poised to ratchet up bond sales in international markets after Petroleo Brasileiro SA ended an 11-month drought last week.

Iron ore was smashed on Monday, down 6.7% to $51.22, a 10-week low. Photo: iStock

Traders have boosted the probability of a rate hike in June to 30%, up from 4% just a week ago, amid hints from Fed officials that higher borrowing costs may be looming.

Two more policymakers joined the chorus today, with Fed St Louis President James Bullard saying he doesn’t see the UK vote on European Union membership influencing the decision, though the central bank’s meeting will be held the week before the vote.

Separately, the San Francisco Fed’s John Williams said two to three rate increases this year are still “about right.”

The S&P 500 slipped 0.2%, ending near the lows of the session. Trading volume was 19% lower than the 30-day average. The index has gone more than a year since reaching its last record as the seven-year bull market continues to lose steam amid concern stimulus is fading.

Defensive shares led declines, with utilities and phone stocks falling at least 0.6%. Apple climbed 1.3% after Taiwan’s Economic Daily News reported that the iPhone maker has asked suppliers to prepare production for a new version of its smartphones (see Apple Call spread trade).

Monsanto jumped 4.9% after Bayer disclosed an unsolicited $62 billion all-cash offer. Bayer slumped as much as 6% in Germany.

Investors will parse data this week on manufacturing, housing, consumer sentiment and growth for clues on whether the US economy has strengthened enough to handle higher borrowing costs.

A May manufacturing reading today came in below the forecasts of economists surveyed by Bloomberg, slipping to the lowest since September 2009 with factory orders at the weakest level this year.

The Stoxx 600 fell 0.4%. Data showed growth in the euro area’s private sector unexpectedly slowed in May, signalling that the region won’t maintain the strong pace of expansion recorded at the start of the year.

The MSCI Emerging Markets Index added 0.5%. Taiwan’s Taiex jumped 2.6%, the most in eight months. Apple vendors Taiwan Semiconductor Manufacturing and Hon Hai Precision Industry were the biggest contributors to the gains.

The USD traded near an almost two-month high as speculation mounted that interest-rate increases are ahead for the US. The currency paused after its best streak of weekly gains since January, as San Francisco Fed president John Williams added to a string of pro-tightening commentary from policy makers.

The dollar added 0.2% to C$1.3134 and rose less than 0.1% to 72.21 US cents/AUD. The yen appreciated 0.9% to 109.18 per dollar. Finance Minister Taro Aso raised the issue in a meeting with US Treasury Secretary Jacob Lew, who said JPY moves haven’t been overly volatile.

Brazil’s real led losses among major currencies as a report that Planning Minister Romero Juca suggested ending the nation’s graft probe called into question the new government’s pledge to root out corruption.

The real dropped 1.8% to a one-month low of 3.5865 per dollar. A measure of implied price swings in the pound over the next one month climbed to its highest since February as the vote that will decide the fate of Britain’s membership in the European Union draws closer.

The yield on 10-year Treasury notes was little changed at 1.84%, while two-year note yields climbed two basis points to 0.89%.

West Texas Intermediate crude dropped 0.7% to settle at $48.08/barrel, for a fourth day of losses. Cooler weather is helping to control a blaze in the heart of Canada’s oil-sands region and allowing Suncor Energy and Syncrude Canada to start getting back to work.

Exports from Iran could surpass 2.2 million barrels a day by midsummer, the state oil company told the Mehr news agency. Crude net-long jumped last week as short base collapsed as Ole Hansen posted on Trading Floor. See here.

Gold capped the longest slump in more than two months, as renewed concerns that the Fed will soon raise interest rates dimmed the demand outlook for precious metals as a store of value.

Futures for June delivery fell 0.1% to end at $1,251.50 an ounce, a fourth straight loss - the longest slump since March 16.

The CBOE Volatility Index (VIX) came off highs to hold below 16. (see VIX Bull Call Spread trade)

