Article / 05 September 2017 at 0:45 GMT

Today's Trade: S&P/ASX 200 takes a tumble as risk aversion rules

Trading Desk / Saxo Capital Markets
Australia
  • Gold has hit an 11-month high on the rise in global tensions
  • Iron ore has enjoyed a multi month uptrend since June
  • Iron ore bulls would not welcome any break from this trendline

Overnight and early trading
  • The S&P/ASX 200 fell sharply in early trading. It was down 0.63% to 5,666.20 at 1033 AEST (0033 GMT).
  • Gold and the yen maintained gains in early Asian trading as the UN Security Council met to discuss the threat from North Korea.
  • S&P 500 Index futures were little changed, with the cash market closed on Monday for Labor Day, while contracts on Japanese equities were slightly higher. The Stoxx Europe 600 Index declined after a report that Pyongyang is preparing to launch an intercontinental ballistic missile as a follow-up to Sunday’s nuclear test. The yen and Swiss franc led currency gains on Monday. Gold rose to an 11-month high. Gasoline gave up some of last month’s gains as U.S. Gulf Coast refineries plan to resume operations following Hurricane Harvey-triggered shutdowns.


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The spot physical iron ore market has taken a breather, despite strong steel prices in China. Photo: Shutterstock

  • Investors moved into haven assets and sold stocks following North Korea’s largest-ever nuclear test, prompting U.S. President Donald Trump to denounce the country as a hostile rogue nation.
  • Just before European markets opened, South Korea’s Defense Ministry reported that North Korea was again preparing for a possible missile launch. Still, analysts said the moves were relatively muted and pointed to past market reactions to North Korean missile and nuclear tests, which have quickly been reversed.
  • The Stoxx Europe 600 index ended the day 0.5% lower, after falling by as much as 0.7% earlier in the session. Japan’s Nikkei 225 closed 0.93% lower.
  • US equity futures were hit too, with the S&P 500 and Dow Jones Industrial Average each down 0.3%. Most U.S. financial markets were closed Monday for Labor Day.
  • North Korea’s acceleration of both its nuclear and missile programs has presented Mr. Trump with his biggest foreign-policy crisis. In the wake of the latest escalation, the U.S. said it was drawing up new economic sanctions.
  • The Japanese yen came off its initial lows and fluctuations in Asian markets were more pronounced last Tuesday, when North Korea fired a missile over a main Japanese island for the first time since 2009.
  • As trading ended in Europe, the dollar was down 0.6% against the yen, with the dollar-yen pair at ¥109.5. The Swiss franc, another haven currency, was up 0.8% against the dollar.
  • In other haven assets, New York spot gold prices were up 0.7% to $1,340, after rising by slightly over 1% to touch 11-month highs earlier in the session.
  • On Monday, South Korea’s Kospi fell as much as 1.7%, though it quickly pared declines and ended down 1.2%, while the South Korean won slid 0.7% against the US dollar. Elsewhere, Hong Kong’s Hang Seng Index fell 0.8% and Australia’s S&P/ASX 200 closed down 0.4%.
  • Oil and gas prices were mixed Monday, as some refineries came back on line following Hurricane Harvey, which shut down a sizable portion of U.S. capacity.
  • Even following recent tensions, volatility in U.S. and global markets has been exceptionally muted, offering a major support to international markets. Late last month the CBOE Volatility Index or VIX, which measures S&P 500 options prices to assess expected volatility, hit an all-time intraday low.
  • After recent missile tests, the VIX closed at around 10.13 on Friday, far below its average of around 20 over the last two decades.
  • Source: Bloomberg, TradingFloor.com, WSJ.com
Local markets
  • BHP Billiton LDN ADR +0.13, Rio Tinto LDN ADR -0.64%
  • Gold pushed to a fresh 11-month high as the North Korean crisis escalated. After North Korea successfully tested a hydrogen bomb over the weekend, reports suggest it’s on the verge of launching another intercontinental ballistic missile. This saw President Trump hint that the US may launch new economic sanctions against it and China. This saw gold prices hit the highest level since Trump won the election. Spot gold was up 0.9% at $1,336, after earlier touching its strongest level since late September last year at $1,339.47. U.S. gold futures for December delivery were up 0.8% at $1,341.30 an ounce. Gold stocks in Toronto didn’t trade yesterday due to a public holiday. Gold stocks: GOR, NCM, NST, AQG, EVN, KCN, RMS, RRL, SAR, SLR.
  • Crude oil was slightly weaker, as reports of restarts at some Texas refineries saw gasoline prices decline. Marathon Corp and Valero Energy Corp both announced their refineries would recommence operations shortly. EIA also approved the release of 5.3 million barrels of crude oil from its strategic petroleum reserve. West Texas Intermediate for October delivery gained 8 cents to $47.37/barrel, while Brent for November settlement slipped 41 cents, or 0.8%, to $52.34/b on the London-based ICE Futures Europe exchange. The global benchmark crude traded at a premium of $4.32 to November WTI. Oil stocks: WOR, WPL, STO, SEA, BPT, OSH, HZN, AWE, KAR, ORG, SXY.
  • The spot physical iron ore market took a breather, despite strong steel prices in China. The spot iron ore price slipped 1.3% or $1.05 to settle at $77.86. Two other Chinese steel mills reported fires at plants, following on from the accident at Benxi Steel Group last week. This has seen prices surge as fears of further inspections raise the spectre of more supply disruptions. However the rising prices are creating concerns in the industry, with three listed steel mills issuing warnings about the rising raw material prices impacting profitability. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, BCI, SDL.
  • Nickel climbed to a two-year high and copper extended gains to the highest since September 2014 as bets on tighter markets, especially in top user China, buoyed metals after their longest run of weekly gains in a decade. Nickel advanced as much as 2.9% to $12,380 a tonne on the London Metal Exchange, its highest since June 2015. Copper climbed as much as 1.3% to $6,924 a tonne. Most metals rose after the LME Index of six contracts capped an eight-week advance on Friday -- one short of a record run in 2006. Copper stocks: OZL, SFR; Nickel stocks: IGO, WSA; Aluminium stock: AWC.
  • Aussie bulls walk on thin ice if iron ore breaks 10-week uptrend.
  • Trading ex-dividend: Bendigo Bank, Boral, Mortgage Choice, Oil Search, Ramsay Health, Servcorp, Spark Infra, iSentia.
  • A2 Milk (ATM NZ, A2M AU); Plans to start on-market buyback of up to $NZ40mln.
  • AGL Energy (AGL): Final stage of smart meter unit auction starting this week: AFR.
  • Murray Goulburn (MGC), Bega Cheese (BGA): Murray Goulburn is said to consider bidders for its assets: AFR.
  • Scentre (SCG): Mall upgrades to sustain sales growth, limit margin fall: BI.
  • Telstra (TLS), TPG Telecom (TPM), Vocus (VOC); Australia government to sell residual spectrum at competitive auction.
  • Ten Network Holdings (TEN): Most Ten Network creditors to be paid in full, KordaMentha says.
Broker upgrades, downgrades
  • National Australia Bank (NAB): Raised to buy at Shaw and Partners, price target $31.02.
  • Quintis (QIN): Cut to lowest junk rating at Moody’s on failed payment.
  • Astro Japan Property Group (AJA): Cut to neutral at JPMorgan, PT $A7.25.

