Article / 22 August 2016 at 1:42 GMT

Today's Trade: Weaker profits keep ASX at bay

Trading Desk / Saxo Capital Markets

  • ASX 200 is down a handful of points at 5522.2 on the back of poor profits
  • AUDUSD eases to 76.06 US cents
  • Big miners lower, with BHP 1.5% down - but Fortescue is bucking the trend

By Saxo Capital Markets (Australia)

The ASX/S&P 200 moved marginally lower in early trade as traders looked askance at the risk of a rising US dollar and how this might affect commodities - despite recent commodities rises. Other forces pulling at the ASX are corporate - profits have not come in as well as expected.

At the 10.15am (AEST) official market open, the benchmark ASX 200 index lost 4.5 points, or 0.08% to 5,522.2.

On Friday, a two-month advance in US equities ran out of steam amid signs investors are again growing skeptical of the long-awaited rebound in corporate profits.

Stocks didn’t fall by much - at its close of 2,183.87 on Friday, the S&P 500 Index slipped 0.01% over the five days - but that was enough to make it the second-worst week since June.

The benchmark gauge for US equities closed just 10 points above where it ended July as momentum seeped out of a rally that lifted shares almost 20% since February’s low.

Among reasons for the paralysis - inflated valuations, the coming presidential elections, August vacations - the most worrying may be the steady deterioration of earnings estimates for the second half of the year.

Wall Street analysts are now projecting income for companies in the S&P 500 will decline in the third quarter by 0.9% compared with 0.8% a week ago and estimates for an increase of 2.3% back in June.

Also of concern: Equities faltered even as the outlook for interest-rate hikes stayed muted and signs of investor bullishness emerged.

The S&P 500’s decline came as global stocks dropped 0.2% for the week, falling for the second time this month. The Dow Jones Industrial Average lost 23.9 points to 18,552.57, leaving it about 83 points from an all-time high.

The Nasdaq Composite Index added 0.1% to 5,238.38. Stocks are still up more than 9% since the two-day selloff that followed the UK’s vote to separate from the European Union.

The rally has been aided by economic data in the US that has on average beat expectations as well as speculation the Federal Reserve won’t raise rates more than once in 2016, if at all.

While most companies beat expectations for earnings in the second quarter, a full-blown rebound in corporate profits in the second half of the year is looking like a taller order.

Estimates for Q3 earnings growth, as high as 10% at the end of 2015, turned negative in the first week of August, data compiled by Bloomberg show.

With 96% of companies reporting for the April-June period, profits contracted 3.7% from a year ago, according data compiled by Bloomberg. Revenue declined 0.2%. Income has now fallen for five straight quarters, the longest stretch since the financial crisis.

There have been scattered signs of improvement in profits all year. Looking at the rate earnings are falling year-over- year, declines in the S&P 500 “appear to have troughed” during the first quarter of 2016, Brian Belski, chief investment strategist at BMO Capital Markets, wrote in a report to clients Friday.

The number of companies with weakening profits was smaller this quarter than in the first, data compiled by Bloomberg show. So far, 37 % of S&P 500 members reported lower earnings, compared with 39% last quarter.

Even with the outlook softening, signs abound that investors don’t want to miss the rally in equities. Hedge funds have raised net equity holdings in the past three months, and asset managers are favouring stocks over US Treasuries, according to a report by Bank of America.

On the watch list: Janet Yellen's speech in Wyoming will be keenly listened to. Photo: iStock

Phone companies and utility stocks weighed on the S&P 500 in the week, extending losses in the two groups over the past month.

While those sectors led the market higher in the first half of the year as investors sought dividends and perceived “safety” shares, investors have turned to technology and financial stocks since July.

Energy producers posted the biggest gains over the five days, adding 2% amid a 9.1% rally in New York-traded crude oil.

Over in Europe, stocks finished in the red, as a sharp decline in mining stocks and banks added pressure to the region, while investors kept an eye on oil's fluctuations and individual stock news. The Dax dropped 0.55%, the FTSE lost 0.15% and the CAC declined by 0.82%.

