Article / 17 October 2016 at 23:56 GMT

Today's Trade: Soft start for ASX200, Aussie holds

Trading Desk / Saxo Capital Markets
Australia
  • Treasuries rebounded and the US dollar fell after mixed economic data
  • Oil fell as Opec members added supply and American producers increased drilling
  • UK government bond selloff gathered pace amid prospects of higher inflation
  • Iron ore rallied the most since August 16, up 1.9%
  • Local shares had a soft start and AUD held at around 0.7630 against the US dollar
  • NZ consumer prices rose 0.2%, down from 0.4% 

By Saxo Capital Markets (Australia)

Overnight and early trade

The local market was off to a soft start at 5,393, and the Australian dollar was holding around 0.7630 after a morning speech from the new RBA governor, Philip Lowe.

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 The oil price fell as Opec members added supply and American producers increased drilling, threatening to compound a global surplus. Photo: iStock


  • Treasuries rebounded from a four-month low and the dollar fell after mixed economic data in the world’s largest economy bolstered the case for accommodative monetary policy.
  • US government bond yields dropped and the greenback retreated against most of its major peers after a measure of manufacturing in New York unexpectedly contracted, while the nation’s factory production rose for the third time in four months. Stocks declined with energy shares as investors assessed corporate earnings. Oil fell as Opec members added supply and American producers increased drilling, threatening to compound a global surplus.
  • Traders have monitored economic data and remarks from policymakers for clues on the path of interest rates. The Federal Reserve Bank of New York said its Empire State index declined this month as analysts projected expansion, while data on US manufacturers signaled recovery. Investors also weighed comments from US Federal Reserve Vice Chairman Stanley Fischer, who sees limits to how far the central bank can pursue a strategy to push unemployment ever lower.
  • Futures indicate a 67% probability the Fed will raise rates by its December meeting, up from around 50% as recently as September 27, according to calculations by Bloomberg.
  • The benchmark 10-year note yield fell three basis points, or 0.03%, to 1.77%, according to Bloomberg Bond Trader data. The yield earlier rose as high as 1.81%, the highest since June. The selloff in UK government bonds gathered pace as prospects of faster inflation gave investors another reason to pull back from a market hurt by the mounting economic and political cost of Brexit.
  • The euro rose 0.2% to $1.0998, following the biggest weekly drop versus the greenback since November. The yen advanced 0.3% to 103.89 per dollar, after weakening 0.5% on Friday. The pound remained near a three-decade low against the dollar. Bank of England Deputy Governor Ben Broadbent said the currency’s slump since the UK vote to quit the European Union will help the economy overcome shocks from the decision.
  • Elsewhere in the world, the rand led gains among major currencies after a group of senior South African business leaders publicly expressed support for Finance Minister Pravin Gordhan as he faces fraud charges. Brazil’s real advanced on a report that President Michel Temer’s administration expects a last-quarter economic rebound.
  • US stocks slipped on Monday, with energy producers falling as crude oil sank and retailers declined, led by Amazon.com Inc. Lenders retreated even as Bank of America Corp's quarterly results exceeded estimates. Netflix Inc. surged 19% after regular trading hours, as it reported adding more subscribers than estimated in the third quarter. International Business Machines Corp. sank 2.3%, after reaffirming its full-year view while its operating earnings topped analysts’ forecasts. The VIX climbed 0.6% to 16.21.
  • European stocks fell for the fourth time in five days on concerns about the health of the global economy, while speculation grew that inflation will quicken. All industry groups in the Stoxx Europe 600 Index slid, pushing the benchmark gauge down 0.7%.
  • The MSCI Emerging Markets Index dropped 0.3%, paring its gains this year to 13%.
  • Oil dropped 0.8% in New York. Libyan output expanded to 560,000 barrels a day, according to the National Oil Corp., up from 540,000 last week. Iran repeated plans to boost production to 4 million barrels a day. Nigeria aims to raise output by 400,000 barrels a day to 2.2m, Oil Minister Emmanuel Ibe Kachikwu said in New Delhi.
  • West Texas Intermediate for November delivery slipped 41 cents to settle at $49.94 a barrel on the New York Mercantile Exchange. It’s the lowest since October 7. Brent for December fell 0.8% to $51.52 a barrel on the London-based ICE Futures Europe exchange. The global benchmark crude closed at a $1.15 premium to December WTI.