Stock to watch: Whitehaven Coal (WHC)
Despite the sharp false break, we continue to believe in the strength of Whitehaven Coal (WHC) and hinted further rally two weeks ago. Yesterday WHC has hit highest level in 5 years with decent volume but WHC is near 3.85 (50% retracement of 2011 high 7.35 and 2016 low 0.35), so this level could act as a temporary resistance level.

Whitehaven Coal (WHC) chart
1
 
Stock to watch: Qantas Airways (QAN)
Qantas broke through $6 on the day of the earning release, but the airline wiped out all of these gains the very next day. Since then, price moves for the airline look unimpressive with thin volume, therefore reversal scenario seems still valid if it fails to climb back up to $6.

Qantas chart
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EURUSD rally

 
The continuing rally in the Euro was met with a fierce rejection at the major 2012 level last week, and ended the week well off its highs.

EURUSD long-term chart3





















Now whilst the technical outlook remains extremely bullish, last week’s reversal sets the tone for a healthy pullback.
 
After topping out earlier last week, we saw prices dip for 2 days which was then met with support at 1.1822 (or the previous week’s resistance). An attempted rally that followed was reversed at precisely the 61.8% retracement.

EURUSD daily chart4






















We mark this 61.8% retracement level at 1.1974 as major resistance again this week and buying will attempt to defend the zones between 1.1730 down to 1.1700 which corresponds to the April – June positive trendline.

Interesting to note that on the weekly chart, the 200 weekly moving average sits at that April – June positive trendline. A weekly close below this trendline which means below the 200 WMA opens a retest of 1.15 or the major breakout level the euro claimed this year.

EURUSD weekly chart
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Bullish iron ore trend


Iron ore has enjoyed a multi month uptrend (from June to the present), which remains as a core focus. Any break from this trendline will not be welcome for iron ore bulls.

Iron ore price trend6



















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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.

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