Article / 01 June 2016 at 0:33 GMT

Today's Trade: S&P/ASX 200 slumps, as BHP and Rio Tinto take a dive

Trading Desk / Saxo Capital Markets
  • The S&P/ASX 200 took a sharp tumble at the start of trading
  • Iron ore lost ground again, finishing its worst month on record
  • Iron ore is down 25% for May – its biggest slump since 2013
  • Copper fell as a resurgent dollar cut demand for commodities priced in the USD
  • Gold prices rose, snapping its longest selloff in more than a year 
  • GDP data is likely to impact the AUDUSD

By Saxo Capital Markets Australia

Overnight and early trading
  • The S&P/ASX200 was down 1.05% to 5,322.10 at 1018 AEST (0018 GMT).
  • US shares capped a third month of gains, their longest rally since June 2014, while the dollar ended May with its biggest advance in almost two years as speculation mounted that the American economy can withstand higher interest rates as soon as this summer.
  • While the S&P 500 Index slipped Tuesday, it all but erased a 0.5% slide in the last hour of trading, leaving it up 1.5% in May. Data showing consumer spending climbed the most in seven years bolstered the case for rate hikes, helping the dollar cap a 3.7% jump this month. Yields on two-year Treasury notes, the coupon securities most sensitive to Fed expectations, jumped 10 basis points in May. Gold halted a nine- day slide, while crude oil fell, trimming a fourth monthly advance, its longest climb in five years.

Crude oil will be a key focus for the rest of the week, with Opec meeting on Thursday to discuss production policy. Photo: iStock

  • The Fed’s rate outlook is occupying investors as futures show odds of a hike at the July meeting at more than 50% while gains in commodity prices from crude to crops bolster prospects for inflation. A report on Tuesday showing US consumer spending climbed in April by the most in almost seven years added to optimism that growth in the world’s largest economy is robust enough to withstand what would be only the second rate increase in eight years. Payrolls data due Friday will also be scrutinized by investors.
  • The S&P 500 fell 0.1% to 2,096.96, slipping from its highest level since April 20. The gauge briefly popped above 2,100, a level it failed to hold in April after snapping back from the worst-ever start to a year on record. Trading volumes Tuesday were 14% above the 30-day average. US and UK markets were closed on Monday for a holiday.
  • The longest rally for US stocks in two years is occurring against a backdrop of investor disaffection. As the S&P 500 rose for three straight months, more than $11 billion was withdrawn from mutual and exchange-traded funds tied to U.S. equities, according to data compiled by Bloomberg and the Investment Company Institute.
  • The S&P 500 has gained 2.6% in 2016, with most of the climb coming last week after a rally from February lows lost steam in April. The gauge has risen 1.8% in the second quarter and now sits 1.6% below its all-time high set May 21, 2015.
  • The Stoxx Europe 600 Index lost 0.8% with bank shares leading losses, trimming its third straight monthly advance to 1.8%, still the most since November. Investors in the region are focused on monetary policy, with the European Central Bank reviewing benchmark rates on Thursday, when President Mario Draghi will also speak to reporters.
  • Emerging-market equities fell 3.9% in May as concern over the Fed’s rate plans dented the relative appeal of riskier assets. Brazil’s Ibovespa plunged 10% this month, its worst since 2014. China’s Shanghai Composite Index, the heart of a global selloff at the beginning of the year, fell 0.7% in May, in a second month of declines.
  • Asian index futures signaled a mixed session Wednesday, with futures on Japan’s Nikkei 225 Stock Average traded in Osaka down 0.9% to 17,080. Contracts on stock gauges in Australia, South Korea and Hong Kong’s Hang Seng Index dropped at least 0.2%, while those on the FTSE China A50 Index were up 0.2%.
  • Oil capped its longest run of monthly gains since 2011 as a spate of disruptions curb supply before Opec meets Thursday to discuss production policy. West Texas Intermediate crude fell 0.5% to close Tuesday at $49.10 a barrel, trimming its May advance to 6.9%. See short trade set up over OILUSJUL16 CFD: WTI July future races to key resistance level.
  • Oil has surged more than 85% since touching a 12-year low in February on signs the global surplus is easing amid declining output. Opec is unlikely to reach an agreement to limit production this week in Vienna as the group sticks with the Saudi strategy of squeezing out rivals, according to analysts surveyed by Bloomberg.
  • Gold advanced for the first time in 10 days to snap its longest selloff in more than a year as U.S. consumer confidence unexpectedly fell and manufacturing gauges weakened, boosting demand for the metal as a store of value. Gold lost 6.1% in May, paring this year’s rally to 14%.
  • Source: Bloomberg,

Local markets
  • Bank of New York Australia ADR Index -1.4%, BHP Billiton ADR -1.9% to A$18.65 equivalent, 2.3% discount to last Sydney close, Rio Tinto ADR -2.4% to A$38.77 equivalent, ~13% discount to last Sydney close.
  • Gold advanced for the first time in 10 days to snap its longest selloff in more than a year as US consumer confidence unexpectedly fell and manufacturing gauges weakened. Gold for August delivery closed up 0.1% at $1,217.50/ounce on the Comex division of the New York Mercantile Exchange. Prices hit $1,201.50/oz earlier in the session, the lowest level since February 17. Gold has lost close to 5.9% in May, paring this year’s rally, as traders brace for tighter US monetary policy amid signs of an improving economy. Silver for July delivery ended down 1.7% at $15.99 a troy ounce. July platinum was off 0.2% to $981.60/oz, while September palladium traded up 0.8% at $547.35/oz. Gold stocks: NCM, NST, AQG, EVN, KCN, RMS, SAR, SLR

