Today's Trade: Nerves, oil take ASX lower
- Oil prices tumbled close to 5% during the overnight session
- Materials and energy sectors pulling down the ASX in early trading
- Markets are concerned that a correction in commodity prices is under way
By Saxo Capital Markets (Australia)
Overnight and early trading
The ASX-S&P 200 has had a shaky start to the day, with an upbeat opening was shortlived as shares started to fall.
The S&P/ASX 200 was down 0.2% or 10 points to 5217, while the All Ords was down 9 points or 0.2% to 5301.
Yesterday's leaders, the materials and energy sectors, are doing the dragging today.
BHP is down 1.3%, Santos is down 3%. The banks are lower, with CBA is down 0.3% and Westpac lower by 0.6%.
US stocks slipped, damping an advance in global equities, as crude fell to a two-month low on renewed concern of an oversupply in America. Treasuries fell with gold amid easing demand for haven assets before tomorrow’s US payrolls report.
The S&P 500 Index slipped as crude sank toward $45/barrel on government data that showed inventories contracted less than anticipated in the past week.
European shares rose for the first time in four days, while emerging market equities climbed the most in a week. Treasuries retreated, pushing yields higher from unprecedented lows, while a rally in gold faltered.
The yen strengthened on Thursday. As global financial markets continued to weigh the fallout from Britain’s shock decision to secede from the European Union, attention is shifting to Friday’s US jobs report for clues on the Federal Reserve’s next policy decision.
The central bank mentioned concern that job creation was faltering at its last meeting, though the latest data signalled the US economy may have been gaining speed before the UK vote.
The S&P 500 Index fell 0.1% to 2,097.77. The index climbed as much as 0.5% and fell by an equal amount in a meandering session. MSCI’s gauge of global equities rose 0.2% on Thursday, paring a gain of 0.8%.
ADP Research Institute reported Thursday firms added 172,000 jobs in June, more than the 160,000 estimate in a Bloomberg survey, and Labor Department data showed jobless.
The Stoxx Europe 600 climbed 1.1%, halting the longest losing streak in three weeks. All 19 industry groups advanced, with a gauge of financial services providers climbing 2.1% as a group after closing at the lowest level since 2011.
The MSCI Emerging Markets Index gained for the first time in three days, rising 0.8%. Benchmarks rose at least 1% in Hong Kong, Hungary, Poland, South Africa and South Korea.
The yield on US Treasuries due in a decade increased two basis points to 1.39%, after sinking to an unprecedented 1.32% in the last session. The gap between yields on five- and 30-year debt, a gauge of the yield curve, narrowed to the flattest since April 2015.
Billionaire bond investor Bill Gross said Wednesday that sovereign bonds are “too risky” with yields in many developed markets near all-time lows.
German bonds slipped, after 10-year yields touched the lowest level on record on Wednesday. Japan’s two-year bond yield dropped one basis point to an all-time low of minus 0.345%.
The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, rose 0.2%. Futures put the probability of the Fed raising interest rates by December at about 12%, down from 50% at the time of the UK’s June 23 referendum.
After setting fresh three decade lows for two days running, the pound is finally getting some respite. Sterling was at $1.2902, after touching $1.2798 Wednesday. The yen strengthened for a third day, rising 0.6% to 100.76 per dollar, taking its post-Brexit rally to 5%.
The MSCI Emerging Markets Currency Index advanced 0.2%, headed for its first increase in four days. South Korea’s won jumped 1%. China’s yuan strengthened 0.1%, after sliding to the lowest level since November 2010 on Wednesday.
Oil tumbled to the lowest level in almost two months after the government report showed crude supplies fell 2.22 million barrels in the week ended July 1. West Texas Intermediate slid
4.8% to settle at $45.14 a barrel in New York after rising past $48 earlier in the session. Selling accelerated after futures broke through the $45.83-a-barrel June low.
Gold futures fell 0.4% to $1,361.50 an ounce in New York. Global gold holdings topped 2,000 metric tons for the first time since July 2013 amid rising demand for havens from the fallout from the UK vote.
