Article / 19 May 2016 at 1:41 GMT

Today's Trade: Miners a drag on ASX200; AUD at three-month low

Trading Desk / Saxo Capital Markets
Australia
  • US Federal Reserve signals willingness to raise rates in June if economy improves
  • AUD falls to a three-month low and commodities slump as US dollar soars
  • Local market held back by falls in the miners
  • Spot gold loses 1.6% to $1,258 and crude oil falls

By Saxo Capital Markets (Australia)

The local market struggled in early trade. At the open it was at 5361.8 points, held back by the miners. The local currency fell to a three-month low, after the FOMC minutes, and was hovering around US72c.
aus
 AUDUSD punched through its 200-day moving average overnight as USD rose to a seven-week high. Photo: iStock

Overnight

The S&P 500 closed little changed, with a rally in banks offsetting broader declines paced by consumer shares, as Federal Reserve policy makers signaled a willingness to raise borrowing costs in June if the economy continues to improve.

Equities favoured for generous dividend payouts slid as Treasury yields spiked, while banks rallied the most in a month on the potential for higher interest rates to boost profits.

Commodity shares slumped as the dollar soared on the Fed’s hawkish tone. Target Corp. fell the most since 2008 on disappointing results, and Wal-Mart Stores Inc. lost 3% to weigh on consumer shares.

The S&P 500 rose less than 0.1% to 2,047.63, after lurching between gains and losses of more than 0.6%. The Dow Jones Industrial Average fell 3.36 points to 17,526.62 after jumping more than 100 points just before the Fed minutes. The Nasdaq Composite Index increased 0.5%, boosted by gains in Apple Inc. and Qualcomm Inc. About 8bn shares traded hands on US exchanges, 8% above the three-month average.

Minutes from the Fed’s April meeting showed most officials said a rate increase would be appropriate in June if the economy continued to improve, but were divided over whether those conditions were likely to be met in time. Some meeting participants expressed concern that markets were ill-prepared for a June rate hike.

In its statement last month, the Fed omitted previous language that “global economic and financial developments continue to pose risks”, tacitly nodding to improvement in financial markets. Policy makers also reiterated in April that they would probably raise rates at a gradual pace. Since the conclusion of the Fed’s meeting on April 27, the S&P 500 is down about 2.3%.

Traders are pricing in a 30% chance of higher borrowing costs in June, up from 4% on Monday and 14% just before the Fed minutes. Wagers for a July move jumped to nearly 50% from 16% last week. September is now the first month with at least even odds of higher rates after such bets had been pushed out to February as recently as a week ago.

Equities erased losses in the final minutes of trading on Wednesday as banks extended gains. Concerns that borrowing costs could rise sooner than expected, even as global growth languishes, sent stocks lower yesterday, wiping out a rally on Monday.

Only twice since 2009 have bank shares in the S&P 500 outperformed the broader index as much as they did today. Once in February, when Jamie Dimon spent $26.6m to buy shares of JPMorgan Chase & Co., and the other time was in November 2010, as the Fed prepared guidelines on whether lenders were strong enough to boost dividends and buy back shares after the financial crisis.

Disappointing earnings from retailers, including Macy’s Inc. and Nordstrom Inc. have helped stoke more volatility lately. As the earnings season draws to a close, analysts have moderated forecasts for a first-quarter profit decline to 7.4%, from 10% in April. Still, Goldman Sachs Group Inc. downgraded equities to neutral, saying they don’t look attractive unless companies post sustained earnings growth.

The S&P 500 has fallen for three straight weeks, the longest stretch since January, after a 15% rally from a 22-month low in February lost traction amid a tepid earnings season and lukewarm economic data. The benchmark has slipped 2.6% from a four-month high reached on April 20, and is less than 4% from a record set a year ago.