 Crude prices will be a key focus for the rest of this week, with Opec members meeting on Thursday to discuss their production policy. Photo: iStock

  • Oil capped the longest run of monthly gains in five years as a spate of disruptions curb supply before Opec meets on Thursday to discuss production policy. Futures slipped Tuesday, trimming a fourth consecutive monthly advance, as Canadian producers start to resume operations after wildfires eased. Militant attacks have cut Nigerian supply to the lowest level in more than two decades. West Texas Intermediate for July delivery fell $0.23 to close at $49.10/barrel on the New York Mercantile Exchange. Brent for July settlement, which expired Tuesday, slipped $0.07 to $49.69/b on the London-based ICE Futures Europe exchange. Total volume traded was 32% below the 100-day average at 2:53 p.m. Oil stocks: WPL, STO, SEA, BPT, OSH, HZN, DLS, AWE, KAR, ORG, SXY.
  • Iron ore fell $0.12, or 0.2%, to $50.15/tonne, finishing its worst month on record. Iron ore is down 25% for May which is the biggest slump since 2013, after rising for three months through April. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, ARI, BCI, SDL.
  • Copper fell, capping the biggest monthly drop since November as a resurgent dollar cut demand for commodities priced in the currency. Nickel rose for a third session as workers at the world’s second-biggest ferronickel mine voted to strike. Metals slumped in May as Federal Reserve officials including chair Janet Yellen hinted at higher US rates as soon as their June gathering, strengthening the dollar and making materials more expensive in other currencies. Money managers raised their bearish copper bets in the week ended May 24 by 38% to the most in four months, U.S. government data show. Copper for delivery in three months fell 0.5% to settle at $4,671/tonne ($2.12 a pound) on the London Metal Exchange. Prices lost 7.5% this month.
  • The LME Index of six metals slid 6.9% in May, the first monthly retreat since January. The bourse was closed Monday for a holiday. Nickel rallied as much as 1.7% on Tuesday. Workers at South32 Ltd.’s Cerro Matoso in Colombia voted to take strike action amid a dispute over negotiations on a wage agreement. On the LME, lead, zinc and tin gained, while aluminum was unchanged. Copper stocks: PNA, OZL, SFR; Nickel stocks: WSA, SIR; Aluminium stocks: AWC
  • A2 Milk (A2M), Murray Goulburn (MGC), Bellamy’s Australia (BAL), Fonterra (FSF): Global milk stockpiles seen delaying dairy price recovery: Group.
  • BHP (BHP): To benefit from higher price of oil: BofAML.
  • BlueScope (BSL): Affirmed at BB by S&P; outlook stable.
  • Cabcharge (CAB): Might be considering potential sale of business.
  • JV stake to partner ComfortDelGro: Australian
  • Evolution Mining (EVN): May be considering sale of Pajingo gold mine in Queensland to slim down portfolio: Australian.
  • Lendlease (LLC), Arrium (ARI): Lendlease wins Northern Connector contract in Adelaide: South Australian government.
  • TFS (TFC): 9-mo net profit after tax $A66.2mln vs A$81.3m y/y.
  • Treasury Wine (TWE): Sees younger drinkers boosting sales in China.
  • Woolworths (WOW): Sets July 4 deadline for hardware unit bids: AFR.
  • Ex-Div: CSR (CSR), Aristocrat Leisure (ALL), Infratil (IFT), Technology One (TNE).

Broker upgrades, downgrades
  • Flexigroup (FXL): Cut to neutral vs buy at Goldman Sachs.
  • Greencross (GXL): Cut to hold vs buy at Morningstar.
  • Pulse Health (PHG): Cut to hold vs buy at Bell Potter.
  • Seven Group (SVW): Raised to buy vs hold at Morningstar.

Open positions

Original trade views

Watch for GDP data impact on AUDUSD

AUDUSD had the biggest daily gains since May 2 and it looks like we are seeing some short coverings as the AUDUSD has been trading at an oversold area.

The major focus for AUDUSD today would be the quarterly GDP numbers at 1130 AEST (0130 GMT). GDP has been declining in the last two quarters, so unless we see another disappointing figure, AUDUSD has potential to continue to retrace to the upside towards the next resistance level at 0.7380. The support level remains at 0.7150 which coincides with the previous downtrend line.
AUDUSD trend
Price moves for the EURUSD were choppy as it reversed the initial gains as the US dollar strengthened against the major currencies. The key support level remains at 1.11 where the 200 day moving average lies while the interim resistance level should be the 1.12 handle.

There is some economic data to watch tonight including number of manufacturing PMIs from Europe and the US ISM manufacturing PMI at midnight.
EURUSD trend
Energy stocks weigh on S&P/ASX200

While the Shanghai Composite index made a sharp rally to end the tight trading ranges on Tuesday, the S&P/ASX200 (AUS200.i) sold off driven by the big four banks.

Upside momentum already seems to show signs of exhaustion, so the AUS200 could remain under further selling pressure as the materials and the energy stocks are expected to weigh down the index. The Caixin manufacturing PMI will be released at 1145 AEST after the manufacturing PMI at 1100 (0100 GMT).
 S&P/ASX200 trend
The S&P/500 (US500) continued to show resilience as it recovered majority of the early losses to climbe up into the close.

Unless gold (XAUUSD) extends the rally and the crude oil (CL) declines further, it is difficult to see any catalyst for reversal in the US500.
 US500 trend

The US500 trend Create your own charts with SaxoTrader; click here to learn more. 

Sources: AFR, SMH, CNBC, BBG, WSJ, The Australian, Reuters

– Edited by Robert Ryan

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

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