Today's Trade: Selloff contagion spreads to ASX
- UK’s Chancellor of the Exchequer George Osborne seeks to reassure markets
- But in Australia, the contagion is being felt among banks and miners
- Gold stocks have lifted, based on gold's safe haven status
- Macquarie Group has been severely hit owing to its exposure to the UK
By Saxo Capital Markets
Overnight and early trading
The ASX/S&P 200 was 72 points, or 1.4%, lower at 5066 at around 1040 AEST (0040 GMT), and is now a bad session away from breaking the 5000 barrier since April, although it remains well above its February lows.
Banks and miners led the index lower, while Telstra continues to be a shining light among blue chips.
Among the banks, CBA lost 1.5%, Westpac gave up 1.3%, ANZ fell 2% and NAB dropped 1.8%. Macquarie continued its horror run, falling another 1.1% as investors consider the financial giant’s UK exposure.
Gold miners continued to shoot higher with the commodity’s price - Regis Resources lifted 1.4% and Northern Star added 1.2%.
BHP Billiton slipped 1.8% to $17.75, while Rio Tinto fell 1.7% despite the price of iron ore seeing its best session in two months overnight.
Overseas: The aftershocks of the UK’s vote to leave the European Union reverberated across financial markets after a weekend of political turmoil, with the pound extending its record selloff and European equities dropping to levels last seen in February.
The S&P 500 Index dropped 1.8% to its lowest level since mid-March as the rout in Europe’s equity benchmark dropped 11% over two days, the most since 2008.
GBPUSD fell below Friday’s lows, sinking more than 3% to its weakest point since 1985 as S&P Global Ratings reduced its rating on the UK’s sovereign debt.
Demand for haven assets boosted gold as 10-year Treasury yields slid to a four-year low. Crude oil extended its selloff amid concern Brexit will hit global growth, sapping energy demand.
Trillions of dollars have been wiped from global equity values as internecine squabbles flare among the UK’s main political parties, exacerbating the sense of instability.
As market volatility spikes, investors are also concerned about the ability of central banks to dial back the damage in markets.
Federal Reserve Chair Janet Yellen withdrew from a panel discussion set for Wednesday at the gathering, the Fed said Monday, without offering a reason.
Lazard and Evercore Partners posted their biggest two-day declines since at least 2008, leading a slump among independent investment banks. Utilities and phone stocks gained at least 0.6% as groups.
The Stoxx Europe 600 Index slid 4.1%, following a 7% selloff on Friday, as the FTSE 100 Index lost 2.6%.
The Stoxx 600 Banks Index, which includes European companies involved in banking, fell 7.7% after tumbling 14% on Friday. The volume of European shares changing hands today was more than double the 30-day average.
UK banks were the worst performers, with Royal Bank of Scotland Group losing 15% and Barclays sliding 17%. Losses in Italian lenders were limited after people who didn’t want to be identified but have knowledge of the discussions said Italy was considering injecting capital into some banks.
The MSCI Emerging Markets Index dropped 1.4% after sliding 3.5% on Friday. Shares in emerging Europe and Africa were among the hardest hit, with benchmarks in Poland and South Africa falling at least 1.6%.
Futures on Asian indices foreshadowed losses following rebounds in China and Japan on Monday. Contracts on the Nikkei 225 Stock Average fell 2% in Osaka, while futures on equity benchmarks from Australia to Hong Kong were down at least 0.8% in most recent trading.
The yen strengthened 0.2% to 102 per dollar, following Friday’s 3.7% surge. The currency jumped to 99.02 on Friday, its strongest level since 2013. Finance Minister Taro Aso told reporters Monday that Prime Minister Shinzo Abe had asked for various measures to stabilise Japanese markets.
The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, added 0.9% in a second day of gains as demand for safe havens outweighed diminishing prospects of policy tightening in the US.
The odds of a Fed interest rate increase by February has plunged to about 10% since the Brexit vote, from 52% on Thursday. The MSCI Emerging Market Currency Index fell 0.7% Monday after dropping 1.3% in the previous session.
UK government bonds surged, pushing 10-year yields below 1% for the first time, while the yield on similar-maturity German government bonds dropped seven basis points to -0.12%.
The collapse in the GBP since UK voters chose to quit the EU means imports of oil, natural gas and industrial metals will become more expensive for Britain.
Copper rose, reversing earlier declines, as the UK’s Chancellor of the Exchequer George Osborne sought to reassure markets. Gold gained 0.9% to its highest closing level since July 2014 as the market gyrations nonetheless burnished the appeal of haven investments.
Local markets and commodities
- The S&P/ASX 200 Index futures were down 1.3%; futures relative to estimated fair value suggest an early decline of 1.5%.
- Bank of New York Australia ADR Index was down4%, the most since March. BHP Billiton ADR -3.6% to A$17.88 equivalent, 1.1% discount to last Sydney close. Rio Tinto ADR was-2.6% to A$38.14 equivalent, a 13.5% discount to last Sydney close.
- Gold rose for a second day, adding to the biggest surge in seven years on Friday, as the fallout from the UK’s decision to leave the European Union boosted haven demand. Gold increased as the pound extended a record selloff and European equities fell to the lowest since February.
