Article / 13 February 2017 at 0:15 GMT

Today's Trade: Materials, energy take ASX higher

Trading Desk / Saxo Capital Markets
Australia

  • Share market buoyed by Friday's 2.5-year high for iron ore price
  • Materials sector is spearheading the ASX's 0.25% rise to 5735 points
  • US share rally pushes Apple within a dollar of its record close of $133
By Saxo Capital Markets

Overnight and early trading

This morning's trading has been dominated by miners and energy stocks - BHP, Rio and Fortescue have all reaped the high iron ore price, but the week ahead will be more interesting for the ASX/S&P 200, as many companies report their earnings.

Overseas, the major US stock indices ended the week at fresh records, buoyed by corporate earnings and the prospect of tax cuts.

Stocks have been rising since President Donald Trump’s election, partly on expectations that such cuts would energise the US economy and lift company profits.

Gains picked up Thursday after Trump said his goal of lowering taxes for businesses was moving “ahead of schedule”. He plans to send Congress an outline for a tax code overhaul for individuals and businesses by the end of the month.

The Dow Jones Industrial Average rose 96.97 points, or 0.5%, Friday to 20,269.37 and notched a weekly gain of 1%. The S&P 500 climbed 8.23 points, or 0.4%, to 2,316.10 for a rise of 0.8% for the week.

The Nasdaq Composite added 18.95 points, or 0.3%, to 5734.13 - adding 1.2% during the week. All three closed at record levels on Friday.
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 On the up and up: The Aussie market is set to go far today. Photo: Shutterstock

The rally in stocks pushed Apple within a dollar of its record close of $133 this week. Apple shares slipped 30 cents, or 0.2%, to $132.12 Friday but posted a weekly gain of 2.4%.

Bank stocks got a lift early Friday afternoon as the Federal Reserve announced that Daniel Tarullo, its regulatory point man who was appointed by President Barack Obama in 2009, will resign this spring.

The KBW Nasdaq Bank index of large US commercial lenders gained 0.2% Friday.

The US dollar wavered against the yen after a news conference with Trump and Japanese Prime Minister Shinzo Abe on Friday, where Trump said the US was “committed to the security of Japan”,

Tensions between the US and Japan had risen recently over currency and trade issues.

The USD fell less than 0.1% against the Japanese yen to ¥113.20, coming off gains of around 0.5% earlier in the day. The US Dollar Index, which measures the US currency against 16 others, was little changed.

Corporate earnings have also supported stocks lately. With about 360 companies in the S&P 500 having reported so far, fourth quarter earnings are on track to grow 5% from the year-earlier period, according to FactSet, more than the 3.2% growth rate analysts had expected at the end of 2016.

Sears Holdings shares surged 1.42, or 26%, to 6.96 after the struggling retailer laid out a plan to turn its business around by cutting costs.

As investors favored riskier assets like stocks on Friday, US government bonds came under modest pressure.

As bond prices fell, the yield on the 10-year US Treasury note rose to 2.409%, from 2.397% on Thursday. Gold for February delivery shed less than 0.1% to $1,234.40/oz.

