Article / 13 September 2016 at 0:48 GMT

Today's Trade: Rally follows rout on dovish talk from Fed's Brainard

Trading Desk / Saxo Capital Markets
  • ASX200 opened higher and AUD edged up against weaker US dollar
  • US stocks rallied overnight after the biggest rout since June
  • US dollar weakened as the US Fed's Brainard remained dovish on rates
  • 10-year Treasury yields halted their surge
  • Oil rallied, rising back above $46 a barrel

By Saxo Capital Markets (Australia)

Overnight and early trading

Australian shares opened strongly higher and the Australian dollar recovered against the greenback.

US stocks rallied after the biggest rout since June wiped about $500bn from the value of equities, while the dollar weakened as the US Federal Reserve’s Lael Brainard remained dovish in her approach to tighter monetary policy.

  Fed Governor Brainard urged “prudence” when it came to raising interest rates. Photo: iStock

The S&P 500 Index staged its steepest reversal since January, jumping the most in two months to hold gains after Fed Governor Brainard urged “prudence” when it came to raising interest rates. 

The dollar fell for the first time in four days as odds on a hike at next week’s Fed meeting slid to 20%, while 10-year Treasury yields halted their surge. Shares in Europe and Asia paced Friday’s US slump, while an index of developing-nation equities tumbled 2.2%. Oil rallied, rising back above $46 a barrel.

Brainard counseled continued prudence in the path toward tighter Fed policy, even as she acknowledged the world’s largest economy was making gradual progress towards achieving the central bank’s goals. Her comments came after financial markets were jolted out of a period of relative calm by concern some global policy makers are questioning the ability of loose policy to ignite price growth and support economic expansion. Brainard is the last Fed official to speak before next week’s Fed Open Market Committee meeting.

The S&P 500 rose 1.5% to 2,159.04, reversing course in the wake of its worst sell-off since June. The rebound delivered the index its second day with a move of more than 1%, after it had gone 43 days without a move of that magnitude in either direction.

Phone companies jumped 2%, following their worst drop since 2014 with the biggest gain in four months. Shares on consumer-staples companies added 1.9%, while Apple Inc. advanced 2.2%. Biotechnology shares rallied the most since June.

The MSCI All-Country World Index also rebounded following two days of losses, adding 0.2%. The index spent most of the session lower, with losses reaching as much as 1.1% amid sell-offs in Asian and European markets. The Stoxx Europe 600 Index lost 1%, paring a rout that reached 2%, while MSCI’s Asia Pacific Index dropped 1.9%.

Brainard, seen as a leading opponent of rate increases for much of the past year, is the last scheduled Fed speaker before the self-imposed blackout period running up to the September 20-21 policy meeting. Any hawkish shift in her rhetoric may have stoked volatility in financial markets, which on Friday put the probability of a hike in US borrowing costs this month at 30%.

Futures on Asian stock indices foreshadowed a rebound, with contracts on the Nikkei 225 Stock Average rising 0.8% in Osaka, despite gains in the yen. Futures on Australia’s S&P/ASX 200 Index jumped 1.5%, while those on the Kospi index in Seoul gained 0.9%. Contracts on Hong Kong’s Hang Seng and Hang Seng China Enterprises indexes advanced at least 0.8%. FTSE China A50 Index futures were up 1%.

The yen gained against its major peers as traders remained on edge following last week’s global sell-off in stocks. Japan’s currency, a traditional haven play, advanced 0.8% to 101.85 per dollar, after falling almost 1% over the previous two trading sessions. It added 0.8% to 114.43 per euro.

Treasuries fluctuated, with yields on 10-year notes dropping one basis point, or 0.01 percentage point, to 1.67%. Yields jumped 13 basis points over two days last week to the highest level since June on Friday.

US yields stayed elevated after an unprecedented slate of auctions drew weaker-than-usual demand. Given some traders anticipated Brainard would signal a potential rate increase next week, her more dovish tone led to a brief gain in Treasuries. Germany’s 10-year yields climbed three basis points to 0.04%, their highest level since June 23.

West Texas Intermediate crude oil rebounded from losses of more than 1.5% to settle 0.9% higher at $46.29 a barrel in New York. Gold futures fell for a fourth straight session and nickel led a sell-off in industrial metals as concern over the Fed’s rate-hike plans lingered. Bullion for delivery in three months slipped 0.7% to settle at $1,325.60 an ounce in New York. Nickel slid 2.8% in London for its biggest drop in a month, while copper futures rose 0.7% on the Comex in New York.