Source: Bloomberg, TradingFloor.com

US earnings
  • Tuesday: Goldman Sachs, BlackRock, Johnson and Johnson, United Health, Philip Morris, Comerica, Domino's Pizza, Harley-Davidson, Kansas City Southern, Intel, Yahoo, Intuitive Surgical, Pinnacle Financial
  • Wednesday: American Express, Morgan Stanley, US Bancorp, M&T Bank, eBay, Abbott Labs, Halliburton, St. Jude Medical, Tupperware, Supervalu, Unifirst, Tractor Supply, SLM, Citrix, Canadian Pacific Railroad, Northern Trust
  • Thursday: Microsoft, Verizon, Travelers, Union Pacific, Bank of NY Mellon, Walgreens Boots Alliance, Illinois Tool Works, E*Trade, Dunkin Brands, American Airlines, Alaska Airlines, Pulte Group, Fifth Third, KLA-Tencor, Advanced Micro
  • Friday: Daimler, General Electric, Honeywell, McDonald's, Manpower

Local markets

  • Bank of New York Australia ADR Index down 0.1%, BHP Billiton ADR down 0.3% to A$22.22 equivalent, 0.8% discount to last Sydney close, Rio Tinto ADR up 0.1% to A$41.72 equivalent, ~18% discount to last Sydney close.
  • Gold prices rose overnight, helped by a weaker US dollar. Gold for December delivery closed up 0.1% at $1,256.60 a troy ounce on Comex and remained close to 18% higher since the beginning of the year. Many analysts expect gold to struggle for the remainder of the year, however, as investors increasingly believe the Federal Reserve is on track to raise rates in coming months. Federal-funds futures, used to bet on central-bank policy, on Monday showed that investors assigned a 69.1% likelihood of a rate increase in December, up from around 50% in the middle of last month. Expectations of higher rates tend to weigh on gold, as the metal struggles to compete with yield-bearing assets such as treasuries when borrowing costs rise. Goldies in Toronto rallied 1.49% overnight. Gold stocks: GOR, NCM, NST, AQG, EVN, KCN, RMS, RRL, SAR, SLR.
  • Oil fell to a one-week low as Opec members added supply and US producers increased drilling, threatening to compound a global surplus. West Texas Intermediate for November delivery slipped 41 cents to settle at $49.94 a barrel on the New York Mercantile Exchange. It’s the lowest close since Oct. 7. Total volume traded was 5.8% below the 100-day average. Brent for December fell 43 cents, or 0.8%, to $51.52 a barrel on the London-based ICE Futures Europe exchange. The global benchmark crude closed at a $1.15 premium to December WTI. Libyan output expanded to 560,000 barrels a day, according to the National Oil Corp., up from 540,000 last week. Iran repeated plans to boost production to 4m barrels a day. Nigeria aims to raise output by 400,000 barrels a day to 2.2m, Oil Minister Emmanuel Ibe Kachikwu said in New Delhi. Rigs targeting crude in the US rose for a seventh week to the highest since February, Baker Hughes Inc. said. Oil has fluctuated near $50 a barrel amid uncertainty about whether the Organization of Petroleum Exporting Countries will implement an agreement to reduce supply. An Opec committee will meet later this month to try and resolve differences over how much individual members should pump. The details of how supply will be reduced needs to be finalized by the group’s next meeting in Vienna on Nov. 30. Oil stocks: WOR, WPL, STO, SEA, BPT, OSH, HZN, DLS, AWE, KAR, ORG, SXY
  • Iron ore rallied the most since August 16, up 1.9%. This strength follows China steel futures which reached a near 6 week high. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, BCI, SDL.