Information sources: Bloomberg,

Key earnings - global and Australia

Global: Nordson, Premier
AU: GWA Group, Spark Infrastructure, Fortescue Metals, Northern Star Resources, Boart Longyear, Growthpoint Properties, SEEK, BlueScope Steel, a2 Milk, Bega Cheese

Global: Bank of Montreal, Best Buy, Toll Brothers, J.M. Smucker, Intuit, Trina Solar
Oil Search, Scentre Group and Healthscope

Global: HP, Royal Bank of Canada, Guess, Express, WPP Group, Heico, Williams-Sonoma, Workday
AU: Wesfarmers, Boral and Westfield

Global: Toronto-Dominion Bank, Canadian Imperial Bank, Tiffany, Movado, Burlington Stores, Dollar General, Dollar Tree, Michaels Cos, Autodesk, GameStop, Pure Storage, Splunk
AU: Woolworths, Amcor, Perpetual and South32

Global: Big Lots
AU: Harvey Norman and Coca-Cola Amatil

Local markets and commodities

  • The S&P/ASX 200 Index futures -0.1%; futures relative to estimated fair value suggest little change early.
  • Bank of New York Australia ADR Index -1.1%, BHP Billiton ADR -1.8% to A$20.98 equivalent, 1.5% discount to last Sydney close, Rio Tinto ADR -1.8% to A$42.11 equivalent, 15% discount to last Sydney close.
  • Gold prices slipped on Friday, weighed down by a strengthening dollar after two Federal Reserve officials’ comments that increased expectations for an interest rate increase this year. Gold for December delivery settled down 0.8% at $1,346.20 a troy ounce on the Comex division of the New York Mercantile Exchange.
  • With no new economic data, investors have been watching remarks from Fed officials for clues about when the central bank will raise interest rates. Gold has traded in a narrow range in recent sessions that have seen central banks take center stage in the absence of market-moving fundamental news.
  • Investors will watch Federal Reserve chairwoman Janet Yellen as she speaks at a monetary policy conference in Jackson Hole, Wyoming next Friday. Goldies in Toronto lost 1.73% on Friday. In early reporting, NST reported a FY net profit of A$151.4m; Net income GAAP est. A$163.1m. NST declared a 4 cent dividend versus expectations of 3 cents. Gold stocks: GOR, NCM, NST, AQG, EVN, KCN, RMS, RRL, SAR, SLR.
  • Oil prices posted a third weekly gain Friday as the potential for a production-freeze deal among major producers outweighed concerns about ample inventories. US futures for September delivery settled up 30 cents, or 0.6%, to $48.52/barrel on the New York Mercantile Exchange, the highest settlement since July 1.
  • Prices rose 9.1% this week, the biggest one week percentage gain since March. Brent, the global benchmark, fell a penny to $50.88/b on ICE Futures Europe. The contract gained 8.3% this week. The oil market was buoyed by declines in US crude and gasoline inventories, a weakening dollar and recent indications that major producers both outside and within Opec could take steps to stabilise prices.
  • Some large producers including Saudi Arabia have recently said they would be open to a deal among nations to freeze production, though a similar attempt to reach a deal in April failed. Oil stocks: WOR, WPL, STO, SEA, BPT, OSH, HZN, DLS, AWE, KAR, ORG, SXY.
  • Iron ore for January rallied 1.7% to close at 444.5 yuan/tonne on Dalian Commodity Exchange, logging a weekly gain of 2.9% last week. According to brokerage houses in China, iron ore has been trading in a see-saw pattern this week as some bearish positions were cut. FMG reported FY net income of $984 million against estimates of $910m ($316m previous) also declaring a 12 cent dividend. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, ARI, BCI, SDL.
  • Copper and other industrial metals slumped on Friday on low volume. Benchmark copper on the London Metal Exchange closed down 0.3% to $4,798 /t. Copper gained 0.8% for the week after two weeks of losses. Nickel closed unchanged at $10,355/t.
  • Three-month LME aluminium ended down 1% at $1,667, pressured by producer selling, further pulling back from a 13-month peak hit on Thursday. Zinc finished 0.4% weaker at $US2286 but gained 2.1% for the week, the biggest weekly gain in a month. Copper stocks: PNA, OZL, SFR; Nickel stocks: IGO, WSA; Aluminium stock: AWC.
  • In other news: Bluescope (BSL): Underlying NPAT A$293.1m; NOTE: Adj. net income est. A$300.7m (11 analysts); Domino’s Pizza (DMP): Trades ex-div; Fairfax (FXJ): Commerce Commission extends appraisal of NZME/Fairfax merger; Fortescue (FMG): Scheduled to release FY results; NOTE: Adj. net income est. $906.2m (11 analysts); Growthpoint (GOZ): Scheduled to release FY results; NOTE: Adj. net income est. A$124m (5 analysts); GWA Group (GWA): Scheduled to release FY results; NOTE: Adj. net income est. A$48.4m (8 analysts); Japara Healthcare (JHC): Scheduled to release FY results; NOTE: Adj. net income est. A$32m (7 analysts); NIB Holdings (NHF): Scheduled to release FY results; NOTE: Adj. net income est. A$95.7m (10 analysts); Origin Energy (ORG): Said to start Australian wind farm sale next week.
  • Seek (SEK): Scheduled to release FY results; NOTE: Adj. net income est. A$182.1m (11 analysts); Spark Infrastructure (SKI): Scheduled to release 1H results; Rules out bid for Ausgrid: Australian; TPG Telecom (TPM): Close to deal to buy NZ’s 2degrees: AFR; UGL (UGL): Scheduled to release FY results’ NOTE: Adj. net income est. A$34.4m (9 analysts);Woolworths Ltd. (WOW): Talks with Lowe’s might have broken down, delaying sales process: Australian.

