Article / 25 May 2016 at 0:48 GMT

Today's Trade: S&P/ASX200 soars as overseas bourses boost sentiment

Trading Desk / Saxo Capital Markets
  • S&P/ASX200 soars as overseas bourses boost sentiment
  • US stocks rallied on a growing conviction that the Fed will hike rates in July
  • Gold lost heavily yet again, while copper edged higher
  • Crude made gains on a fall in US inventories and lower Iraqi production

By Saxo Capital Markets Australia

Overnight and early trading

  • The S&P/ASX200 shot higher at the start of trading. The benchmark index was up by a robust 1.52% at 1026 AEST (0026 GMT) to 5,376.20. 
  • US stocks joined a rally in European shares as growing conviction that the Federal Reserve will raise interest rates in the middle of the year sparked gains in financial equities. The dollar rose, while Treasuries fell as housing data reinforced confidence in the strength of the American economy.
 Crude made strong gains overnight as US oil inventories declined and Iraq reported production woes that have trimmed output in the Opec member nation. Photo: iStock

  • Banks and technology shares drove the S&P 500 Index to its biggest advance in two months, while the Stoxx Europe 600 Index jumped the most since mid-April. The dollar climbed to its strongest level since March against the euro, denting demand for gold, which capped its longest losing streak since November. The pound strengthened on a poll showing the campaign to keep Britain in the European Union is gaining ground. The Turkish lira climbed after a cabinet reshuffle and a rate cut boosted confidence in the central bank.
  • After swinging around in the wake of the Fed’s April meeting minutes, markets seem to have grown comfortable with the elevated odds of a U.S. rate increase in the next two months.
  • Traders are now pricing in a better-than-even chance of the central bank boosting borrowing costs at its July meeting, with Fed officials lining up to indicate their willingness to support such a move, should the current strength in the economy be sustained. Data Tuesday showed purchases of new homes surged in April to the highest level since the start of 2008. Investors will scrutinize comments from Fed Chair Janet Yellen later this week, as well as a key government jobs report due next Friday.
  • The S&P 500 jumped 1.4% to 2,076.06 as of 4 p.m. in New York. Financial stocks surged 1.6% as a group, with JPMorgan Chase & Co. and Citigroup Inc. jumping at least 1.7% as Treasury yields climbed to a three-week high. Toll Brothers Inc. jumped the most in three years following the stronger-than-forecast new-home sales data and as the luxury house builder’s quarterly profit topped estimates. An S&P gauge of homebuilders posted its steepest climb since January 2014. The Nasdaq composite outperformed, closing 2% higher for its best day since March 1 and above its 50-day and 200-day moving average. Apple closed up 1.5% (see Apple Call spread trade here: #SaxoStrats: Apple Call spread looks enticing).
  • The Stoxx Europe 600 Index added 2.2% Tuesday, its biggest one-day rally since April 13, as insurers and banks led gains.
  • The MSCI Emerging Markets Index of stocks fell 0.1%, while the Borsa Istanbul 100 Index jumped 3.5%. Futures on equity indexes in Asia signaled a rebound, following the MSCI Asia Pacific Index’s 0.9% Tuesday. Contracts on Japan’s Nikkei 225 Stock Average jumped 1.6% to 16,750 in Osaka amid a 0.7% drop in the yen, while futures on benchmarks in Sydney, Seoul and Hong Kong climbed by at least 0.6% in most recent trading.
  • The Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, rose 0.3% after closing little changed for the previous three sessions. The euro slipped 0.7% to $1.1141, while the yen dropped to 109.99.
  • Sterling jumped 1.8% versus the euro and was up 1.1% against the dollar, the currency’s first advance versus the greenback in three days. An ORB survey for Britain’s Daily Telegraph newspaper found older voters, previously found to back leaving the EU, are switching sides. The lira rose 1.6% versus the dollar as Mehmet Simsek retained his position as Turkey’s deputy prime minister.
  • Simsek is the last man standing from the team of ruling party officials feted by investors as the driving force behind Turkey’s rapid growth years. The central bank also reduced the country’s overnight-lending rate by 50 basis points, matching the median estimate of analysts. The yuan was the most resilient of 31 major currencies, gaining 0.02% versus the dollar and trimming this year’s loss to 0.9%. China’s central bank scrapped a market- based mechanism for managing the currency on Jan. 4, returning to a system whereby the exchange rate is based on what suits authorities the best, the Wall Street Journal reported, citing unidentified people close to the People’s Bank of China.
  • Gold fell for a fifth day, with bullion for June delivery slipping 1.8% to $1,232.20 an ounce. The prospect of higher U.S. rates damps the precious metal’s appeal as a store of value. Zinc in London dropped 0.7% to its lowest level in more than a month, while nickel rose 0.8% as Chinese import data signaled a diverging demand picture for the two metals. Copper rose 0.9%.
  • West Texas Intermediate crude oil rose 1.1% to settle at $48.62/barrel before U.S. data on the country’s inventories. The total volume traded was 29% below the 100-day average. (see crude trade set up here: WTI July future races to key resistance level).
  • The CBOE Volatility Index (VIX) declined to trade near 14.5 (see VIX Bull Call Spread trade idea:
  • Two-year Treasury yields rose one basis point, or 0.01%age point, to 0.91%, after the difference between two- and 30-year rates shrank to 171 basis points Monday, the narrowest since 2008. The Treasury Department sold $26 billion of the securities Tuesday amid the highest demand since November. Yields on 10-year notes climbed by three basis points to 1.86%.
  • Greek bonds reversed with yields on sovereign securities due in a decade adding one basis point to 7.16%, after reaching the lowest since November.
  • Euro-area finance ministers convened in Brussels on Tuesday, primarily to discuss the disbursement of a proposed 11 billion euros in aid for Greece, but also for talks on how to ease its debt through lengthening loan maturities, lowering interest rates and postponing payments.
  • Sources: Bloomberg,

