Article / 12 October 2016 at 23:46 GMT

Today's Trade: Nervous start for ASX200 after Fed minutes

Trading Desk / Saxo Capital Markets
  • Fed minutes show several officials said a rate hike was needed 'relatively soon' 
  • Investors have boosted their bets on a December hike
  • The US dollar climbed to a seven-month high
  • Sterling gained for the first time in five days
  • The local market was down at the open

By Saxo Capital Markets (Australia)

Overnight and early trade

In local trade, the ASX200 opened down as investors sold resources and banks. The benchmark index was down 25 points, or 0.5%, at 5450. The Australian dollar slipped further as the US dollar rose to a seven-month high.

 The greenback advanced to its strongest level since the start of September versus the yen. Photo: iStock

Minutes of the US Federal Reserve’s last meeting supported the dollar, while also boosting equities, as the record indicated policy makers may increase interest rates soon but maintain a gradual approach to further tightening. The pound rallied.

The US dollar climbed to a seven-month high after the minutes showed several officials said a rate hike was needed “relatively soon". The greenback advanced to its strongest level since the start of September versus the yen. The S&P 500 Index rose from a one-month low, while 10-year Treasuries capped a second day of declines. Sterling gained for the first time in five days after UK Prime Minister Theresa May accepted that parliament should be allowed a say on her Brexit plan. 

Oil fell a second day.

Investors have boosted wagers on a Fed hike, with odds the US central bank will lift borrowing costs this year at 66%, up about 4% from a week ago. Better-than-estimated data on manufacturing to services, coupled with concern inflation will accelerate, is driving the bets, which held gains as the Fed minutes confirmed officials are moving towards tightening. The meeting record showed that policy makers viewed last month’s decision to hold fire was a close call. Higher US rates would further amplify the country’s divergence with policy approaches in Japan and Europe.

The Dow Jones Industrial Average edged up 15.54 points, or 0.1%, to 18144.20. The S&P 500 rose 2.45 points, or 0.1%, to 2139.18, while the Nasdaq Composite edged down 7.77 points, or 0.1%, to 5239.02. The VIX closed just below 16 at 15.91 overnight.

Apple Inc. contributed the most to the gauge’s advance, while Cisco Systems Inc. slumped with other network-equipment makers after Ericsson AB said its business was deteriorating faster than expected. After surging as much as 7.2% this year through a record in August, the S&P 500 has failed to push higher as analysts predict a sixth quarter of falling earnings and speculation intensifies that the Fed will raise borrowing costs this year.

Concern over a slowdown in earnings also weighed on European stocks. Ericsson tumbled 20% after reporting a slump in third-quarter sales and profitability, while Glencore Plc led commodity producers higher.

The Stoxx Europe 600 fell 0.5%. The British pound gained 0.7% against the dollar to $1.2207 after four consecutive days of losses. The pound touched a historic low against a basket of currencies on Tuesday, according to Bank of England data. London’s export-heavy FTSE 100 index, which touched its highest level in decades on Tuesday, pulled back 0.7% as the pound recovered.

Benchmark 10-year Treasury yields rose by one basis point, or 0.01%, to 1.77%, after jumping five basis points last session, according to Bloomberg Bond Trader data. US government debt has lost 0.9% so far this month, according to Bloomberg Barclays US Treasury Index data, with benchmark yields rising every trading day except October 7.

That’s already putting bonds on pace for their biggest decline since February 2015, and comes as government securities have fallen around the world this month.

A $20bn US 10-year debt auction on Wednesday drew the highest yield at a sale of the securities since March. That lured investors, with a gauge of demand known as the bid-to-cover ratio rising to the most since June. A $24bn three-year note sale earlier in the day drew the highest auction yield since January.

Oil dropped on speculation the Opec agreement to trim crude output won’t succeed in reducing supply. Crude got a boost after the Organization of Petroleum Exporting Countries agreed late last month to have a new output range of 32.5m to 33m barrels a day. Opec Secretary-General Mohammed Barkindo said on Wednesday that talks with Russia about production curbs have been “very constructive". The country has been sending mixed signals about its commitment to an output cut or freeze.

West Texas Intermediate crude for November delivery fell 1.2% to $50.18 a barrel on the New York Mercantile Exchange. Brent for December settlement dropped 1.1%, to $51.81 a barrel on the London-based ICE Futures Europe exchange.

Gold for immediate delivery rose 0.2% to $1,255.25 an ounce in only its third rising day in 12 sessions. Most industrial metals also advanced.

