Article / 27 July 2017 at 0:48 GMT

Today's Trade: S&P/ASX200 gains ground on mining rally, as AUD soars

Trading Desk / Saxo Capital Markets
Australia
  • AUDUSD broke through psychological resistance at 0.80
  • USD sank and Treasuries climbed on Fed's inflation comments
  • Wall St reached new record highs on robust corporate earnings results
  • After months of going nowhere, the copper market is now on fire
  • Spot iron ore rose on expectations of stronger Chinese steel demand

By Saxo Capital Markets Australia

Overnight and early trading
  • The S&P/ASX200 edged higher in early trading; it was up 0.10% to 5,782.10 at 1043 AEST (0043 GMT).
  • The US dollar sank and Treasuries climbed after the Federal Reserve signalled that inflation remains persistently below its target even as the economy picks up steam.
  • The US Dollar Index fell to the lowest in more than a year, while the 10-year Treasury yield slipped back below 2.3% after the Fed held rates steady and indicated it would start unwinding its balance sheet “relatively soon.”
  • U.S. stock indexes climbed to fresh records after corporate earnings continued to beat Wall Street expectations.

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The spot iron ore price has soared back above $70/t on expectations of stronger Chinese steel demand; the move will benefit top Australian miners. Photo: Shutterstock

  • The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite posted all-time highs on the same day for the first time since July 19.
  • Stocks stayed steady after Federal Reserve officials voted unanimously to leave interest rates unchanged and signaled that the central bank could start shrinking its balance sheet “relatively soon”—a decision that was widely expected by investors and analysts.
  • The Dow Jones Industrial Average advanced 97.58 points, or 0.5%, to 21711.01.
  • The S&P 500 inched up 0.70 point, or less than 0.1%, to 2477.83 after erasing slight losses from earlier in the session, and the Nasdaq Composite added 10.57 points, or 0.2%, to 6422.75. Both indexes set records on consecutive days with earnings season at one of its busiest points.
  • With the Fed’s commentary suggesting the central bank will keep rates low for now, investors say U.S. stocks should keep eking out gains, provided that earnings continue to be supportive.
  • Roughly one-third of the S&P 500 has reported results so far, with 75% of the companies beating earnings estimates as of Wednesday afternoon, according to FactSet. Companies that have reported so far have posted 8.7% growth in earnings per share from the same quarter a year earlier, a higher figure than analysts projected entering reporting season.
  • Boeing shares led the Dow industrials higher following the company’s quarterly earnings report, jumping $20.99, or 9.9%, to a record $233.45—their largest one-day percentage increase since October 2008.
  • The aerospace giant added roughly 144 points to the blue-chip index after beating profit expectations and raising its guidance for the year. With its advance, Boeing vaulted past Goldman Sachs Group to become the priciest stock in the Dow.
  • After releasing results, shares of AT&T rose 1.81, or 5%, to 38.03—the stock’s best day since March 2009. Advanced Micro Devices shares climbed 65 cents, or 4.6%, to 14.76. Shares of Coca-Cola added 50 cents, or 1.1%, to 45.74, the stock’s largest advance in more than two months.
  • Ford Motor fell 21 cents, or 1.9%, to 11.06, however, after the company revised its guidance. Akamai Technologies declined 7.79, or 15%, to 45.49, making it the worst performer in the S&P 500.
  • Amazon.com shares rose 12.93, or 1.2%, to an all-time high of 1,052.80 giving the e-commerce giant a market value above $500 billion for the first time, according to FactSet, ahead of its earnings Thursday.
  • Government bonds rose, with the yield on the 10-year U.S. Treasury note edging down to 2.285% from 2.328% on Tuesday. Yields fall as prices rise. The WSJ Dollar Index, which measures the U.S. currency against 16 others, fell 0.6% after trading up before the Fed’s statement.
  • Elsewhere, the Stoxx Europe 600 added 0.5%.
  • Source: Bloomberg, TradingFloor.com, WSJ.com

