Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 05 February 2018 at 23:47 GMT

Today's Trade: Wall St shockwaves hit world markets, undermine AUS200

Trading Desk / Saxo Capital Markets
  • There were heavy falls on Wall Street on Monday, driven by rising bond yields
  • The Dow fell 4.6%, while the S&P 500 fell 4.1% and the Nasdaq Composite lost 3.8%
  • Selling was broad-based, across all 11 sectors in the S&P 500
  • Oil fell as the slump in equity markets undermined the outlook for energy demand
  • Gold clawed back some lost ground after its biggest one-day loss in two months

Overnight and early trading
  • In the first half an hour of trading, the benchmark S&P/ASX200 had already given up nearly 3% of its value; It was down 2.72% to 5,862.00 at 1028 AEST (2328 GMT, on Monday evening).
  • U.S. stocks plunged the most in 6 1/2 years on Monday, with the Dow Jones Industrial Average sinking more than 1,100 points, as the equity selloff reached a fever pitch amid rising concern that inflation will force interest rates higher. Treasuries rallied and gold rose on haven demand.
  • Volatility roared back into American equity markets, as the S&P 500 Index sank 4.1% to wipe out its January gain and turn lower on the year. The index capped its worst day since the U.S. lost its pristine credit rating, topping the rout that followed China’s shock devaluation of the yuan, the Brexit selloff and jitters heading into the presidential election. Trading volume was almost double the 30-day average. All but two stocks in the broad gauge declined.
 The slide on Wall St has had a wide-ranging impact, including on energy; crude fell as the slump in stocks undermined the outlook for energy demand. Photo: Shutterstock