Source: Bloomberg, TradingFloor.com

Local markets and commodities

  • The S&P/ASX 200 Index futures contract rose 0.2%; futures relative to estimated fair value suggest an early gain of 0.2%.
  • Bank of New York Australia ADR Index +1.7%, BHP Billiton ADR +2.2% to A$26.11 equivalent, 0.9% premium to last Sydney close, Rio Tinto ADR +5.3%, most since January 10, to A$59.16 equivalent, ~10% discount to last Sydney close.
  • Gold futures fell on Friday, retreating further from this week's three-month high, as Trump's promise of a major tax announcement boosted the dollar and upbeat data fuelled talk of a near-term rise in US interest rates. Initial jobless claims dropped unexpectedly last week to the lowest in nearly 43 years. Spot gold was up 0.22% to $1,233.20/oz, while US gold futures for April delivery dropped by 90 cents to settle at $1,235.90. On Wednesday, it touched its highest since November 11 at $1,244.67. Gold stocks: GOR, NCM, NST, AQG, EVN, KCN, RMS, RRL, SAR, SLR.
  • Oil prices rose on Friday after reports that Opec members delivered more than 90% of the output cuts they pledged in a landmark deal that took effect in January. West Texas Intermediate for March delivery rose 86 cents to settle at $53.86/barrel. Brent for April settlement climbed $1.07, or 1.9%, to $56.70/b. In the first month of the Opec agreement, key member Saudi Arabia reduced production by even more than it had committed, while higher demand is aiding the group’s bid to re-balance world markets, the IEA said. Oil stocks: WOR, WPL, STO, SEA, BPT, OSH, HZN, DLS, AWE, KAR, ORG, SXY.
  • Iron ore keeps getting told the end is nigh: So far in 2017, the response has been the end’s just another high. The rally has been powerful enough to push futures in China back to $100/tonne as spot prices trade at levels last seen in 2014, boosting miners’ shares. Spot prices advanced 3.3% to $86.62/t, the highest since September 2014. Miners’ shares are benefiting from the rally. Rio Tinto Group, which last week reported its first profit gain since 2013, jumped as much as 3.5% in London, while Vale has climbed 26% in 2017. In the US, Cliffs Natural Resources surged 19% on Thursday, the most since May. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, BCI, SDL.
  • Copper posted the biggest gain in almost four years, leading a surge in metals, as exports from China jumped and BHP Billiton signalled a halt in shipments from the world’s largest copper mine. BHP declared force majeure on shipments from the Escondida mine in Chile after workers began a strike on Thursday, two customers notified by the company said. While the strike’s start on Thursday was well telegraphed and copper didn’t react, a prolonged shutdown would support price gains. Copper for delivery in three months climbed 4.6% to settle at $6,090/t. In other metals, LME zinc climbed 3.3% to finish at $2,924, the highest since November 28. Zinc, mainly used in galvanised steel, was also boosted after Chinese iron ore futures jumped and Chinese steel rebar futures also gained. Aluminium closed 1.4% firmer at $1875/t, the highest since January 24, lead gained 2.8% at $2,400/t, and nickel jumped 3.7% to end at $10,660/t, the strongest since December 23.Copper stocks: PNA, OZL, SFR; Nickel stocks: IGO, WSA; Aluminium stock: AWC.
  • In other news: AGL Energy (AGL): Cuts power to NSW smelter to avoid blackouts in heat: ABC; Amcor (AMC): 1H results expected; NOTE: 2-analyst adj. net income est. A$305m; Ansell (ANN): 1H results expected; NOTE: In Oct. co. forecast FY EPS $1-$1.12; Arrium (ARI): Liberty House may list assets in London if bid successful: AFR; Aurizon (AZJ): 1H results expected; NOTE: 2-analyst rev. est. A$1.74bn; Bellamy’s (BAL): Chairman says co. has “turned the corner”: Australian; Bendigo & Adelaide Bank (BEN): 1H results expected; NOTE: Adj. net income est. A$219.2m (5 analysts, range A$215m-A$223m); Contact Energy (CEN): Earnings, profit increased in 1H.
  • Domino’s Pizza Enterprises (DMP): “Zero tolerance” for franchisees who break law; Fortescue (FMG): Iron ore 65% powers back to $100 in world’s top user as miners surge; Hunter Hall Intl (HHL): Rejects revised takeover bids by WHSP, Pinnacle; JB Hi-Fi (JBH): 1H results expected; NOTE: Adj. net income est. A$110.3m (3 analysts, range A$107m-A$114m); Macquarie (MQG), Cimic (CIM), Spotless (SPO): Adelaide Hospital Group calls in insolvency firm: Australian; Newcrest (NCM): 1H results expected; NOTE: Adj. net income est. $267.3m (3 analysts, range $255m-$280m); Rio Tinto (RIO): Former Areva CEO to leave board a year After French charges; Telstra (TLS): Fitch Affirms Australia’s Telstra At ’A’; Withdraws Ratings.