Local markets
  • Bank of New York Australia ADR Index +0.9%, BHP Billiton ADR +1.4% to A$25.45 equivalent, 0.3% premium to last Sydney close, Rio Tinto ADR +0.2% to A$57.47 equivalent, ~11% discount to last Sydney close
  • Gold inched up slightly on Wednesday, recovering most of its losses, following the release of a Federal Reserve decision, which kept monetary policy unchanged, as was expected. Investors were then looking for clues about the central bank's next move. The Federal Open Market Committee released a statement containing key language that points to starting the move upward in rates in September. The "relatively soon" phrase is the crux of the statement. Fed watchers had been looking for the language to change from "this year," as indicated following the June meeting, to something more immediate. Meantime, company results and economic data have been largely upbeat of late. Germany's Ifo business survey on Tuesday also showed confidence, soaring to record highs in July, while US consumer confidence levels jumped to near 16-year highs, boosting the dollar. Spot gold last climbed 0.52% to $1,255.09/oz. US gold futures for August delivery climbed 0.22% to $1,254.70/oz, teetering between positive and negative territory. The Gold stocks in Toronto rallied strongly rising 2.38% overnight. Gold stocks: GOR, NCM, NST, AQG, EVN, KCN, RMS, RRL, SAR, SLR
  • Oil surged to an eight-week high after the government said US stockpiles shrank to levels last seen at the start of the year. Futures rose 1.8% in New York. Crude inventories declined by 7.21 million barrels last week to the lowest since January 6, according to the Energy Information Administration Wednesday. Petrol stockpiles fell for a sixth week to the lowest level since December, the data showed.
  • Crude has been on a rebound since hitting its low point for the year in June as rising demand for gasoline during the summer driving season is helping push stockpiles lower. But, prices have been stuck below $50/barrel in New York since May amid lingering concerns that rising global output from producers such as Libya, Nigeria and the U.S. will offset reduced flows from Opec members and its allies. The UAE reiterated its commitment to Opec production cuts and said it would deepen its own curbs, and Kuwait also has promised to pump less. The move follows criticism on Monday from Saudi Energy Minister Khalid Al-Falih of Opec members who haven’t fulfilled their pledged supply reductions. West Texas Intermediate for September delivery rose 86 cents to settle at $48.75/b on the New York Mercantile Exchange, the highest since May 30. Total volume traded was about 31% above the 100-day average. Brent for September settlement added 77 cents to end the session at $50.97/b on the London-based ICE Futures Europe exchange. The global benchmark traded at a premium of $2.22 to WTI. Oil stocks: WOR, WPL, STO, SEA, BPT, OSH, HZN, AWE, KAR, ORG, SXY.
  • Spot iron ore price pushed back above $70/t on expectations of stronger Chinese steel demand. Spot iron ore rose 1.4% or $0.95 to close at $70.43. Steel futures in China were a little bit more subdued, but remained near five year highs due to persistently low stockpiles. Inventories of rebar in China remain near a seasonal low, according to SteelHome data. Coking coal markets were relatively quiet, with only limited offers to buy cargoes in the physical market. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, BCI, SDL.
  • After seven months of going nowhere, the copper market has suddenly caught fire. While some of the rally has been fuelled by the usual fundamentals - a stronger Chinese economy and labor disputes at mines - the latest lurch may be caused by momentum and derivative traders. Option dealers who sold calls at key levels such as $6,000 a ton are now scrambling to cover their exposure after the contracts unexpectedly came into the money. Copper rose 1.7% to settle at $6,329 a tonne in London. The metal rallied as much as 2.8% to $6,400, the highest level since May 2015. Trading volumes have also been elevated. About 34,967 contracts traded in electronic trading Wednesday, above the 30- day average. More than 38,000 contracts changed hands in electronic trading yesterday, the most since November. Prices were supported on Wednesday by news that China plans to curb metal-rich waste imports in order to cut pollution, according to people familiar with knowledge of the issue.
  • For most of this year, the copper market has been subdued, creating an opportunity to make money by selling calls. The trade is profitable if copper prices stay below the strike price and the contracts expire worthless - meaning the seller pockets the options premium. But, now copper is soaring, pushing those calls into the money. Option sellers may need to buy the metal to cover the contract and hedge their losses, which can propel prices even higher. Similar activity was seen in November when prices spiked above $5,500 a ton. LME options data shows large volumes of calls in August and September contracts have been granted, allowing holders to buy copper at levels between $6,000 and $6,200 a ton. Copper stocks: OZL, SFR;
