Article / 30 May 2016 at 2:28 GMT

Today's Trade: Sluggish start for ASX200, but watch for data this week

Trading Desk / Saxo Capital Markets
  • Gains in copper and other metals have not helped the flagging Australian dollar
  • Even gains in the crude price failed to arrest the decline in the Aussie dollar
  • Iron ore rebounded 3.4% to $51.15/tonne, giving miners a lift
  • Equities should stay resilient unless we see weaknesses from crude oil  
  • US markets will be closed for the Memorial Day holiday today

By Saxo Capital Markets Australia

Overnight and early trading

  • The S&P/ASX200 lost ground in early trading; it was down 0.09% to 5,401.10 at 1223 GMT (0223 GMT).
  • US stocks climbed in light, pre-public holiday trading, with the S&P500 posting the biggest weekly gain since March, amid growing confidence that the economy is strengthening enough to handle higher borrowing costs as early as this summer.

 Crude's crucial role ... when oil prices take a turn for the worse, equities are likely to follow suit. Photo: iStock

  • Equities resumed an advance after barely budging Thursday, lifted by gains in banks and technology companies, which marked their best week since February. Federal Reserve chair Janet Yellen said in remarks at Harvard University an improving economy would probably warrant another rate increase “in the coming months,” sending the dollar higher and damping commodity producers.
  • The S&P 500 rose 0.4% to 2,099.06 at 1600 in New York, the highest since April 20. The Dow Jones Industrial Average added 44.93 points, or 0.3%, to 17,873.22, while the Nasdaq Composite Index increased 0.7% to a five-week high. About 5.6 billion shares traded on US exchanges, the second-lowest this year and 23% below the three-month average. US markets will be closed on Monday in observance of Memorial Day.
  • A series of speeches by Fed officials and the release of the minutes to their April policy meeting have heightened investor expectations for another tightening move either next month or in July.
  • The S&P 500 gained 2.3% last week, with stronger than forecast housing data helping to boost optimism on the economy. Traders are pricing in a 34% chance the Fed will increase rates in June, up from 30% before Yellen’s remarks, and 4% early last week. July shows a 58% probability of higher borrowing costs, up from 51% earlier Friday.
  • Leading gains, Ulta Salon Cosmetics & Fragrance Inc. jumped 9.1% to a record after quarterly results beat estimates and the company raised its outlook. Alphabet Inc. rose 1.5% to a five-week high after Google won a jury verdict that kills Oracle Corp.’s claim to a $9 billion slice of the search giant’s Android phone business. Verizon Communications Inc. rose on a deal to end a 44-day strike by landline workers.
  • After slipping as much as 3% from a four-month high on April 20, the S&P 500 is back within 0.2% of that level, boosted by gains this week in technology shares, with Apple Inc. climbing 5.4% (See #SaxoStrats: Apple filling the gap) and Microsoft Corp. adding 3.4%.
  • That’s rejuvenated a rally that pushed the benchmark up as much as 15% from a February low before stalling last month amid mixed corporate earnings –  including disappointing results from those two tech giants –  and lukewarm signs of an economic pickup.
  • A report Friday also showed the economy expanded at a slightly faster pace in the first quarter than previously estimated, though the figures do little to alter views of the third consecutive sluggish start to the year. A separate gauge showed consumer confidence climbed less than forecast in May as Americans were a little less ebullient about the economy’s prospects in the run up to the presidential election.
  • With the reporting season almost at an end, analysts estimate first-quarter earnings declined 7.1%, compared with calls for a 10% drop as recently as April. They forecast second-quarter income will slide 4.9%, while growth is expected to return in the third quarter with a 3% increase.
  • In Friday’s trading, all of the S&P 500’s 10 main industries rose, with financial shares rising 0.7% while technology and health-care companies increased more than 0.5%. All 10 groups marked weekly gains for the first time since March. The CBOE Volatility Index fell 2.3% to 13.12, an 11-week low. The measure of market turbulence known as the VIX also posted the first weekly decline in three. (See VIX Bull Call Spread).
  • Energy producers were little changed as oil prices retreated for a second day after briefly rising above $50 a barrel on Thursday (see WTI July future races to key resistance level). The commodity trimmed its third weekly advance as Canadian energy producers moved to resume operations after wildfires eased. Chesapeake Energy Corp. and Marathon Oil Corp. lost more than 1.6%.
  • European stocks extended a third weekly increase: the Stoxx Europe 600 Index added 0.2% at the close of trading in London, taking its advance to 3.4% for the week. The number of shares on the gauge changing hands was about 20% lower than the 30-day average, before holidays in the UK and US on Monday. European shares posted their best weekly gains since February, resuming a rally that had stalled after a 16% rebound from a low that month. The region’s benchmark gauge posted its longest streak of weekly gains since March and closed 0.3% away from its April 20 high.
  • On Friday, steelmaker Voestalpine AG climbed 2.7% after Berenberg wrote in a note that the company is benefiting from strength in the auto industry. Roche Holding AG led gains among health-care companies, up 4%, after its Genentech unit reported positive drug results. Satellite-services provider SES SA slumped 10% after a stock offering. Banco Popular Espanol SA fell for a second day, extending a record low, after its biggest slump since 1999 following a share sale
  • Source: Bloomberg,

