Article / 05 October 2016 at 23:32 GMT

Today's Trade: Oil fuels early rise for ASX200

Trading Desk / Saxo Capital Markets
  • Local markets opened slightly up on the higher oil price
  • Crude oil rallied to almost $50/barrel
  • Bonds sold off while US shares rebounded overnight
  • Spot gold dropped 0.4%, extending losses into a fourth-straight session 
  • AUDUSD failed to break below the recent swing low 0.7589

By Saxo Capital Markets (Australia)

The ASX200 rose slightly at the start of trading, helped by the overnight rise in crude oil to almost $50/barrel. At the start, the benchmark index was 0.3% higher at 5468. The energy sector was up 1.1% with Santos up 2.3% and Oil Search up 1.9%. 

 A surge in the price of oil helped energy stocks rise at the start of trading. Photo: iStock


Bonds fell and the dollar held near a two-week high after data on services and manufacturing showed the US economy is strong enough to keep the Federal Reserve on track to raise interest rates by year-end.
Treasuries dropped for a fourth day in their longest decline in more than a month as a report showed service companies expanded at the fastest rate in almost a year. The dollar rose for a seventh day against the yen. A rally in crude to almost $50/barrel spurred an advance in global shares, with Brazil’s Ibovespa leading gains among the world’s biggest equity markets.
Traders have been weighing actions of global central banks against incoming economic data for clues about the path of unprecedented stimulus measures. The Fed left its benchmark rate unchanged last month, noting the case for a hike strengthened and describing risks to the economic outlook as “roughly balanced”. Key jobs numbers at the end of this week are forecast to show a pickup in hiring, which could bolster the case for higher borrowing costs.
Investors have poured into riskier assets as supportive policies in the biggest economies spurred demand for higher-yielding investments. Those efforts have sucked down yields on global bonds, so that $12 trillion now yield less than zero, while pushing stocks in the US to record highs. The combined size of the balance sheets of the world’s six major central banks has grown to $16 trillion from $6 trillion in 2008, according to Bianco Research.
Eight years after the financial crisis, the world is suffering from an unprecedented hangover. Gross debt in the non-financial sector has more than doubled in nominal terms since the turn of the century, reaching $152 trillion last year, the International Monetary Fund said. The situation complicates the task for policymakers, who have been urged to use fiscal policy to boost growth amid the waning ability to stimulate the economy.
The 10-year Treasury note yield rose two basis points, or 0.02%, to 1.71%, according to Bloomberg Bond Trader data. Yields on two-year notes, the coupon maturity most sensitive to Fed expectations, climbed to a one-month high.
The benchmark yield dipped to a record low of 1.318% on July 6, when the market-implied odds of higher US rates by December stood at just 12%. The probability has increased to 63%, according to fed fund futures data compiled by Bloomberg. JPMorgan Chase & Co says the benchmark yield can climb as high as 2% this year.
European bonds extended their selloff, which started Tuesday after Bloomberg News reported policymakers will probably wind down bond purchases gradually before the conclusion of the region’s quantitative easing. Yields on Italy’s 10-year bonds surged to the highest since June and those on Spain’s jumped above 1% for the first time in two weeks.
MSCI’s global equity gauge halted a back-to-back slide as energy companies surged. The Ibovespa climbed as oil company Petroleo Brasileiro jumped to an almost two-year high.
The S&P 500 Index added 0.4% to 2,159.73 after two days of losses following hawkish comments from Fed officials. ConocoPhillips and Transocean paced a rally in energy companies, while phone and utility shares retreated.
While investors are scrutinising data for signs of stronger growth and preparing for another earnings season, they’re also keeping a close eye on signals from policymakers. Chicago Fed President Charles Evans said the central bank will probably increase borrowing costs by the end of the year, joining calls from Cleveland Fed President Loretta Mester and her counterpart from Richmond, Jeffrey Lacker, to raise rates sooner rather than later.
In Europe, stocks retreated on bets the European Central Bank will turn less accommodative and as a report showed the region’s economy is losing steam. The Stoxx Europe 600 Index fell 0.6%, led by utilities, travel and leisure, and real-estate companies.
The dollar gained 0.6% to 103.54 yen, the strongest in about a month, and was little changed at $1.1209 per euro. The greenback has rallied about 3% from this year’s low in May amid mounting wagers that the Fed will boost rates.
The pound rose for the first time in six days against the euro as traders speculated it had fallen too far, too fast on speculation the UK is headed for a so-called hard Brexit.

Nickel touched a two-week low as concerns about supply restrictions eased. Zinc, copper and lead retreated in London, while tin and aluminium gained.

