Article / 26 February 2018 at 23:45 GMT

Today's Trade: Wall St, iron ore miners drive S&P/ASX200 higher

Trading Desk / Saxo Capital Markets
Australia
  • Upbeat US corporate earnings results have helped drive a rally on Wall St
  • The softer US dollar helped gold rebound from its biggest weekly loss this year
  • Crude hit a three-week high, as soaring stock markets stoked optimism
  • Bulk commodities prices have gained ground, led by strong gains in iron ore
By Saxo Capital Markets Australia

Overnight and early trading
  • The S&P/ASX200 surged higher in early trading; it was up 0.48% to 6,072.00 at 1036 AEDT (2336 GMT, on Monday evening).
  • Asian stocks looked set to build on the recent rally after US shares reached a four-week high and investors bet monetary policy tightening won’t be too severe to derail the bull run in equities.


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Sharp rises for steel prices in China have helped drive strong gains in iron ore prices; the gains will impact leading miners in Australia and elsewhere. Photo: Shutterstock


  • Futures contracts indicated a higher start for stocks in Japan, Australia and Hong Kong.
  • Financial and technology shares rallied Monday, lifting the S&P 500 and Dow Jones Industrial Average to their third consecutive day of gains.
  • Stocks began the day in positive territory, then steadily climbed higher, with the Dow industrials at one point up more than 400 points, and all but one of the S&P 500’s 11 sectors rising.
  • The day’s moves helped stocks further recoup their February losses, which had pulled major indexes into correction territory, or down more than 10% from the all-time highs they reached the previous month.
  • One factor that has helped stocks recover: a stream of corporate earnings results suggesting that U.S. firms are on strong footing. A record 78% of S&P 500 companies have beaten analysts’ revenue estimates so far for the fourth quarter of 2017, and overall earnings growth is nearly 15%, which would make it the best quarter since 2011, according to FactSet.
  • The Dow industrials rose 399 points, or 1.6%, to 25709. The S&P 500 added 1.2%, and the Nasdaq Composite advanced 1.2%. The VIX continued its drop, closing at 15.80 overnight.
  • Technology stocks, among the best-performing sectors in the S&P 500 this year, led gains in the broad index Monday. HP shares rose 6% after JPMorgan raised its rating for the stock to overweight from neutral, while Qualcomm added 5.8% after the chip giant said it was getting closer to negotiating a takeover deal by Broadcom.
  • Financial shares rallied, with Class B shares of Berkshire Hathaway —which posted a nearly $45 billion annual profit, thanks in part to the new tax legislation—jumping 3.9%.
  • Mattel shares fell 3.4% after Jefferies cut its rating on the stock to underperform from hold.
  • Some investors remain concerned about the recent pickup in bond yields, which put pressure on stocks at the start of the month. With interest rates remaining in focus, many investors said they would be watching closely for Federal Reserve chairman Jerome Powell’s policy update to Congress on Tuesday, his first appearance on Capitol Hill since he was sworn in as the new Fed chief earlier this month.
  • Government bonds strengthened Monday, with the yield on the benchmark 10-year U.S. Treasury note recently at 2.862%, compared with 2.871% Friday. Yields fall as bond prices rise.
  • Meanwhile, stocks elsewhere around the world also rose, with the Stoxx Europe 600 closing up 0.5%, led by advances in shares of basic resources and technology companies.
  • Source: Bloomberg, TradingFloor.com, WSJ.com, CNBC