Source: Bloomberg,

Local markets

  • Bank of New York Australia ADR Index up 1.2%, BHP Billiton ADR up 0.9% to A$20.50 equivalent, 2.8% premium to last Sydney close, Rio Tinto ADR up 1.2% to A$41.14 equivalent, 13% discount to last Sydney close.
  • Gold futures fell for a fourth straight session and nickel led a sell-off in industrial metals amid concern that the Federal Reserve is moving closer to raising US interest rates. Fed Governor Lael Brainard urged prudence in tightening monetary policy, even as the economy is making gradual progress to achieving the central bank’s goals. The speech was the last scheduled appearance by a central banker before this month’s policy meeting, and came after Boston Fed President Eric Rosengren said the economy could overheat if policy makers wait too long. Gold futures for December delivery slid 0.7% to settle at $1,325.60 an ounce on Comex in New York. The fourth straight loss is the longest slump in two months. Silver futures for December delivery fell 1.9% to $19 an ounce on the Comex. Gold stocks: GOR, NCM, NST, AQG, EVN, KCN, RMS, RRL, SAR, SLR
  • Oil advanced as US stocks rebounded from the biggest rout since June and as the dollar retreated against its peers. West Texas Intermediate for October delivery rose 41 cents to $46.29 a barrel on the New York Mercantile Exchange. Total volume traded was 40% above the 100-day average. Brent for November settlement increased 31 cents, or 0.6%, to $48.32 a barrel on the London-based ICE Futures Europe exchange. The global benchmark crude traded at a $1.48 premium to WTI for November delivery. 
  • Oil has fluctuated since rallying in August amid speculation the Organization of Petroleum Exporting Countries and Russia would agree on measures to stabilise the market later this month. All solutions are possible, Algeria’s energy minister said on Friday when asked if producers could raise output within the framework of a freeze. A deal to cap production was proposed in February but a meeting in April ended with no final accord. Opec flipped its forecasts for rival supplies in 2017. Production from outside the group will grow by 200,000 barrels a day next year, compared to a drop of 150,000 a day projected a month ago. The gain is driven by the startup of the Kashagan oil field in Kazakhstan. That means the organization’s total output of 33.24 million barrels a day in August was 757,000 a day higher than the average amount the world will need from Opec in 2017. The longer Opec and other producers talk about a ceiling on crude output, the more doubts grow in the market. Money managers increased wagers on falling WTI prices by the most in three months as a meeting between Russia and Saudi Arabia last week ended without specific measures to support the market. Oil stocks: WOR, WPL, STO, SEA, BPT, OSH, HZN, DLS, AWE, KAR, ORG, SXY
  • Iron ore lost 0.6% to $US57.78. According to brokerage houses in China, Speculation about limits on property speculation have the effect of weakening the steel market, and steel inventories have been increasing in the market for several weeks. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, BCI, SDL
  • Nickel for delivery in three months slumped as much as 4.1% to $9,950 a metric ton on the London Metal Exchange, retreating from its highest close since August 15. Copper sank to a two-month low as the strike at Codelco’s mine ended. Copper dropped as much as 1.1% to $4,582 a ton, the lowest since June 20. Copper futures rose 0.7% on Comex. Members of the processing-plant union at Codelco’s Salvador mine in Chile accepted a wage offer to end a five-day strike. 
  • The FTSE 350 Mining Index fell 3.8%, led by losses in Anglo American Plc. Zinc fell 1.4% to $2,259 a ton on the LME. Lead slumped 1.8% to $1,868 a ton. Copper stocks: PNA, OZL, SFR; Nickel stocks: IGO, WSA; Aluminium stock: AWC
  • Trades ex-div.: Austal (ASB), CSL (CSL), Healthscope (HSO), Macquarie Telecom (MAQ), McGrath (MEA), Village Roadshow (VRL)
  • BHP Billiton (BHP): Could restart South Australian power plant: The Australian
  • Bluescope Steel (BSL): JV with Nippon Steel to add Thai capacity: Nikkei
  • Graincorp (GNC): Australia set to harvest second-biggest wheat crop: Abares
  • JB Hi-Fi(JBH): Said to agree to terms with Good Guys on rights issue: AFR
  • Oil Search (OSH): Buys exploration acreage in offshore Papuan Gulf, PNG
  • Origin Energy (ORG): Macquarie’s Mira said interested in Origin’s Stockyard: AFR
  • PSivida (PVA): Second Medidur trial to complete enrollment next month
  • Santos (STO): May cut ~600 jobs, sell non-core assets: The Australian

Broker upgrades and downgrades

  • Vicinity Centres (VCX): Raised to buy vs hold at Morningstar

Stock to watch

We flagged Transurban (TCL.xasx) last Wednesday, September 7 as a long opportunity was identified near 10.60, which has been a major resistance level throughout 2015. Yesterday TCL .xasx gapped down and declined as low as 10.55 but closed above 10.60. Unless there is a daily close below 10.50, we would continue to maintain our bullish bias from here, targeting the gap fill at 10.86 then 11.33 where the 200-day moving average crosses the 38.2% retracement level.

TCL daily chart

US500 failed to test 2,100 and made a huge reversal to recover more than half of the heavy losses from last Friday. Dovish comments from Brainard also boosted gains to push the prices above the previous support level of 2,160.  

AUS200 briefly broke below the psychological level of 5,200 but the 200DMA seems to remain as a valid support level. CBA also closed above the massive support level of $70, so we do not see any severe catalysts to the downside on AUS200 unless we see a clear breakout below 70.
AUS200 daily chart
The support levels 0.7490 to 0.75 held as AUDUSD rebounded as the US dollar retreated overnight. The rally from copper also helped drive up AUDUSD and we expect similar price actions from copper in the near term. The focus today should be on the Chinese industrial production at midday local time and Mario Draghi’s speech at 7pm could be also interesting.

AUDUSD daily chart  
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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. Watch our daily morning call on Periscope at 9:45am: #SaxoStratsAPAC and follow us up on
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