  • Aluminium dropped to the lowest in more than two weeks amid concern that more supply could come to market. Metal for delivery in three months slid as much as 1.7% to $1,647 a metric ton on the London Metal Exchange, the lowest since Sept. 28. Prices settled at $1,660.50 in London. A group of Indonesian bauxite producers will ask the government to lift an export ban of the material, one of the raw ingredients used to make aluminium. China will continue to relax policies designed to shrink its coal production capacity by allowing some mines to boost output to cool rising prices, according to Australia’s Whitehaven Coal Ltd. Coal is used to power aluminium smelters. Aluminium has climbed more than 5% in the past month amid delivery disruptions in China after regulators imposed new rules to clamp down on truck overloading. Nickel on the LME fell 1.9% to $10,290 a ton as China raised production of a lower-grade alternative. Output of nickel pig iron increased to 32,800 tons of contained metal last month as new projects came online and smelters resumed output after environmental checks, according to Celia Wang, a researcher at trading house Grand Flow Resources in Shanghai. Copper closed unchanged on the LME, while tin and lead declined and zinc rose. Copper stocks: PNA, OZL, SFR; Nickel stocks: IGO, WSA; Aluminium stock: AWC
  • Atrum Coal (ATU): ACG obtained extension to Oct. 21 from UK takeover panel
  • Aurizon (AZJ): Annual meeting scheduled; Note: Co. in Aug. forecast underlying Ebit A$900m-A$950m; rev. A$3.35bn-A$3.55bn
  • Cochlear (COH): Annual meeting scheduled; Note: Co. in Aug. forecast FY17 net A$210m-A$225m
  • Crown Resorts (CWN), Star Entertainment (SGR): Crown board met last night to discuss detained workers; Note: China’s foreign casino crackdown sends shudder through industry
  • Fletcher Building (FBU): Annual meeting scheduled; Note: Co. in Aug. forecast FY17 earnings growth at least 5%
  • Macquarie Group (MQG): National Grid said to pick Macquarie, Fosun as CPPIB exits
  • Navitas (NVT): Extends contracts with Curtin University
  • Oil Search (OSH): Third-quarter output report expected; Note: Co. is targeting 2016 production 28-30mmboe
  • Paladin (PDN): Says average December quarter selling price expected to be $27-28/lb
  • Seven Group (SVW): Caterpillar’s Oberhelman to retire; Umpleby named CEO; Note: Is an authorised Caterpillar dealer in West Australia, NSW and North-East China
  • Whitehaven Coal (WHC): Sees China easing mining limits to boost supply

Broker upgrades and downgrades

  • Regis Resources (RRL): Raised to buy from bold at Bell Potter
  • Westfield (WFD): Raised to buy vs hold at Morningstar
  • Whitehaven Coal (WHC): Cut to underperform vs neutral at Credit Suisse

Stock to watch

Sandfire Resources (SFR.xasx) is threatening a break of its support around the $5 mark it had been holding as a base since April 2016. A break below $5 is becoming more probable given it is trading in a descending triangle formation. However, the RSI does not signal a break down yet. We look for two consecutive closes below $5.00 before initiating a short position. Stops would lie above the descending red trendline.

SFR daily chart
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AUS200 and AUDUSD

The Shanghai composite index sold off as it formed an outside reversal which is usually a bearish pattern, so AUS200 also seemed to have follow the weak leads from both China and Hong Kong. However, the overnight price actions of the major equity indices were quite subdued, without a clear direction. Since AUS200 made a daily close below the key support level of 5,400, we are reasonably convinced that further declines are likely. The next support level would be 5,327 and the resistance level is 5,436.
 
AUS200 daily chart
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Both bond yields and the US dollar still appear resilient but AUDUSD also continues to bid up. The major focus today would be monetary policy meeting minutes (1130 local time) and the US CPI numbers at 2330.

AUDUSD 4-hourly chart
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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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