Local markets
  • Bank of New York Australia ADR Index is up 1.1% to 290.6, BHP Billiton ADRs are up 1.0% to $A31.07 equivalent, a 0.7% premium to last Sydney close, Rio Tinto ADRs are up 1.7% to $A73.90 equivalent, a 8.3% discount to last Sydney close
  • Gold rose on Monday as a softer dollar helped the metal rebound from its biggest weekly loss this year, while traders awaited Reserve Chair Jerome Powell's debut congressional testimony this week for clues on the next direction of trade. Spot gold was up 0.29% at $1,332.74/oz, while U.S. gold futures for April delivery were up 0.31% an ounce at $1,334.40. The dollar index was flat on Monday, lifting gold after it fell 1.4% last week, its biggest weekly drop in 2 1/2 months. Hedge funds and money managers raised their net long positions in COMEX gold contracts in the week to February 20, U.S. Commodity Futures Trading Commission data showed on Friday. Gold stocks in Toronto added 0.98% overnight. Gold stocks: GOR, NCM, NST, AQG, EVN, KCN, RMS, RRL, SAR, SLR
  • Crude closed at a three-week high as booming stock markets stoked optimism about economic growth that drives energy demand. Crude futures rose 0.6% in New York on Monday. Blue-chip stocks reached a level not seen since the start of this month and the dollar retreated from earlier gains, boosting oil’s appeal as a store of value. Prices flirted with the $64/barrel mark against the backdrop of Saudi Arabian Energy Minister Khalid Al-Falih’s weekend remarks about phasing out production caps that have been in effect since late 2016. Oil in New York has advanced about 8% in the past two weeks as production curbs by Opec and allies such as Russia drained a global glut. Front-month futures contracts will trade at a premium to later-dated ones, a condition known as backwardation, for two to three years, Francisco Blanch, head of commodities research at Bank of America Merrill Lynch, said in a Bloomberg Television interview. WTI for April delivery rose 36 cents to settle at $63.91/barrel on the New York Mercantile Exchange after earlier dipping to $63.06. Total volume traded was about 31% below the 100-day average. Brent for April settlement added 19 cents to end the session at $67.50/b on the London-based ICE Futures Europe exchange. The global benchmark crude traded at a $3.59 premium to WTI. Oil stocks: WOR, WPL, STO, SEA, BPT, OSH, HZN, AWE, KAR, ORG, SXY.
  • Bulks were higher, led by strong gains in iron ore. The steel making raw material was supported by sharp rises in steel prices in China. Reports that Hebei, China’s largest steel making province would extend curbs on production past the original deadline of March saw buying activity by physical traders and investors increase sharply. The city of Tangshan is considering imposing further output curbs on steel from March until November. This could idle nearly 10mt of capacity, Bloomberg reported a city government official as suggesting. With demand expected to pick up as we head into peak season, this saw futures for steel rebar and hot-rolled coil for May rise 2% and 2.7% respectively. Spot iron ore added 0.2% or $0.18 closing at $77.50 overnight. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, BCI, SDL.
  • Industrials were higher, with all base metals except aluminium rising. Detailed Chinese trade data confirming strong import demand of most metals for January helped boost investor sentiment. Imports of zinc almost quadrupled from a year ago (+287.1% y/y), while refined nickel imports were up 108% y/y. 
  • Copper concentrate imports were also strong, up 243.9% y/y. The moves in currency markets also supported the move, with the USD weakening late in the session. Copper stocks: OZL, SFR; Nickel stocks: IGO, WSA; Aluminium stock: AWC.
  • Iluka sees 2018 zircon, rutile, synthetic rutile output 705,000 tons vs 825,000t in 2017 on completion of processing heavy mineral concentrates from Murray Basin. Expects mineral sands supply to remain tight in 2018; Delivery at Sierra rutile, Jacinth-Ambrosia and Cataby is core focus. Sees production costs rising to $A405m vs $A362m amid restart of Jacinth-Ambrosia mine. Plans 2018 $A410m capex. FY net loss $A171.6m, amid impairment charge $A151m tied to Hamilton mineral separation plant. Mineral sands rev. $A1.018b, up 40%. Final div. $A0.25; BDVD est. $A0.15; Co. to institute DRP. Operating cash flow A$391.7m vs $A137.3m yr ago; Free cash flow $A322m vs A$47m yr ago.
  • Caltex Australia FY Adj Net $A621m, est $616.0m. Caltex Australia reported final dividend per share of $A0.61, BDVD est. A$0.63. FY revenueA$A21.40 billion, est. $A19.5bn (8 analysts). Plans to convert all convenience retail franchise stores to corporate-owned by mid-2020; To cost A$100m-A$120m over 3 years. Targets $A120m-$A150m sustainable EBIT boost from convenience retail within 5 years; Franchisees operate 433 sites. Plans to complete review of real estate, infrastructure assets in 2Q. Sees 2018 capex A$470m-$A540m incl SeaOil. FY historical cost profit $A619m; Net income GAAP est. A$616.7m (3 analysts).
  • Ex-Dividend: Alumina, Amcor, Asaleo Care, Challenger, Fairfax, Greencross, Lendlease, Moelis Australia, Wagners, Worleyparsons
  • AGL Energy (AGL): Billionaire Miner, Japanese Plan Australia LNG Import Plant
  • Apollo Tourism (ATL): Non-Deal Roadshow Set By Morgans for February 27.
  • Ausdrill (ASL): UBS Seeking Buyers for 10% Stake in Ausdrill: AFR.
  • BHP (BHP): Productivity Gains Are Cheered by Investors -- and Unions.
  • Beacon Lighting (BLX): Non- Deal Roadshow Set By Morgans for February 27.
  • Cedar Woods (CWP): Non-Deal Roadshow Scheduled By Morgans for March 6.
  • Commonwealth Bank (CBA): To Dispute ASIC Rate Rigging Proceedings.
  • Crown Resorts (CWN): William Hill Is Said to Receive 4 Australian Unit Offers: AFR.
  • Fortescue (FMG): Citi Warns Iron Ore May Become ‘Best Short’ After Rally to $80.
  • Homeloans (HOM): Non-Deal Roadshow Scheduled By Morgans for March 1.
  • Mitchell Services (MSV): Non-Deal Roadshow Set By Morgans for March 6.
  • Motorcycle Holdings (MTO): Non-Deal Roadshow Set By Morgans for March 6.
  • Oil Search (OSH): Exxon Shuts Papua New Guinea Output to Inspect Quake Damage.
  • Rio Tinto (RIO): Completes European Aluminum Retreat With Sale to Norsk Hydro.
  • Shine Corporate (SHJ): Non-Deal Roadshow Set By Morgans for March 6.
  • SmartGroup (SIQ): To Raise ~A$75m in Placement at 5.5% Discount.
  • Superloop (SLC): Non-Deal Roadshow Scheduled By Morgans for March 6.
  • Sydney Airport (SYD): Non-Deal Roadshow Set By Morgans for February 27.
  • Technology One (TNE): Annual Meeting Scheduled.
  • Transurban (TCL): ACCC to Review Bid for Westconnex Stake.
  • Villa World (VLW): Non-Deal Roadshow Scheduled By Morgans for March 5.
  • Westpac (WBC): Westpac Is Said to Aim Sale of Car Loans Unit Next Yr: Australian.
  • Woolworths (WOW): PetroChina May Be Bidder For Gas Stations If BP Plan Doesn’t Proceed: Australian.
Broker upgrades, downgrades
  • Adairs (ADH): Cut to Hold at Morgans Financial; Price Target $A2.28; Downgraded to Neutral at Goldman; PT $A2.30.
  • Catapult Group (CAT): Downgraded to Hold at Baillieu Holst; PT $A1.51.
  • Galaxy Resources (GXY): Cut to Equal-weight at Morgan Stanley.
  • MYOB (MYO AU): Upgraded to Outperform at Credit Suisse; PT $A3.75.
  • Mayne Pharma (MYX): Downgraded to Sell at Wilsons; PT $A0.55.
  • Monadelphous (MND): Upgraded to Hold at Morningstar.
  • Monash IVF (MVF): Downgraded to Hold at Morgans Financial; PT $A1.25.
  • Pact Group (PGH): Downgraded to Hold at Morningstar.
  • QBE Insurance (QBE): Upgraded to Neutral at Credit Suisse; PT $A10.20.
  • Senetas (SEN): Downgraded to Hold at Bell Potter; Price Target $A0.13.
  • Zip Co. (Z1P): Downgraded to Hold at Bell Potter; PT $A1.03.
  • Spark Infrastructure (SKI): Upgraded to Overweight at JPMorgan; Raised to Neutral at Credit Suisse.
Australian corporate earnings due out out this week
  • Tuesday: Lendlease, Caltex, Iluka.
  • Wednesday: Harvey Norman, Ramsay Healthcare, Adelaide Brighton.
Stock to watch: Bega Cheese