  • Aluminium closed up 0.6% at $US1942 a tonne, nickel ended 0.3% higher at $US10,040, zinc finished down 1% at $US2808, lead slipped 0.2% to $US2313 and tin finished up 0.1% at $US20,325.  Nickel stocks: IGO, WSA; Aluminium stock: AWC
  • Macquarie Group Ltd. (MQG) said it expects earnings in the year to March 2018 will be “broadly in line” with last year. First-quarter performance was up on the previous year, though down on the final quarter of 2017, the Sydney-based investment bank and asset manager said in a statement Thursday. Chief Executive Officer Nicholas Moore said its annuity-style businesses such as asset management and finance, which now provide about 70 percent of group earnings, “continue to perform well.” Base fees in the asset management business were broadly in line, but performance fees are down on the previous year. Capital market businesses saw “improved trading conditions”. Macquarie is expected to post adjusted net income of $A2.3 billion ($1.84 bn) this financial year, up from $A2.2 bn last year, according to the median estimate of 14 analysts surveyed by Bloomberg. The investment group has reported five consecutive years of profit growth.
  • Resolute Mining (RSG) FY17 gold production of 329,834 oz at an AISC of $A1,132/oz ($853/oz) significantly better than original cost guidance of $A1,280/oz and revised guidance of A$1,150/oz. Average gold price received of $A1,717/oz from total FY17 gold sales of 317,242 ounces. Gold production for the June Quarter 2017 of 70,654 ounces achieved at an AISC of $A1,502/oz ($1,127/oz). FY18 gold production forecast of 300,000 ounces at an AISC of $A1,280/oz ($960/oz). Positive exploration results received from Nafolo, Tabakoroni and BA-01 have highlighted underground mining opportunities that have potential to complement the existing Syama mine plan. Syama underground mine development progressing on schedule with completion of the sublevel cave development project expected in December 2018. Cash, bullion and listed investments of $A290 million ($223 mln) as at 30 June 2017. Gold in circuit inventory as at 30 June 2017 of 88,000 ounces worth $A142 mln (US$109 mln).
  • ANZ Bank (ANZ), Commonwealth Bank (CBA), National Australia Bank (NAB), Westpac (WBC): West Australia state says it could raise $A1bn over four years from its own bank tax: The Age.
  • Aurizon Holdings (AZJ): Aurizon takes $A526mln impairment in bulk business.
  • Beach Energy (BPT): Q4 production report expected; NOTE: Co. in April sees FY17 output target 10.3-10.7mmboe.
  • BHP Billiton (BHP): Esso JV tender for gas from Longford is understood to have fetched about double historical prices: AFR.
  • Fonterra (FSF): Lifts 2017-18 milk price forecast by $0.25.
  • Fortescue (FMG): Q4 production report expected; NOTE: Q4 total ore shipped est. 43.2mt (3 analysts).
  • GUD Holdings (GUD): FY results expected; NOTE: Co. in Feb. forecast FY17 underlying Ebit ~$A85mln.
Broker upgrades, downgrades
  • Automotive Holdings (AHG): Cut to hold at Morningstar.
  • Metcash (MTS): Cut to underweight at JPMorgan, price target $A2.30.
  • Reliance Worldwide (RWC): Raised to positive at Evans and Partners.
  • CSR (CSR): Cut to neutral at Evans and Partners; PT $A3.88.
  • Fairfax Media (FXJ): Raised to buy at Citi, PT $A1.10.
Australian earnings calendar
  • Thursday: Macquarie Group Ltd (AGM), GUD Holdings Ltd (2017 Earnings Call), CYBG PLC (Q3 2017 Sales and Revenue Release); June 2017 Sales and Revenue Release: Beach Energy Ltd, Fortescue Metals Group Ltd
  • Friday: Westpac Banking Corp: Business Update Call; Iron Mountain Inc: Q2 2017 Earnings
International earnings
  • Thursday: Deutsche Bank AG, Royal Dutch Shell Plc and Twitter
  • Friday: Credit Suisse Group AG, Nomura Holdings Inc., Exxon Mobil Corp., Chevron Corp., UBS Group AG, Barclays Plc and BNP Paribas SA
Gold Miners ETF GDX rallies

The US dollar fell again earlier this morning after the release of the Federal Open Market Committee statement failed to impress the treasury rates. Gold mining ETF (GDX) rallied back above the previous uptrend (from 2016 low of 12.40) but gains were limited to the downtrend (from 2017 high 25.71) which should now act as an interim resistance.
 
GDX chart1

























AUDUSD dips and rebounds

 
AUDUSD temporarily dipped below 0.79 handle yesterday soon after disappointing CPI numbers and the decline was reinforced when RBA governor Philip Lowe’s comments sounded less hawkish. The reversal began heading into the European open, but a proper spike came when the FOMC delivered the statement, causing US treasury yield to fall.

AUDUSD has now broken the psychological level 80 cent level for the first time since early 2015. Upside momentum is likely to remain unchanged while retracement should not be a surprise down to the support at the 0.79 handle.

AUDUSD chart
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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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