In Wednesday’s trading, the CBOE Volatility Index increased 2.4% to 15.95, a two-week high. Among the S&P 500’s 10 main industries, utilities, raw-materials and phone companies retreated at least 1.3%. Financial shares jumped 1.9%, and technology companies gained 0.5%, paring an earlier increase by more than half. AT&T Inc. dropped 1.7%, the biggest in four weeks. Copper producer Freeport-McMoRan Inc. sank 8.4%.

Consumer staples slumped for a second day as Hormel Foods Corp. tumbled 8.6%, the most since 2008 after narrowing margins sparked concern about the maker of Spam and other supermarket fare. Costco Wholesale Corp. fell 1.6%, its fifth decline in six days, while Wal-Mart capped the biggest two-day loss since October.

Joining Target’s decline within the consumer discretionary group, Nordstrom Inc. fell for a seventh session, the longest losing streak since December. The shares are down 26% during the span. Best Buy Co. sank 3.6% to a one-month low and Urban Outfitters Inc. lost 3.3% before its earnings report.

Citizens Financial Group Inc. and Huntington Bancshares Inc. jumped at least 5.3% to lead gains among banks in the equity benchmark. Bank of America Corp. and JPMorgan Chase added more than 3.8% amid speculation higher rates would bolster profits. In the broader financial group, Lincoln National Corp. rose 4.1% to a four-month high, while Charles Schwab Corp. and E*Trade Financial Corp. each increased at least 4.9%.

There was a bright spot amid the recent gloom of retailer earnings. Lowe’s Cos. jumped 3% to a record after posting a quarterly profit that topped projections. Home Depot Inc.’s results yesterday also exceeded estimates as the home-improvement industry has been largely immune from the malaise, with rising property values encouraging people to spend on their dwellings.

Apple rose 1.1%, on track towards snapping its longest weekly losing streak in 11 months (see Apple Call spread trade). Chief Executive Tim Cook began his first visit to India on Wednesday as the iPhone maker and its competitors are keen to expand in a country with the prospect of a billion new device sales. 

Qualcomm added 1.5% to close at a three-week high, while Micron Technology Inc. rallied 3.9%. Amazon eked out a slight gain of 0.31% (see Amazon Put spread trade).

Source: Bloomberg, TradingFloor.com

Local markets

  • Bank of New York Australia ADR Index down 1.9%. BHP Billiton ADR down 3.4%. Rio Tinto ADR down 3.3%
  • Spot gold lost 1.6% to $1,258. Gold for immediate delivery extended declines after most Federal Reserve policy makers in April said an interest-rate increase would be appropriate in June if the economy continued to improve. Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labour market conditions continuing to strengthen and inflation making progress toward the committee’s 2% objective, then it likely 'would be appropriate for the committee to increase the target range for the federal funds rate in June', according to minutes of the Federal Open Market Committee’s April 26-27 meeting released on Wednesday Gold stocks: NCM, NST, AQG, EVN, KCN, RMS, SAR, SLR
  • Crude oil fell, WTI and Brent down 1.2% and 1.7% to $47.88 and $48.56. Oil dropped from a seven-month high as the dollar surged after the Federal Reserve published minutes. Oil rose earlier in the day when the EIA data showed US output recorded another fall. Daily production was down 11,000 barrels a day to 8.79mb a day. But there was an unexpected jump in inventories of 1.31mb. Analysts surveyed by Bloomberg had projected a 3.5mb decline. Venezuela is offering oil at the biggest discounts in seven years as the third-largest supplier to US refineries fights to defend its market share from Canadian and Middle Eastern-grade oil stocks: WPL, STO, SEA, BPT, OSH, HZN, DLS, AWE, KAR, ORG, SXY
  • Iron ore finished the day higher, up 1.8% to $56.78 before FOMC minutes were made public. Physical tenders were thin as traders are now cautious that we’re approaching low steel demand season. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, ARI, BCI, SDL
  • Base metals were generally down on a stronger dollar. Aluminium bucked the trend, rising 0.8% to $1,555. Copper slumped to a three-month low as weaker equity markets in China dented investor sentiment about growth in the country, the world’s biggest consumer of the metal. Copper is testing $4,600 a metric ton again, now at $4,612.50 which is the first loss in four sessions. Copper stocks: PNA, OZL, SFR; Nickel stocks: WSA, SIR; Aluminium stocks: AWC
  • Commonwealth Bank (CBA): AUD$300m increase to January 2021 bond
  • IOOF (IOOF): Said to plan to raise AUD$300m-$400m, the Australian reported
  • James Hardie (JHX): Set to report fourth-quarter results
  • Mantra Group (MTR): Placement said to price at AUD$3.95/share, AFR says