Broker gradings

- Insurance Australia Group (IAG): Ratings unchanged after full-year results; Cut to underperform vs neutral at Credit Suisse
- Medibank (MPL): Cut to underperform vs neutral at Credit Suisse
- Woodside Petroleum (WPL): Raised to sector perform at RBC Capital; sees lower LNG prices

Stock to watch

Fortescue Metals reporting this morning (see details above under iron ore bullet point) may give it the legs it needs to claim its A$5 handle today.

A$5.09 happens to be its 76.4% retracement level between the 2014 highs to this years lows so we expect buying to potentially be capped at this level.

A$5.09 would also serve as an attractive level for profit taking given its aggressive momentum which can be seen by the overbought levels as per the RSI. We would target A$4.40 should we see a reversal off this $5.09 level.

Fortescue Metals quarterly chart 
US500.i and XAUUSD

Gold (XAUUSD) had two consecutive weeks of choppy price actions and maintained trading within the current triangle formation, but it appears to have broken the lower support line of the triangle.

Therefore the interim resistance level could be 1,341 and daily close below this level would indicate further weakness in the near term.

The US dollar showed signs of recovery last Friday and we are mildly bullish on US dollar this week as the bond prices (ZN) are also under selling pressure. The major focus would be the Jackson hole at the end of the week.

XAUUSD monthly chart

Source: Saxo Bank
The rising wedge of US500 still appears to be valid as the upper resistance line managed to restrict further gains.

The last week’s candlesticks seem to signal no clear direction although the resilience continues to remain.

The key resistance level to sell would be near 2,200 which is the retest of the lower support line of the wedge. The upward momentum looks to be slowing down but we are patiently waiting for a shorting setup.

US 500 quarterly chart

Source: Saxo Bank - create your own charts with SaxoTrader. Click here to learn more 

Today's trade sources: AFR, SMH, CNBC, BBG, WSJ, The Australian, Reuters

-- Edited by Adam Courtenay

Today’s Trade is compiled by the Sydney trading desk at Saxo Capital Markets. Watch the recording of this Week’s Macro Monday Call at 1030 AEST (0030 GMT)


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