Information sources: Bloomberg, TradingFloor.com
Local markets and commodities
- S&P/ASX 200 Index futures -0.4%; futures relative to estimated fair value suggest an early drop of 0.1%.
- Bank of New York Australia ADR Index -1.6%, BHP Billiton ADR -2.8% to A$18.57 equivalent, 2.7% discount to last Sydney close, Rio Tinto ADR -2% to A$40.49 equivalent, 15% discount to last Sydney close.
- Gold futures fell for the first time in four sessions as reports indicating a resilient US labor market reduced demand for the metal as a haven. Gold futures for August delivery declined 0.4% to settle at $1,362.10/oz on Comex, after climbing 3.5% in the past three sessions. Gold has rallied 28% this year as economic growth concerns fuel bets that the Federal Reserve will keep US interest rates low, boosting demand for the metal as a store of value.
- Fallout from the UK’s Brexit vote added to investor worries. The Fed wants more proof that job creation has resumed at a healthy pace and that growth momentum is intact before raising rates, minutes of last month’s meeting released Wednesday showed.
- Meanwhile China, the world’s biggest producer and consumer of gold, added about 500,000 ounces to central bank reserves in June, restarting monthly purchases to diversify holdings after taking a breather in May. The People’s Bank of China increased assets to 58.62 million ounces, or about 1,823 metric tons, from 58.14 million ounces in May when they were unchanged, according to data on the central bank’s website.
- The country has boosted its hoard in 11 out of the past 12 months after announcing a 57% increase to 53.32 million ounces since 2009. China bought gold during a month when global prices climbed 8.8%, boosted by the UK vote to leave the European Union and a further scaling back of expectations for a rise in US interest rates.
- Bullion has surged 29% this year as investors sought a shelter from market turbulence and increasing global economic and political risks. Assets in exchange-traded funds jumped 37% in 2016 to more than 2,000 metric tons. Gold stocks: GOR, NCM, NST, AQG, EVN, KCN, RMS, SAR, SLR.
- Oil held near $45/barrel after tumbling to the lowest level in almost two months as US crude stockpiles fell less than expected. Futures rose as much as 0.4% in New York after dropping 4.8% Thursday. Crude supplies fell 2.22 million barrels in the week ended July 1, Energy Information Administration data showed. Analysts surveyed by Bloomberg had forecast the EIA would report a 2.5 million decline, while the industry-funded American Petroleum Institute said in its report Wednesday that crude inventories dropped by 6.7 million barrels.
- Futures traded between $45 and $51/b in June after almost doubling from a 12-year low in February amid supply disruptions and falling US output. The recovery has prompted US producers to begin returning drilling rigs to service, leading to speculation a decline in production will slow. West Texas Intermediate crude for August delivery rose as much as 17 cents to $45.31/b on the New York Mercantile Exchange and traded at $45.30/b at 0720 Tokyo time. The grade fell $2.29 to settle at $45.14/b on Thursday, the lowest since May 10. Total volume traded was 19% above the 100-day average. Brent for September settlement dropped $2.40, or 4.9%, to $46.40/b on the London-based ICE Futures Europe exchange on Thursday. The global benchmark crude ended the session at a 56-cent premium to WTI for the same month. Oil stocks: WOR, WPL, STO, SEA, BPT, OSH, HZN, DLS, AWE, KAR, ORG, SXY.
- Iron ore fell 86 cents, or 1.5%, to $55.07/tonne, according to a price index compiled by Metal Bulletin. Iron ore prices have been volatile this year, with daily swings of as much as 18%. China's port inventories have swelled 11%, climbing to an 18-month high of 102.5 million tonnes on July 1. A supply increase could further pressure prices, which soared from the low $40s to more than $70/t earlier this year due to a sudden revival in China's property market. Iron ore has since tumbled 21% from its peak, cutting this year's gain to 28%. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, ARI, BCI, SDL.