Source: Bloomberg,

Local markets

  • Bank of New York Australia ADR Index up 0.7%, BHP Billiton ADR up 0.1% to A$23.14 equivalent, 1.3% discount to last Sydney close, Rio Tinto ADR up 0.7% to A$43.37 equivalent, 18% discount to last Sydney close
  • Spot gold traded near a four-month low as minutes of the Federal Reserve’s latest meeting showed the decision to hold US interest rates steady was a close call, with several officials saying a rate hike was needed “relatively soon". Prices actually started to climb off the lows in the afternoon. Gold futures for December delivery slid 0.2% to settle at $1,253.80. Gold stocks in Toronto rallied 2.98% on Wednesday. Gold stocks: GOR, NCM, NST, AQG, EVN, KCN, RMS, RRL, SAR, SLR
  • Oil dropped a second day on speculation the Opec agreement to trim crude output won’t succeed in reducing supply. West Texas Intermediate for November delivery fell 61 cents to $50.18 a barrel. Futures settled at $51.35 on Monday, the highest close since July 2015. Futures were little changed from the settlement after the industry-funded American Petroleum Institute was said to report US crude supplies rose by 2.7m barrels last week. November WTI traded at $50.16. Brent for December settlement dropped 60 cents, or 1.1%, to $51.81. The global benchmark closed at a $1.17 premium to December WTI. Oil stocks: WOR, WPL, STO, SEA, BPT, OSH, HZN, DLS, AWE, KAR, ORG, SXY
  • Iron ore for January delivery rose as much as 1.8% to 429.50 yuan a tonne on Dalian Commodity Exchange for the third daily increase. Spot iron ore edged lower by 0.52% to 57.16. Prices have risen this week “on stronger demand from Chinese mills re-entering the market after the week-long national holiday", RBC Capital Markets said in a note. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, BCI, SDL
  • Copper futures for December delivery fell 0.4% to settle at $2.177 a pound. Trading was 29% below the 100-day average for this time, according to data compiled by Bloomberg. The metal’s 90-day historical volatility dropped to the lowest since January 2015 on Wednesday. Aluminium, copper, nickel, zinc and tin climbed on the London Metal Exchange, while lead dropped. Gains in aluminium could stall as supply growth accelerates from new and reopened smelters, according to Xiong Hui, chief analyst at state researcher Beijing Antaike Information Development Co. Copper stocks: PNA, OZL, SFR; Nickel stocks: IGO, WSA; Aluminium stock: AWC
  • Cash Converters Intl (CCV), Nufarm (NUF), SMS Mgmt (SMX): Trades ex-div.
  • ANZ Bank (ANZ), Commonwealth Bank (CBA), Telstra (TLS): Scheduled to present at Australia FIX conference
  • Aurizon (AZJ): Bids for Glencore’s Hunter Valley coal haulage unit due this week: AFR
  • Bapcor (BAP): Extends closing date of share purchase plan to Oct. 28
  • Boral (BLD), James Hardie (JHX), QBE Insurance (QBE): Sydney housing boom has peaked amid investor curbs: QBE
  • Bradken (BKN): Gets conversion notices from CHAMP, Sigdo Koppers on redeemable preference share
  • Coal of Africa (CZA): Names Shangren Ding as a non-executive director
  • Iluka (ILU): Scheduled to release Sept. qtr production report; NOTE: Co. 2016 Z/R/SR target 660kt; Sales, FCF weighted to 2H
  • Magellan Financial (MFG): Annual meeting scheduled
  • Newcrest (NCM), Evolution (EVN), Northern Star (NST), Saracen (SAR), Regis Resources (RRL), Resolute Mining (RSG), St Barbara (SBM): Gold trades near 4-month low after Fed meeting minutes
  • Orora (ORA): Annual meeting scheduled; NOTE: Co. forecast FY17 earns up vs FY16
  • Transurban (TCL): Annual meeting scheduled; May also release 1Q sales; NOTE: FY17 distribution target A$0.505
  • Woodside (WPL), Worleyparsons (WOR), Oil Search (OSH), Beach Energy (BPT), Karoon (KAR), Santos (STO), Origin Energy (ORG): Oil falls 2nd day amid doubts OPEC members will reduce output

Broker upgrades and downgrades

  • Alumina (AWC): Cut to neutral vs overweight at JPMorgan
  • BHP Billiton (BHP), Rio Tinto (RIO): BHP, Rio cut to sell as prices for bulk commodities to fall: Citi
  • Medibank Private (MPL): Raised to neutral vs underperform at Credit Suisse
  • REA Group (REA): Raised to outperform vs neutral at Credit Suisse
  • Village Roadshow (VRL): Raised to overweight vs neutral at JPMorgan

Stock to watch

Evolution mining (EVN) appears to have broken the neckline of the head and shoulders pattern yesterday but it found a solid support level near 2.10 where the 200-day moving average crosses the 50% retracement between the November 15 low and July 16 high. A clear breakout would be confirmed once we see further declines below 2.10, which should be a strong support level for now.
EVN daily chart

Despite reversal-looking candlesticks on the US 10-year yields, the US dollar extended gains to the top side to break the 98 handle so USDJPY looks to have made a breakout above the recent resistance level of 104 while EURUSD touched 1.10. The next key support level for EURUSD would be 1.0950, which coincides with 61.8% retracement between the Dec 15 low and May 16 high. After AUDUSD failed to test 0.76 it still remains under selling pressure, although the uptrend should somewhat support the currency.

AUDUSD daily chart  
The interim support level of 5,436 still seems valid but we expect some choppy price actions biased to the downside today as both copper and energy could weigh on the index. In contrast, both Shanghai composite and Nikkei indices are showing resilience, therefore positive sentiments may continue to exist. The focus should be on the trade balance from China today.
AUS200 daily chart
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 Susan McDonald

Today’s Trade is compiled by the Sydney trading desk at Saxo Capital Markets. Watch the recording of this Week’s Macro Monday Call at 1030 AEST.

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