Earnings this week

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

SWM.xasx is at a key level at present. Coming off its lows, where it found a floor at $0.66, SWM recently has found itself under strong buying pressure. After touching its 76.4% Fibonacci extension, it faced heavy profit taking. SWM is now at 2012 lows and may find resistance at this level. Breaking its recent upward trend SWM will first test 1.075 which was its 50% extension and March high. From there it will have levels at $1.025 and $0.865. To the upside, we’d have levels at $1.285.
 
SWM.xasx daily chart
1
 SWM.xasx weekly chart
2
 Source: Saxo Bank

Broker upgrades and downgrades

  • Seven West Media (SWM): Downgraded to underweight from neutral at JPMorgan

Open positions

 
AUDUSD

AUDUSD punched through its 200-day moving average overnight as USD rose to a seven-week high after US Federal Reserve meeting minutes boosted speculation that the central bank would raise interest rates as soon as June. AUDUSD is now hovering just above the 61.8% Fibonacci retracement (Jan 2016 low to the April 2016 top). 

Whilst AUDUSD is swimming below the 200 DMA level, it is currently trading at noisy levels, as marked in the chart below. All eyes will be on the unemployment data due at 1130, where consensus is for the unemployment rate to tick up to 5.8% (vs 5.7% prev). 

The level to watch on the downside is the 0.7180 area, as marked in the chart. Resistance for the day would be the 200DMA: 0.7255.
 
EURUSD

The USD index rallied above the key resistance level of 95 and the 10-year Treasury bond sold off as the Fed minutes indicated a hawkish view on the next month’s rate hike. The probability of the hike has now risen from 4% to 32% in the past three days and we continue to maintain our bullish view on the USD.  

EURUSD declined to break its April low of 1.1216, which is expected to be an interim support level, while the resistance level should be the 1.13 handle. 

The cable (GBPUSD) rallied on the back of the latest Brexit poll results which indicated 55% "Remain" votes. We are now exploring an out of the money long put option as the GBPUSD is now approaching the May high of 1.4770 and the Aug-May downtrend is expected to remain intact before next month’s referendum.
 
AUS200.i

AUS200.i is indicating slight losses on the open and trading could be subdued until the unemployment release at 1130. There is immense noise and support as displayed in the hourly chart at 5,350 and a break below here could signal further losses and a change in trend. 

On a bigger picture (daily chart) resistance overnight was again met at just below 5,400 and this level also overlaps with the October 2015 high, and the double bottom support from June/July 2015. The strength in AUS200.i seems to be losing steam as, while it has been attempting to punch through 5,400, the rate of change has been declining (as can be seen on the daily chart below). 

A change of trend and profit taking is long overdue so a sell stop below 5,350 would be an attractive entry with a stop above 5,400 and profit target set at 5,260 ~ 5,270.
 
 
US500.I

This morning’s hawkish Fed comments caused a sharp reversal in the US500, which briefly made a fresh low below the key support level of 2,040, although it failed to break the April low of 2,033.17. It is possible to see further choppy price actions between 2,040 and resistance levels at 2,060 and 2,072, but we anticipate a proper breakout below 2,040 in the near term as the downward momentum continues to drag down any rallies we have seen this week.



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

-- Edited by Susan McDonald

Today's Trade is compiled by the Sydney trading desk at Saxo Capital Markets. Watch our daily morning call on Periscope at 0945 AEST: #SaxoStratsAPAC.
 

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