Local markets
  • Bank of New York Australia ADR Index +0.9%. BHP Billiton ADR +0.6%. Rio Tinto ADR +1.1%.
  • Spot gold has experienced a second heavy drop in a week, down 1.8% to $1,227. Gold had a fifth straight decline, the longest slump since November. Gold has broken its short term trend line that started on 9th Feb at $1,188 when it opened below $1,249 and never looked back. Swiss customs data showed exports of bullion to India and China, the largest buyers, fell in April from a year earlier. Gold stocks: NCM, NST, AQG, EVN, KCN, RMS, SAR, SLR
  • Crude oil rose with WTI and Brent up 2.8% and 2.2% to $49.19 and $49.17 respectfully. This has come about as the volume was down 29% on its 100DMA and is in line with yesterday’s Short Trade on OILUSJUL16 at $49.85. Commercial crude stocks in the US likely fell by around 2.5 million barrels to just 538.8 million in the week ended May 20, a Reuters poll showed. Oil also got a lift as US stocks rose to their highest point for the last seven sessions, helped by gains in technology and financial stocks.
  • Oil was also supported by an Iraqi official's remarks that maintenance issues and power outages have caused the Opec member's output to fall to 4.5 million barrels per day from January's record high of 4.78 million bpd. Oil stocks: WPL, STO, SEA, BPT, OSH, HZN, DLS, AWE, KAR, ORG, SXY
  • Iron ore has held up after a big fall the prior day, up just 0.3% to $51.36. Iron ore has pivoted from boom to gloom in the space of just a few weeks, with prices sinking back toward $50 a metric ton as a 23 percent loss this month eviscerated April’s speculation-driven rally. . Oversupply should extend into the rest of 2016, Citigroup Inc. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, ARI, BCI, SDL
  • Base metals were mixed. Aluminium $1,553 0.00%, Copper $4,5870 +0.5%, Nickel $8,4200 +0.8%, Zinc $1,828 -0.3% Copper stocks: PNA, OZL, SFR; Nickel stocks: WSA, SIR; Aluminium stocks: AWC
  • Australia construction work done data for Q1 are released at 11:30am AEST
  • Adelaide Brighton (ABC): Annual meeting scheduled; NOTE: Co. in Feb. targeted 2016 cement, clinker sales vol. ahead of 2015
  • Arrium (ARI): Lenders said to consider A$1.5b IPO for Moly- Cop: AFR
  • BHP Billiton (BHP): Samarco says partial restart approved by municipal govt
  • Oil Search (OSH): PNG government says Oil Search-Interoil deal good for the country; InterOil cut at Citi; Unlikely to see other bidders
  • Programmed Maintenance (PRG): FY results expected; NOTE: Adjusted net income estimated at $A38.3m (say four analysts); GAAP est. loss $A27.7million (3 analysts): Bloomberg data
  • Suncorp (SUN): Scheduled to host investor day; NOTE: Company in February forecast improving underlying NPAT, sustainable RoE at least 10%
  • WorleyParsons (WOR): Scheduled to host investor day; NOTE: Company in February saw second half aggregate revenue matching first half, adjusted profit skewed to H2