- Copper posted the biggest three-day loss in more than two months amid concern that stumbling economies in Europe will hurt demand for base metals. In Germany, the largest copper user after China and the US, industrial output dropped the most in 21 months in May.
- The European Central Bank had cited the potential for significant “negative spillovers to the euro area” from the UK’s vote to leave the EU, according to an account Thursday of the June 2 Governing Council meeting. UK property funds with about 18 billion pounds ($23.4 billion) of assets froze withdrawals. Copper futures for September delivery declined 1.4% to settle at $2.1235/pound on Comex, after touching $2.117, the lowest since June 27. The metal has lost 4.2% in three sessions, the biggest such decline since May 5. On the London Metal Exchange, copper, aluminum, zinc, nickel, lead and tin declined. Copper stocks: PNA, OZL, SFR; Nickel stocks: IGO, WSA; Aluminium stock: AWC.
- In other news: ANZ (ANZ), Commonwealth Bank (CBA), NAB (NAB), Westpac (WBA): Rating outlooks lowered to negative from stable by S&P after agency revised Australia’s sovereign rating outlook to negative; all four banks affirmed at AA-; ASIC confident it’ll reach a settlement with banks over alleged interest rate rigging, Australian reports; IOOF (IFL): Said to be considering sale of AET unit, AFR says; Shopping Centres Australasia Property (SCP): Prices A$50m tap of 2021 bonds at swap + 170bps; South32 (S32): “Best option” to get silver rally exposure, Bernstein says; Cimic (CIM) says it has no explanation for recent trading in shares.
Share of the day: Tabcorp
Tabcorp (TAH.xasx) yesterday fell 4.36% after the NSW government said it would shut down greyhound racing, an industry found to have systemic animal cruelty. Tabcorp stated that NSW greyhound racing accounts for around 5% of wagering revenue and expects a “significant level of substitution” to other betting products.
On a weekly chart, it appears as if Tabcorp is trading within a flag formation and given the negative sentiment surrounding the stock following yesterday’s news, further downside pressures may persist in the interim.
However, buying opportunities may arise upon a test of the orange trendline which connects the 2012 low all the way through to the 2014 lows and the most recent low this year.
Tabcorp yearly chart
Source: Saxo Bank
Broker upgrades and downgrades
- Cimic (CIM): raised to neutral from sell at Morningstar
- CYBG (CYB AU): Rating outlook revised to negative from stable by S&P
- Henderson Group (HGG): Frozen property funds said to hold cash
- Insurance Australia (IAG): Cut to equalweight from overweight at Morgan Stanley
AUDUSD and EURUSD
As copper (HG) and crude oil (CL) sold off overnight, both AUD and CAD also declined. The recent price actions of AUDUSD in July looks choppy without forming any clear patterns, but the upside potential of the AUDUSD is expected to be vulnerable as S&P cut Australia’s sovereign outlook to negative from stable yesterday.
The resistance level remains at 0.7545 while the support levels sit at 0.7408 and 0.7380.
The ADP employment numbers were better than expected and the US dollar index (DX) bounced off the May high of 95.96 as we look ahead to the non farm payroll tonight at 10:30pm. The resistance level 1.1108 seems to be valid for now although we are expecting large price swings tonight. Any improvements of the NFP would trigger sell off in the EURUSD as the recent NFP has been shockingly low.
AUDUSD monthly chart
EURUSD monthly chart
Source: Both charts, Saxo Bank
AUS200.i and US500.i
The resistance level for AUS200 would be 5,250 which is equivalent to 5,200 over the SPI futures. This level is likely to hold as the materials and the energy sectors should weigh down on the AUS200, therefore we would look to sell if there is any rally in the opening of the futures at 9:50am. The support level remains at the 200 Day Moving Average near 5,130.
When the US market opened, the US500 began erasing all the gains from the European sessions along with the declines from crude oil but it reversed to rally into the close. The price actions are expected to remain cautious ahead of the non farm payroll figures but we maintain our bearish bias to the downside as long as the yesterday’s high of 2,109 holds.
AUS 200 monthly chart
US 500 monthly chart
Source: All charts 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.