  • Selling accelerated shortly after 1500 hours in New York, with the Dow Jones sinking more than 800 points in a matter of 15 minutes only to snap back. The blue-chip index ended lower by 4.6% -- its steepest drop since August 2011, and is also lower for the year. The Cboe Volatility Index more than doubled to its highest level in 2 1/2 years.
  • The Dow declined 1,175 points, or 4.6%, to 24346, while the S&P 500 fell 4.1% and the Nasdaq Composite 3.8%.
  • Stocks jerked around in a turbulent session, with U.S. stock indexes beginning the day close to the flatline before spiraling lower. The selling was broad and affected various industries, including energy, banking and technology.
  • The stock market’s pullback began in earnest last week, as rising bond yields and a stronger-than-expected pickup in wage growth led some investors to express concerns that a long streak of tepid inflation could be drawing to a close.
  • The yield on the benchmark 10-year Treasury note, which tends to rise on signs of inflation, jumped last week to its highest level since January 2014.
  • The selling was broad-based, with all 11 sectors in the S&P 500 posting declines. Bank shares slid, sending the KBW Nasdaq Bank Index of large U.S. lenders down 4.9% and extending declines after posting its steepest loss of the year Friday.
  • Wells Fargo fell 9.2% after the Federal Reserve on Friday restricted the size of the bank.
  • Declines in shares of oil-and-gas companies also dragged on major indexes. The S&P 500 energy sector shed 4.4%, while U.S. crude oil declined 2% to $64.15/barrel.
  • Meanwhile, a measure of expected swings in the S&P 500, the Cboe Volatility Index, shot higher, jumping 117%--its largest one-day percentage gain ever. The day’s moves marked a break from 2017, when the VIX, also known as Wall Street’s “fear gauge,” posted its lowest yearly average ever.
  • Even with the recent rise in bond yields, many investors are confident stocks will continue to do well in 2018. Interest rates and government bond yields globally remain low by historical standards, and stocks often have risen alongside them as the economy strengthens.
  • Treasury bonds rebounded Monday, with the yield on the benchmark 10-year U.S. Treasury note at 2.794%, according to Tradeweb, from 2.852% late Friday, their highest level since January 2014. Yields fall as bond prices rise.
  • Elsewhere, the Stoxx Europe 600 fell 1.6%, erasing its year-to-date gains, as shares of oil-and-gas companies and real-estate firms slid.
  • Source: Bloomberg,,, CNBC.
Local markets
  • Bank of New York Australia ADR Index is down 2.1% to 284.8, BHP Billiton ADRs are down 1.8% to $A29.72 equivalent, a 1.4% discount to last Sydney close, Rio Tinto ADRs are down 1.0% to $A68.08 equivalent, a 11.0% discount to last Sydney close.
  • Gold edged up on Monday, clawing back some lost ground after posting its biggest one-day loss in two months in the previous session as a softer tone to the dollar took some pressure off the metal. Spot gold was at $1,339.70/oz, up 0.51% but well below late-January's 17-month high of $1,366.07/oz. U.S. gold futures for April delivery rose 0.43% at $1,343.10. Meanwhile, hedge funds and money managers raised their net long position in COMEX gold contracts in the week to Jan. 30 to their highest level since late-September, U.S. Commodity Futures Trading Commission (CFTC) data showed on Friday. Gold stocks in Toronto added 0.24% overnight. Gold stocks: GOR, NCM, NST, AQG, EVN, KCN, RMS, RRL, SAR, SLR.
  • Oil’s decline accelerated as the deepening slump in equity and debt markets undermined the outlook for energy demand against the backdrop of swelling US crude production. West Texas Intermediate crude, the U.S. benchmark, topped $66/barrel this year for the first time since 2014, extending a rally driven by the extension of production caps by Opec and allied producers. While crude’s strong start to the year was also helped by dwindling American inventories and a weakening dollar, analysts have been cautioning about the potential for a surge in U.S. shale output. WTI for March delivery dropped $1.70 to $63.75/b on the New York Mercantile Exchange. Total volume traded was about 68% above the 100-day average.
  • Brent for April settlement lost $1.23 to $67.35/b on the London-based ICE Futures Europe exchange. The global benchmark crude traded at a premium of $3.90 to April WTI. U.S. drillers last week added six rigs to raise the number of machines drilling for crude to 765, the highest since August 11, Baker Hughes data showed Friday. That may lead to a further increase in U.S. crude production, which breached 10 million barrels a day in November to the highest level in more than four decades. Oil stocks: WOR, WPL, STO, SEA, BPT, OSH, HZN, AWE, KAR, ORG, SXY.
  • Iron ore futures in Asia rebounded strongly, bucking a trend which saw the ferrous metal fall over the past three weeks. While steel markets were relatively subdued, the raw materials markets were buoyed by reports of restocking by consumers. A cold winter has restricted material movement, and creating the scene for a restocking phase. This follows on from the relatively positive economic data in recent weeks, including yesterday’s Caixin PMI number. Spot iron ore was up to $75.70. China has officially approved the participation of overseas investors in the trade in iron ore futures on the Dalian Commodity Exchange (DCE), making it the first commodity contract to be internationalised by the country, Metal Bulletin reported. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, BCI, SDL.
  • Copper hit a three-week high on Monday as the US dollar rally paused and the balance of supply and demand looked to stay relatively tight, while nickel climbed after posting its largest daily loss in two months on Friday. London Metal Exchange copper closed up 1.8% at $7,169 a tonne, having hit its highest since mid-January at $7,220, while nickel ended up 2.4% at $13,745 a tonne, having plunged 4% on Friday. Russian aluminium maker Rusal estimates that China's winter capacity cuts will curb output by 1 million tonnes annually. Aluminium ended up 0.1% at $2,211. Copper stocks: OZL, SFR; Nickel stocks: IGO, WSA; Aluminium stock: AWC.
  • In early reporting: Magellan Financial Group Ltd (MFG) – Underlying profit after tax up 25% to $109.2 mln, Interim dividend up 16% to 44.5 cents per share, Average funds under management up 25% to $53.6bn. Today, MFG announced two strategic acquisitions: Frontier Partners in the US and Airlie Funds Management, a leading Australian funds management business. MFG ASX Release.
  • Macquarie Group Limited (MQG) – expects the FY18 result for the group to be up approx.. 10% on FY17. Financial position comfortably exceeds regulatory requirements: Group capital surplus of $A4.1bn, Bank CET1 ration 10.7%, Annuity style businesses’ combined December 2017 quarter net profit contribution slightly up on the December 2016 quarter. Capital markets facing businesses’ combined December 2017 quarter net profit contribution down on the prior corresponding period primarily due to timing of income recognition associated with transportation and storage agreements within the CGM business. Macquarie ASX media release.
  • SCA Property Group (SCP) – Funds From Operations (FFO) of $56.1 million, up by 4.9% on the same period last year. FFO of 7.52 cents per unit, up by 3.2% on the same corresponding period. Distribution of 6.8 cpu, up by 6.3% on the same period last year, representing a payout ratio of 90%. Statutory net profit after tax of $69.6 million, down by 66.0% compared to the same period last year due to a smaller increase in investment property valuations compared to the prior period. Weighted average cost of debt of 3.8%pa and gearing of 32.5% as at 31 December 2017. SCP ASX Media Release.
  • BHP (BHP): Elliott Sees $22 Billion Uplift in Value With a Simpler BHP.
  • CBA (CBA): Preview: Record Profit May Be Overshadowed by Legal Issues
  • Challenger (CGF), AMP (AMP): Interest in AMP Life Insurance Unit Said to be Waning: AFR.
  • Healthscope (HSO): Is Said to Mull Options for Asia Pathology Unit: AFR.
  • Origin Energy (ORG): Tesla to Source Funds For Australia’s $A800mln Virtual Power Plant.
  • Prospect Resources (PSC): Begins Search for Rare Earths in Zimbabwe.
  • Qantas (QAN): Can Science Beat Jet Lag? Airlines Seek Help for 19-hour Flights.
  • Rio Tinto (RIO): Rio Tinto Weighs $450M Investment in South Africa, FT Reports.
  • South32 (S32): Culture Needs to Be ‘Less Alpha Male’: Africa Mining Update.
  • SpeedCast (SDA AU): NBN, Speedcast Pick Gilat for Satellite Service in Australia.
  • Treasury Wine Estates (TWE): May Be Linked to Bid for Ste Michelle Wine Estates in Scrip Deal: Australian.
  • Westpac (WBC): Covered Bond Sales Up 1.6% in 2018, UniCredit Leads.
Broker upgrades, downgrades
  • NextDC (NXT): Downgraded to Hold at Canaccord;  price target $A6.05.
  • Pact Group (PGH): Upgraded to Buy at Morningstar.
  • QBE Insurance (QBE): Outlook Revised to Negative at Moody’s on Weaker Earnings.
  • Sandfire (SFR): Downgraded to Neutral at Hartleys Ltd; PT $A6.83.
  • Seven West (SWM): Upgraded to Buy at Morningstar.
Dow Jones selloff

The Dow Jones at one stage sold off 1,500 points, which was the biggest point drop in history and all the major risky assets plunged while safe havens (yen, US treasury and gold) rallied.

US high yield bond fund (DHY) also declined as a death cross (the 50 day moving average crossing 200 day moving average) is also signaling reversal of the last year’s uptrend.

Meanwhile, Bitcoin has now fallen 66% from the top at $19,511 and it is approaching its 200 DMA. And the VIX doubled from previous day’s close to spike toward 40, which would be highest level since 2015.

Sentiment and market conditions are clearly negative. However we look to either short VIX futures or long VX put options if VIX rallies towards 50.

Bitcoin takes a tumble

Source: Bloomberg

US high yield bond fund (DHY)
VX chart

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

– Edited by Robert Ryan

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