Local markets
  • Bank of New York Australia ADR Index -0.5%, BHP Billiton ADR -1.7% to $A19.16 equivalent, 1% discount to last Sydney close, Rio Tinto ADR -0.7% to $A40.03 equivalent, 11% discount to last Sydney close.
  • Gold futures for August delivery dropped 0.5% to settle at $1,216.70/oz on Comex clocking another losing week as janet Yellen stated on Friday that a rise rates in the coming months may be appropriate. Silver futures for July delivery also fell 0.5% to $16.269/ on Comex. Gold is now sitting at their lowest level in more than three months, 6% below its peak reached earlier this year. The gold sector in Toronto lost close to 2.5%. Gold stocks: NCM, NST, AQG, EVN, KCN, RMS, SAR, SLR.
  • Oil trimmed its third weekly advance as Canadian energy producers moved to resume operations after wildfires eased. West Texas Intermediate for July delivery dropped 15 cents to close at $49.33/barrel on the New York Mercantile Exchange with the front-month WTI up 3.3% for the week. Brent for July settlement lost $0.27, or 0.5%, to $49.32/b on the London-based ICE Futures Europe exchange with the weekly advance at 1.2%. The 50 level for the WTI and Brent will continue to be a level to punch through (see trade set up: WTI July future race to key resistance level). Oil stocks: WPL, STO, SEA, BPT, OSH, HZN, DLS, AWE, KAR, ORG, SXY.
  • Iron ore rebounded 3.4% to $51.15/tonne after sinking below $50 in the prior trading session. Meanwhile, Goldman Sachs warned that the global iron ore market faces a rising surplus as miners are poised to churn out more supply while China’s production of steel slows, predicting that prices will probably sink below $40 a metric ton as stockpiles expand. Iron ore is down 27% since peaking at more than $70 on April 21, when the speculative frenzy in China helped to lift prices for three straight months. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, ARI, BCI, SDL
  • Copper capped its first weekly gain in a month and other industrial metals advanced after world leaders pledged action to avert a fresh global economic crisis at the G7 summit. Metals climbed following a statement from the G7 leaders that promised “all appropriate policy responses” to sustain growth. Copper advanced for a fourth day, taking its gains last week to 2.8%, the most since the five days through April 22. Copper also gained after it was revealed that the US economy expanded slightly faster in the first quarter than initially estimated. Copper futures for July delivery added 0.5% to settle at $2.114 a pound at 1314 on the Comex (1714 GMT on May 27) and copper on the LME for delivery in three months gained 0.7% to $4,695/tonne ($2.13 a pound). Aluminium, zinc, nickel, lead and tin also climbed in London. Copper stocks: PNA, OZL, SFR; Nickel stocks: WSA, SIR; Aluminium stocks: AWC.
  • ALS (ALQ): Scheduled to release FY results; NOTE: Adj. net income est. A$107m (10 analysts, range $A93.4mln-$A121mln.
  • Alumina (AWC): Alcoa says joint venture partner seeking to block business split.
  • ANZ Bank (ANZ): To conduct roadshow for potential USD hybrid issue.
  • Blackmores (BKL), Murray Goulburn (MGC): Struggling to break into infant formula mkt: AFR.
  • Commonwealth Bank (CBA): Said to eye $A1.6bn stake in Keystart loan portfolio: AFR
  • Fonterra (FSF): Speculation that chief executive Theo Spierings may quit is ‘completely untrue’.
  • Patties Foods (PFL): Pacific Equity in advanced talks to buy co.: AFR; NOTE: PFL mkt cap. $A185.3mln.
  • Range Resources (RRS): Share trading on AIM will be unaffected by ASX suspension
  • South32 (S32): Colombia nickel union votes to go on strike.
  •  Woolworths Ltd. (WOW): BP mulling offer for Woolworths' petrol station unit worth about $A1.5bn: AFR.