- Gold futures for August delivery rose 0.2% to settle at $1,324.70 an ounce on the Comex in New York, the biggest two-day gain since August 2011. Gold jumped 4.7% on Friday as the referendum result caused turmoil across global markets, spurring a $4.3 billion surge in holdings in bullion-backed funds, the most in four years. The gold sector rose 1.76% on the Toronto Stock Exchange. Gold stocks: NCM, NST, AQG, EVN, KCN, RMS, SAR, SLR.
- Oil pared the biggest two-day loss since February as futures remained volatile after the UK voted last week to leave the European Union. Futures rose as much as 0.8% in New York after slumping 7.5% over the last two sessions. Turmoil in financial markets continued Monday with the pound extending its selloff, while demand for haven assets including gold helped drive the precious metal higher.
- US inventories probably fell by 2.5 million barrels last week, according to a Bloomberg survey before an Energy Information Administration report Wednesday. West Texas Intermediate for August delivery rose as much as 37 cents to $46.70/b on the New York Mercantile Exchange. The contract fell $1.31 to $46.33 on Monday.
- Total volume traded was about 87% below the 100- day average. Brent for August settlement fell $1.25, or 2.6%, to $47.16 a barrel on the London-based ICE Futures Europe exchange on Monday. The global benchmark crude ended the session at a 83- cent premium to WTI. Oil stocks: WPL, STO, SEA, BPT, OSH, HZN, DLS, AWE, KAR, ORG, SXY
- Iron ore rose $3.25, or 6.4%, to $53.86/tonne. Prices for seaborne iron ore and materials at Chinese ports got a significant boost from news of a merger between China's Baosteel and Wuhan Iron & Steel. The merger between the two major Chinese mills was announced unexpectedly over the weekend, according to several market sources who saw the move as an indication of Beijing's determination to cut steelmaking capacity in the country.
- Such a merger is being seen as a positive move for the steel market and is anticipated to also stimulate prices for steelmaking raw materials. A depreciation of the Chinese currency during the day also provided some support for iron ore prices at China's ports. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, ARI, BCI, SDL.
- Copper rose, reversing earlier declines of 0.9%, as UK Chancellor of the Exchequer George Osborne sought to reassure markets following Britain’s vote to leave the European Union. Contingency plans were in place to shore up the economy amid market volatility, Osborne said in a statement Monday, adding that he had been in contact with Bank of England Governor Mark Carney over the weekend to add to existing planning.
- The metal slid 1.7% on Friday as the U.K.’s decision to exit the EU caused turmoil across markets. Copper for delivery in three months rose 0.3% to settle at $4,710 a metric ton ($2.14 a pound) at 5:50 p.m. on the London Metal Exchange, after falling as much as 0.9%. Aluminum, zinc, nickel, lead and tin dropped on the LME. Copper stocks: PNA, OZL, SFR; Nickel stocks: WSA, SIR; Aluminium stocks: AWC.
- In other news: Broadspectrum (BRS): Removed from ASX official list; Cromwell Property (CMW): Looking for acquisitions amid Brexit fallout: AFR; CYBG (CYB): Moody’s said to revise some U.K. banks’ outlook to negative: Sky; Evolution Mining (EVN): Scheduled to host investor day; NOTE: Co. in April forecast FY16 output 770,000-820,000 ozs at AISC A$970-A$1,020/oz; Generation Healthcare REIT (GHC): NorthWest Healthcare acquires option to boost stake in co. to ~19.9%; Holders; Mayne Pharma (MYX): Said to buy assets from Teva: AFR; Said to be set for A$900m rights issue: Australian; NAB (NAB): To price 5-year AUD, USD Uridashi bonds mid-July; National Storage REIT (NSR): Investment banks gauging interest for potential cap. raising: Australian; Warrnambool Cheese (WCB): Takeovers Panel received application on Warrnambool Cheese.
Broker upgrades and downgrades
- Rio Tinto (RIO): Raised to neutral vs sell at Goldman
AUDUSD and EURUSD
The resistance levels remain at 0.7380, 0.74 and 0.7460 while the support levels are the 0.73 handle and 0.7285 at the 200 DMA. The AUDUSD is expected to be vulnerable to the current risk-off sentiments, but the potential short covering is also possible.
The selling pressure is likely to be strong but the interim support level 1.09 should restrict further selling for now as we may see some retracements towards the resistance levels 1.11 and 1.12, while the major support level is 1.0820.
EURUSD monthly chart
It was interesting to see the volatility index (VIX) declined and gold (XAUUSD) is struggling to push higher, even though the major equity indices plunged on the back of the growing uncertainties from the Brexit.
The S&P downgraded the UK's sovereign rating two notches from AAA to AA, therefore the near-term outlook would be negative. Since the key support level 2,005 was broken overnight, it is possible to see further declines towards the next support level 1,967 which is the 50% retracement between the Feb low 1,807and the June high 2,128.
The weakness from the big banks weighed down on the AUS200 yesterday but we saw a glimpse of the positive price actions as the banks recovered majority of the earlier losses.
The current market condition still looks negative but we would look to buy if the AUS200 decline back towards the key support level 5,000.
AUS 200 monthly chart
US 500 monthly chart
-- Edited by Adam Courtenay
Today’s Trade is compiled by the Sydney trading desk at Saxo Capital Markets.