Broker gradings

- Henderson Group (HGG): Cut to hold at Shaw and Partners, PT A$3.50
- Magellan Financial (MFG): Raised to equal-weight at Morgan Stanley
- REA Group (REA): Cut to underperform at APP Securities, PT A$49.97

Stocks to watch

JB Hi Fi (JBH) has shown strong correlation to the AUS200 since November last year and we do not see any reason why this would change any time soon.

The AUS200 already moved higher following strong leads from US major equity indices therefore we expect to see positive price actions on the open this morning as JBH also reported a 16% rise in net profits for second half 2016.

The technical picture looks quite promising as the uptrend (from November 16 low) has been maintained above 200 Day Moving Average but we would like to see a clear break out above the recent downtrend (from the September 16 high) as a confirmation of a further rally.
 
JB Hi Fi monthly chart

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This morning Aurizon (AZJ) made a massive turn around as it reported $A54 million first half profit from a $A108 million loss in the previous year.

Similar to JBH, AZJ also has been forming a solid uptrend since the February 16 low 3.35 and we are anticipating a breakout today above the key resistance level of $A5.30 which has been restricting further gains in the last 13 months.

Aurizon monthly chart
 
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Source: All charts, Saxo Bank

DXY, AUDUSD, AUS200, WTI crude and copper

We saw the US Dollar Index claim its first weekly settlement below the 2015 break out level two weeks ago, however last week it managed to close the break out above this so we treat the negative close from a fortnight ago as a false weekly break.

USD Index quarterly chart

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The bias is for further gains this week for the US dollar index, however with two strong levels in mind as levels of resistance: The 50% retracement level at 101.51 could start to attract selling, but the 61.8% retracement level at 102.05 which aligns with the November swing high is a crucial level.

USD Index monthly chart

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The failure for the US Dollar index to punch through 102.05 (or even 101.51) could be translated as a potential head and shoulder formation in the making which would be a negative development.
 
USD Index - potential head and shoulder formation

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Continued upside moves over the AUDUSD is due to receive a challenge at the lower channel trend line which the Aussie broke below in November last year.

However, the current technical picture shows a case for the Aussie to potentially strengthen beyond those final 2016 reistance levels: The AUD currently trades in an inverse head and shoulder pattern which is a bullish set up.

It's noticeable that the recent 2017 high was a 23.6% extension of this head to shoulder range, with a small pullback receiving support at the neckline.

The next resistance from here is the 38.2% extension level at 0.7751 however, the AUD now makes its fourth attempt at these levels and the probability is heightened for the Aussie to break through these levels , grabbing all those buy stops  to drive the Aussie close to the 80 handle.
 
AUD monthly chart

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Reporting season heats up in Australia and the technical outlook is fairly bullish for the ASX200 given that it closed out last week above those final January resistance levels at 5715 which were the levels to clear for further upside moves.

Immediate resistance can be found at 5,741 and above here at 5,774. The January 2016 highs at 5,826 would be the ultimate test for our index throughout our reporting season and a break above here gives us the roadmap to 6000 - the post subprime peak we saw in early 2015 where, we may see aggressive profit taking.

AUS 200 monthly chart

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We saw crude’s neckline at the 51 handle last week prove itself to be a strong support level and the defense we saw here validates again, this crucial level that will continue to defend losses.

Around $56.79 or the 23.6% inverse head and shoulder extension level is the target in the near term.

Crude oil futures, monthly chart 
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Copper finally caught its break above the 200 weekly moving average last week which sets the direction for further upside moves.

Near-term target and next point of resistance is at the 38.2% retracement level between the 2011 highs to 2016 lows and this level at $297 also happens to be quite a significant technical level - so we should exercise long caution here.

Support for the week is obvious: the 200 weekly moving average is to hold losses for the week.

Copper quarterly chart
 
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Source: All charts, Saxo Bank - create 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


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