Local markets and commodities

  • The S&P/ASX 200 Index futures little changed; 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 +0.4%. Rio Tinto ADR +0.1%.
  • Spot gold moved down another 0.2% to close below $1,250 for the first time since April 27. The fall has capped the longest slump in more than two months, as renewed concerns that the Federal Reserve will soon raise interest rates dimmed the demand outlook for precious metals as a store of value. The odds of a rate increase in June climbed to 30%, from 4% a week ago, Fed fund futures data show. Minutes of the Fed’s April 26-27 meeting released Wednesday used the word “June” six times in a policy context. Gold stocks: NCM, NST, AQG, EVN, KCN, RMS, SAR, SLR.
  • Crude oil held yesterday’s levels, with WTI up 0.2% to $48,09 while Brent was flat at $48.35/b. Iran's Deputy Oil Minister Rokneddin Javadi said the country's crude exports, excluding gas condensates, would reach 2.2 million bpd by the middle of summer from 2 million bpd now. His comments further dampened hopes for a coordinated decision to freeze Opec oil production at a meeting of the exporter group in Vienna on June 2. A report that showed a stockpile drawdown of near 1m/b at the Cushing, US West Texas Intermediate (WTI) futures took place the week ending 20th May. Oil stocks: WPL, STO, SEA, BPT, OSH, HZN, DLS, AWE, KAR, ORG, SXY.
  • Iron ore was smashed, down 6.7% to $51.22 to a 10-week low on Monday. Iron ore prices that soared amid China’s speculative frenzy last month just took another leg down, plummeting as rising port inventories in the top user spurred concern global supplies are once again topping demand.
  • In China, traders piled into raw-material futures including iron ore in March and April, helping to boost prices, only to switch track when regulators clamped down. Inventories at ports have climbed above 100 million tons, offering fresh evidence of increased supplies from Australia and Brazil, and BHP forecast last week that there may be further increases. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, ARI, BCI, SDL.
  • Base metals were generally down with copper losing 0.3% and both nickel and zinc losing 1.8%. Aluminium was the lone wolf, up 0.4% as the Chinese government policy chance looks to cut old industry loss making production. China still uses their old, dirty high cost smelters which we suspect will continue to be closed one by one as aluminium prices remain at these depressed levels. Copper stocks: PNA, OZL, SFR; Nickel stocks: WSA, SIR; Aluminium stocks: AWC.
  • In other news: Aussie bonds set to lose highest-yielding AAA spot to Singapore; ANZ Roy Morgan weekly Australia consumer confidence data due 0930 AEST (0030 GMT). Arrium (ARI): Administrators set to start Moly-Cop sales process in July; AGL Energy (AGL): Scheduled to speak at AFR/JPMorgan conference in Sydney; ANZ Bank (ANZ): Said reviewing options for wealth-mgmt: WSJ; Automotive Holdings (AHG): Buys dealerships in NSW and Victoria; Bank of Qld (BOQ): Ratings affirmed at S&P; outlook stable; Goodman Group (GMG): Blackstone said to eye Goodman industrial assets: AFR; OZ Minerals (OZL): Annual meeting scheduled; NOTE: In Feb. co. forecast 2016 copper production 115k-125k tons; gold output 125k-135k ozs; TechnologyOne (TNE): Maintains FY profit growth target of 10%-15%; Tower (TWR): Posts wider 1H loss after impairment charges; Westpac (WBC): The country's biggest lender to landlords, is lowering the size of the deposits it will require from property investor borrowers, partially reversing last year's crackdown. WBC this month told mortgage brokers the maximum loan-to-valuation ratio (LVR) for new mortgages for property investors would rise to 90 per cent, up from 80 per cent.

Earnings this week

Tuesday: Best Buy, Toll Brothers, Hewlett Packard Enterprise, Intuit,AutoZone

Wednesday: HP, Tiffany, Costco, NetApp, Bank of Montreal, Express, Lions Gate, Guess, Popeye's Louisiana Kitchen

Thursday:Canadian Imperial, Royal Bank of Canada, Toronto Dominion Bank, Signet, Abercrombie and Fitch, Seadrill, International Game Technology, GameStop

Stock to watch: Santos (STO)

As oil approaches $50/b, we are anticipating resistance at this key level. STO, which is in a more magnified way than its underlying commodity has found an upward trend.

Retracing to close at its Fibonacci 23.60% retracement, we are watching STO for a break, and we suspect to the downside, should oil see selling pressure.

Levels to watch on STO to the downside are the break of the upward trend line and the first target at $3.65.

Santos monthly chart

Source: Saxo Bank

Broker upgrades and downgrades

  • Bluescope Steel (BSL): Cut to neutral vs overweight at JPMorgan
  • Bluescope Steel (BSL): Cut to neutral vs buy at UBS
  • Lifestyle Communities (LIC): Cut to hold vs buy at Canaccord Genuity
  • South32 (S32): Cut to neutral vs outperform at Credit Suisse
  • Wisetech Global (WTC): Rated new neutral at Credit Suisse

Open positions


The 61.8% Fibonacci retracement level (Jan 2016 low to the April 2016 top) has been confirmed as the level of support as the AUDUSD has failed to close below this level these past three trading sessions.

As stated in previous reports, the 200 Day Moving Average was always a resistance threat which proved to be true overnight as the AUDUSD was rejected at this level 0.7254.

Be on guard for a speech due at 1355 AEDT by Reserve Bank of Australia governor Glenn Stevens who speaks at the Trans-Tasman Business Circle briefing, in Sydney.

The risk is to the topside today and the first level to break through in order to see a move higher would be the 200 DMA at 0.7254 and above that, levels to target are 0.7300 and 0.7329.

AUDUSD monthly chart
Source: Saxo Bank


The upward momentum of the US dollar index (DX) appears to be fading, although it is trading above the previous resistance level 95 which should now act as an interim support level.

It is unlikely to see any significant catalysts to push EURUSD below the key support level 1.12 handle today and we expect the US dollar to start reversing the recent strength, therefore the gold (XAUUSD) also should be supported above the swing low of $1,243/oz.
EURUSD monthly chart

Source: Saxo Bank


The AUS200.i started the week yesterday with increased volatility as an attempt to push higher in the morning was capped by the sell-off the market saw in the Nikkei and futures in the emini contract.

As each trading day passes there is a failure to retest the most recent ceiling of resistance level of 5,400 paints.

It paints a picture that in the absence of positive global leads and another rate cut potential, the AUS200.i is poised to move lower to the support level as marked in the daily chart below.

All eyes will be on the weekly close (see weekly chart) as it has struggled to close above the 50% 2015 top to the 2016 low for 4 weeks now despite this level being tested.
AUS 200 quarterly index

Source: Saxo Bank

The price actions of the US500 were subdued and the volume has been falling these past two trading sessions. The US500 failed to stay above the previous day high of 2,058.60, finding a solid support level at 2,048.

While copper (HG) is struggling to make any recoveries, crude oil (CL) continued to show resilience and it is expected to remain as a key leading indicator to determine the sentiments of the equity indices.

US500 monthly chart
Source: Saxo Bank - Create your own charts with SaxoTrader; click here to learn more

Today's Trade information sources: AFR, SMH, CNBC, BBG, WSJ, The Australian, Reuters

-- Edited by Adam Courtenay

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

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