During 2017, Bega Cheese (BGA) doubled its prices from a double bottom at $3.94. But ahead of earnings tomorrow, BGA is looking to retest the double top level at $8.13, which has acted as a key resistance level since 2015.

While BGA is expected to maintain upside momentum, we look to sell any rallies up to 8 with 20 cents stop in the anticipation of temporary pullback.

Bega Cheese (BGA) chart
1
 
Stock to watch: Sandfire Resources

The gold and copper miner Sandfire Resources (SFR) delivered a 66% increase in interim net profit last week and since then it looked to have broken out of the recent resistance level of $7.50. This stock has a strong correlation to price of copper (HG), which has maintained its resilience hovering near the key resistance level 3.30/LB or 7,250/t.

SFR ended five years of consolidation to make a break out in January this year and the breakout level at $6.85 has acted as support level last month. A clear break above $3.30 for HG should confirm further bullish exposure on SFR.

Sandfire's share price chart
2
 
Stock to watch: Harvey Norman

The electronics retailer Harvey Norman (HVN) is reporting tomorrow, and it is trading near an intersection of downtrend (from its high of 2016) and the resistance level at $4.53, which has remained valid for almost a year.

While a false breakout is not unlikely, we would feel more comfortable to be long once we see a monthly close above $4.53.

Harvey Norman's share price chart

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

– Edited by Robert Ryan

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Today's Trade is compiled by the Sydney trading desk at Saxo Capital Markets.

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