Earnings due out this week

  • Wednesday: HP, Tiffany, Costco, NetApp, Bank of Montreal, Express, Lions Gate, Guess, Popeye's Louisiana Kitchen
  • Thursday: Canadian Imperial, Royal Bank of Canada, Toronto Dominion Bank, Signet, Abercrombie and Fitch, Seadrill, International Game Technology, GameStop

Broker upgrades, downgrades

  • Flight Centre (FLT): Raised to outperform vs neutral at Credit Suisse.
  • Westpac (WBC): Raised to outperform vs neutral at Macquarie.

Open positions

Pending order

AUDUSD takes a tumble

The AUDUSD made a fresh one month break yesterday to clock its largest drop in almost a week as comments from RBA Governor Glenn Stevens at the Trans-Tasman Business Circle briefing did little to diminish expectations for further policy easing. Whilst the orange trendline which acted as support last week was violated, AUD bulls were encouraged to see a settlement above this trendline.

The US dollar continued its strength with overnight moves registering a two-month high against the euro, which would put a lid on any potential gains over our AUD. The key focus today would be the Construction Work Done q/q due at 1130 AEST (0130 GMT). The ceiling to break would be 0.7210. However, the big support level the desk has started eyeing is 0.7064 which is a 76.4% retracement level (January 2016 low to the April 2016 top)

AUDUSD trend1
Quiet ends for EURUSD

The EURUSD ended three days of quiet price action as it broke below the March 24 low of 1.1143. The next support level should be 1.1070, which is the 50% retracements between the December 2015 low of 1.0525 and the May high at 1.1615.

The previous support level at the 1.12 handle is expected to become a resistance level now. The upside momentum of the US dollar index (DX) seems to be a lot stronger than we initially anticipated and this is also having negative influence on gold (XAUUSD), which is now fast approaching the next support level of $1,200/oz.
EURUSD trend

S&P/ASX200 may test 5,400

The S&P/ASX200 (AUS200.i) enjoyed a huge rally overnight (see US500.i analysis below) and a big test lies ahead for our index: penetrating the 5400 level.

As mentioned in previous reports, this level has enjoyed being mulitple levels of support and resistance in the past (as marked on the chart) and a break and settlement above this level would signal further gains.
Room for S&P500 rally

The S&P500 (US500.I) made a clear breakout above the downtrend and now approaching the May high at 2,085, which would be the next resistance level. The head and shoulders pattern looks to have been broken and now a bullish flag appears to have been established since the overnight break out of the downtrend.

US new home sales hit an eight-year high and this figure seems to have boosted sentiment in US equities. If we see a daily close above 2,085, then the US500 could rally a lot higher to test the April high at 2,111.

Scope for a rally: the S&P500
Create your own charts with SaxoTrader; click here to learn more.  

– Edited by Robert Ryan

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

For more on forex, click here.

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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