Source: Bloomberg,

Local markets and commodities

  • The S&P/ASX 200 Index futures +0.5%; futures relative to estimated fair value suggest an early gain of 0.5%.
  • Bank of New York Australia ADR Index +1.6%, BHP Billiton ADR +1.9% to A$23.17 equivalent, 1.4% premium to last Sydney close, Rio Tinto ADR +1.9% to A$44.26 equivalent, ~15% discount to last Sydney close
  • Gold ended lower after a choppy day of trading with December futures down $1.10 to $1,268.60. Spot gold dropped 0.4% to $1,263.68, extending their losses into a fourth-straight session as a better-than-expected reading on the US services sector helped dull the metal’s investment appeal. 
  • Popular gold ETFs have also come under significant pressure. Meanwhile gold stocks in Toronto made a slight rebound after Tuesday’s slaughter edging 0.45% higher. Gold stocks: GOR, NCM, NST, AQG, EVN, KCN, RMS, RRL, SAR, SLR
  • Oil climbed after government data showed that US crude stockpiles unexpectedly dropped last week to the lowest level since January after a fifth-straight weekly decline. Inventories fell by 2.98 million barrels to 499.7 million in the period ended September 30, the Energy Information Administration said on Wednesday. 
  • West Texas Intermediate for November delivery rose $1.14, or 2.3%, to $49.83. It was the highest close since June 29. Prices reached $49.97 earlier. Total volume traded was 13% above the 100-day average. 
  • Brent for December settlement increased 99¢, or 1.9%, to $51.86. The global benchmark ended the session at a $1.48 premium to WTI for December delivery. Oil stocks: WOR, WPL, STO, SEA, BPT, OSH, HZN, DLS, AWE, KAR, ORG, SXY
  • Iron ore was flat at $55.86/tonne in a quiet week attributable to China’s Golden Week national holiday this week. JPMorgan keeps forecasts at $53/ton in 2016, $54 in 2017. The bank sees about 78 million tons of new supply next year vs about 38 million tons of incremental demand, according to a report dated October 3 received on Wednesday. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, BCI, SDL
  • Base metals other than aluminium ended London Metal Exchange trading in negative territory due to risk-off, a stronger dollar and the absence of Chinese market participants. Three-month copper closed at $4,800/tonne, a drop of $5 on Tuesday's close but off earlier one-week lows of $4,773. 
  • LME three-month nickel settles unchanged at $10,080/ton. Volumes were low – just 8,300 lots of copper had traded on Select by the kerb close, outpaced by aluminium's 11,600 lots. Three-month aluminium settles $6 higher at $1,675/ton. Copper stocks: PNA, OZL, SFR; Nickel stocks: IGO, WSA; Aluminium stock: AWC
  • ARB Corp. (ARB), Webster (WBA), Sims Metal Management (SGM): Trades ex-div.
  • Arrium (ARI): Operations gradually being reinstated as more power is accessed; to receive final bids on Australian unit in December
  • Australian Ethical Investment (AEF): Shunning vice is fund’s secret to doubling market returns
  • Bank of Qld (BOQ): Scheduled to release FY results; NOTE: Adj. net income est. $A362.8mln (12 analysts)
  • BHP (BHP): Sees oil, gas markets rebounding faster than mineral mining; targets oil and gas deals in conventional deepwater
  • Evolution Mining (EVN): Chairman Jake Klein speaks on Bloomberg TV
  • JB Hi-Fi (JBH): Bookbuild closed at $A29.40/share: AFR
  • Rio Tinto (RIO): Wants diamond buyers to think pink
  • Syrah (SYR): Chairman says he’ll seek to appoint new CEO this year
  • Vicinity Centres (VCX): Raised to buy vs hold at Morningstar
  • Westpac (WBC), National Australia Bank (NAB): CEOs scheduled to front inquiry; NOTE: Bank bosses face Australia parliament grilling on rates
  • Woodside (WPL), Worleyparsons (WOR), Oil Search (OSH), Beach Energy (BPT), Karoon (KAR), Origin Energy (ORG), Santos (STO): Oil climbs near $50 after US stockpiles drop for fifth week

Broker upgrades and downgrades

  • Bendigo & Adelaide Bank (BEN): Cut to hold vs buy at Morningstar
  • Nine Entertainment (NEC): Cut to neutral vs buy at UBS
  • Aristocrat Leisure (ALL): Cut to sell vs hold at Morningstar
  • Colonial Holding (CNG): Subordinated note issue revised to BBB+ from BBB at S&P Global Ratings

Stock to watch: Aristocrat Leisure (ALL) 

Aristocrat Leisure (ALL) made a breakout above the key resistance level of $A16 two days ago on the back of the cross-licensing agreement with the US gaming company International Game Technology (IGT). Therefore more upside momentum is possible towards the record high of $A17.68, which coincides with 1000% extension of the rounding bottom that was formed during 2011-12. There could be a good opportunity to sell near $17.68 as the stock also seems overbought.
Aristocrat Leisure
Source: Saxo Trader
Aristocrat Leisure
 Source: Saxo Trader
AUDUSD and AUS200 

The US data last night was mixed as ADP employment numbers were disappointing while the ISM non-manufacturing PMI came out better than expected. The US dollar is maintaining strength and we expect similar heading into the nonfarm payroll figures tomorrow night. 

AUDUSD threatened again to push below the interim support level of 0.76 but failed to break below the recent swing low 0.7589. AUDUSD may show some reactions on the trade balance at 1130 AEDT.
AUDUSD monthly
Source: Saxo Trader 

While US500 is still stuck in the tight range of the triangle formation, the previous resistance level of 5,435 became the support level yesterday. Both banking and mining stocks are looking pretty solid therefore we expect AUS200 to continue the current resilience. The obvious resistance level remains at 5,500.
AUS200 monthly
Source: Saxo Trader. Create your own charts with SaxoTrader; click here to learn more 

– Edited by Gayle Bryant

Today's Trade is compiled by the Sydney trading desk at Saxo Capital Markets.


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