Open positions
Original trades

AUDUSD looks fragile

Gains in copper, broad industrial metals and the rise in oil failed to provide much support to the AUD, as the strength in the US dollar continued on the back of Janet Yellen’s comments that an increase in rates in coming months may be appropriate. The AUDUSD is now back to the orange trendline and is poised to penetrate this as early as today. Looking ahead for the week, we have our GDP release on Wednesday and retail sales and trade balance on Thursday, which may provide the catalyst for a further sell down should figures disappoint.

The big test for the AUDUSD would be the 76.4% retracement (January 2016 low to the April 2016 top) which sits at 0.7069 and below that would open up a test of the 0.70 handle. Resistance to the topside is 0.7210 and above that it lies at 0.7230
AUDUSD trend
Fed hike talks leaves EURUSD under pressure

The US dollar index rebounded off 0.95, which was the previous resistance level back in April and the EURUSD sold off to touch the 1.11 handle. The probability of next month’s rate hike in the US is still only 30%. however the upward momentum of the US dollar seems to be accelerating. So the EURUSD is likely to be under further selling pressure.

The next support level should be 1.1070 which is a 50% retracement between the December 2015 low 1.0525 and the May 2016 high 1.1615. The US market is closed tonight due to the Memorial Day, therefore price actions could be choppy.
EURUSD trend
Data to impact S&P/ASX200 (AUS200.i)

Our AUS200.i extended its weekly gain to seven  straight wins with a close above 5,400 a strong signal that the bullish momentum is intact. We have a handful of figures to act as catalysts to drive the AUS200.i higher this week (GDP release: Wednesday and retail sales and trade balance: Thursday) and the first level to test would be 5,448 as marked on the chart.

The support for the week would be marked at 5,385 to 5,400 and a close below 5,400 this week will signal a turn in our domestic index which could take it down to the level of potential support as marked by the orange trendline
S&P/ASX200 trend
S&P500 (US500.I) gains ground

The S&P500 (US500.I) had the biggest weekly gain since the end of February as Janet Yellen hinted the possibility of a US rate hike in the coming meetings. Last week, we saw the head and shoulders pattern in the daily chart fail. Since then the S&P500 appears to have now formed a bullish flag and it is now fast approaching the April high of 2,111 which is the 100% extension of the range of the descending channel and it should be the next resistance level.

Since the crude oil (CL) touched the key resistance level at $50/barrel, its price action has been subdued. We maintain our view that the equity indices will remain resilient unless we see weaknesses from the crude oil.  
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Sources: AFR, SMH, CNBC, BBG, WSJ, The Australian, Reuters

– Edited by Robert Ryan

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Today's Trade is compiled by the Sydney trading desk at Saxo Capital Markets.Watch our daily morning call on Periscope at 0945 AEST: #SaxoStratsAPAC

Jeff Carnes Jeff Carnes
It is unlikely oil will be able to hold onto these gains once the temporary disruptions end. Libya has been successfully regaining some of its production capacities while Canada finally stopped the wildfire and have been initiating recovery efforts. It is only a matter of time before they return to their previous production levels. With Iran continually ramping up production in addition to the lack of cooperation between Saudi Arabia and Russia, the oil price is poised to go lower once more.


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