Today's Trade: S&P/ASX 200 rebounds, miners gain, NZDEUR opportunity

• The pattern of the past week indicates upside momentum for the S&P/ASX 200
• Higher iron ore prices have given both BHP and Rio a boost
  
• China's aluminium supply glut is likely to affect global prices and equities
  

By Saxo Capital Markets Australia

Overnight / early trade

Equities kicked off to a robust start today, with most leading S&P/ASX 200 stocks making gains. Mining and energy shares were higher soon after the start of trading on the ASX. Iron ore prices rose overnight, giving the share prices for both BHP Billiton and Rio Tinto a boost. The big four banks all moved higher as well. At 10:39am, the ASX 200 was 59 points higher, or up by 1.o per cent, at 5904.00

US stocks closed near highs on Thursday, with the Nasdaq at a record, as investors cheered corporate reports. The Nasdaq Composite outperformed the major indices to set a new, all-time closing record, topping the previous high of 5,048.62 set in March 2000. Apple closed up nearly 1% to lead the Nasdaq higher ahead of the release of the Apple Watch on Friday.

The S&P 500 closed up 4.97 points, or 0.24% higher, at 2,112.93, with telecommunications leading eight sectors higher and consumer staples and industrials the only two lagging sectors. Earlier, the index briefly gained to above its intraday record of 2,119.59, after earlier topping its record close of 2,117.39 set in March. The Dow Jones industrial average closed up 20.42 points, or 0.11%, or 18,058.69, with IBM leading advancers and 3M the greatest laggard. The blue chip index came within 1 percent of its record close in intraday trade before paring gains.

European stocks slipped in response to figures showing that the region’s economy slowed in April, coupled with lasting concerns over the future of Greece. The Stoxx Europe 600 index closed 0.4% lower, after quickly surrendering early gains. Germany’s DAX led declines, falling 1.2%, while France’s CAC 40 lost 0.6%.

Markit’s composite purchasing managers index – a measure of activity in the manufacturing and services sectors – for the region fell to 53.5 in April from 54.0 in March, against expectations of a slight increase to 54.4. A reading below 50 indicates a contraction, while a reading above that level indicates activity is increasing

Crude oil futures settled up $1.58, or 2.81%, at $57.74 a barrel on the New York Mercantile Exchange. Gold futures ended up $7.40 at $1,194.30 an ounce.

See week ahead for this week, by our Asia Macro Strategist, KVP (KVP's Macro Take: China eases rates - so it's equities risk-on).

Friday

   

Despite the fact that PMIs from Europe and US disappointed, the S&P500 was up overnight. Meanwhile the DAX dropped by more than 1%. SPI futures jumped more than 50 points as iron ore and crude oil continues to strengthen.

This week’s price moves have been choppy and the S&P/ASX200 has traded sideways, however whenever it made an intraday low, the S&P/ASX200 was able to rebound to a strong close. This indicates that the upside momentum still exists and we expect to see a positive day today trading above the support level 5,867.

 

The NZDUSD sold off yesterday after Reserve Bank of New Zealand assistant governor John McDermott said the central bank isn't considering a rate hike, suggesting next week's official cash rate review may be more dovish than expected. In contrast, the EURUSD rallied to test the previous swing high 1.0848. This overnight divergence between NZD and EUR provided a good long term opportunity to set up a long term buy trade on NZDEUR.

The NZDEUR has already made a break out of the bullish flag pattern a couple of weeks ago. The NZD has been one of the strongest currencies against both USD and AUD , as it correlates on GDT dairy auction prices, which have been more resilient than other commodities such as iron ore. Also New Zealand has one of the highest cash rates in the world, and it is currently 3.5%. So it is a good carry trade that can earn daily interest swaps against EUR, as the euro’s cash rate is at its lowest point of just 0.05%, and it is expected to remain low in line with the current QE program.

We would not be surprised if NZD continues the current bearish momentum (EUR strengthen) by another 50 pips or so in the near term. However we prefer to enter at 0.7000, which has previously been strong resistance level as we expect NZD to outperform against EUR for the next three to 10 months.

Long NZDEUR

Entry: Market (currently 0.70056 as of this morning)

Target: 0.7224, 0.7420, 0.7500

Stop loss: 0.6925

 






















Sources: AFR, SMH, CNBC, BBG, WSJ