Author: james Carter
Last night, Crude Oil fell 7.5%, Iron Ore 5.4% and Copper 3.5%, while US equities were only down ~0.5%, basically dismissing all things Greece. Trading opportunities in the commodities space may be the next buy signal this very volatile market generates. At MarketMatters we have repeatedly been predicting fresh lows in Fortescue Metals (FMG) and Santos (STO), these were achieved yesterday for FMG, the question is, when does the selling reach panic levels and generate some potentially great trades? Markets remain very volatile at present, leading to pricing extremes in different sectors at different times i.e. both overpriced and underpriced. For example Commonwealth Bank (CBA) crashed 18% into panic lows in mid-June when the ASX200 was trading ~5470. Yesterday, the ASX200 closed at the same level, but CBA has rallied over 9% from the June lows. Hence the answer to the most popular question at present:
• It was a pleasant and strong session in the ASX 200 today ending 106 points higher (+1.9%) at 5,581.• The broad rally was likely seen from global investors exiting China and reweighting back in other Asia-Pacific counterparts after trading was halted in more than 25% of shares listed in China in an attempt to stem the tide of selling in their equities market. That’s close to 800 stocks on halt!• One could be forgiven in thinking that all is right with the world after today’s performance. Having seen the price of oil and iron ore down last night, we still witnessed BHP Billiton (BHP) and RIO Tinto (RIO) both up on the day (BHP +0.9% and RIO +1.1%). Fortescue Metals (FMG) rallied 4.25% at $1.78 – refer to morning comments. In the energy sector, Woodside Petroleum (WPL) closed up 52c (+1.5%) at $34.64 and Oil Search (OSH) up 21c (+3%) at $7.00. It was just one of those days!• Banks were strong across the board – Westpac Bank (WBC) the strongest link, up $1.27 (+3.9%) to $33.76, while Commonwealth Bank (CBA) shot out of the gates at the start, finishing up $1.39 (+1.6%) to $87.69. • Financial Services, IOOF (IFL) resumed its descent, finishing on its day’s lows at $3.27, after fronting a senate economic committee inquiry. • In the Consumer Discretionary space, Myer (MYR) rallied 6.2% at $1.29. We currently hold this as a trade only.
While the counting is not complete, the result appears a foregone conclusion with the “No’s” winning a resounding majority. As we have said recently, it was not a matter of if, but when Greece would leave the Euro, that time appears closer than many anticipated. We believe the real issues for the Euro will emerge if any problems arise in the future, from the low hanging fruit – Italy, Portugal and Spain. This week will definitely be a test of the markets belief that Central Banks can continue to be supportive in the face of adversity. All eyes are on the US S&P futures which have just opened down 1.5%, a negative indication for the ASX200 early today. The Euro currency is currently relatively controlled this morning, down only 1%, and 5% above the recent lows – see chart 1. Technically we still expect the Euro to fall at least 5-10% from current levels, implying further weakness in equities. The “the little Aussie battler ($A)” is already feeling the negative sentiment, trading at levels not experienced since May 2009 – see chart 2. As major uncertainty hits equity markets investors simply need to stand back and remain focused.
• With the Australian market one of the first “cabs off the rank” after the Greek referendum, our market fell from the opening bell. At our worst the ASX 200 traded 102 points lower at 5436, prior to rallying off its lows and ended only down 63 points (1.14%) to 5,475.• After the initial pick up off its lows, the market range traded between 5400 and 5420 until just before market closed at 4.00pm, when the Greek Finance Minister announced his retirement from the ministry. He was quoted as saying “Soon after the announcement of the referendum results, I was made aware of a certain preference by some Euro group participants… For this reason I am leaving the Ministry of Finance today.” This led investors to believe that the Euro Group are now willing to negotiate with Greece and the current dilemma. • Iron Ore was also a major focus today, as the commodity finished limit down in Asia, meaning it has reached the maximum level of decline allowed in the futures market in one day. Fortescue Metals (FMG) followed suit and finished on its lows for the day, down 10.5c (5.8%) to $1.715; its lowest level since 2008! There could be further weakness tomorrow given this news. We remain traders of this sector, not investors and FMG is currently on our radar to trade. Watch out for trade alerts this week.
Three Takeover Targets as M&A Activity Gains a Head of Steam
• Weaker leads from overseas saw the ASX 200 start the day weaker. From there, it fell to being 108 points down after the Retail Sales for June came in weaker than expected at 0.3% (0.5% was consensus). A slightly better afternoon saw the market finish the day down 61 points (1.1%) to 5,538. For the week the index finished down 7 points.• With weaker retail sales for June, the A$ sharply drop from US76.48c to US75.73c, before recovering slightly to be US75.87c at 4.00pm, with traders anticipating the Reserve Bank to possibly pull the trigger on another rate cut. The Reserve Bank is due to announce their decision on any change in rates next Tuesday 7th June 2015, at 2pm.• Mergers and Acquisitions activity continue in Australia, this time G8 Education (GEM) offering a scrip bid of 1 GEM for every 4.61 Affinity (AFJ) shares. AFJ ended 30% higher at $0.70.• Note, the US is closed tonight and next Monday as they celebrate Independence Day. Please watch out for the Weekend Report.
Over the last few days, the local market has been swinging in 100 point ranges. This level of volatility is far from normal and should be taken as a warning signal of potential issues to follow – see chart 1. If we compare the volatility demonstrated in other equity markets around the world, we have been fairly quiet, only currently being 8% below our 2015 highs, compared to China, having fallen 21.7% and the German DAX 9.8%. Markets have now relaxed around Greece, even though a “No Vote” remains a strong possibility in the coming weekend. Our expectation at MarketMatters is for the ASX200 to experience an ongoing choppy price action, over coming months, with an ultimate target on the downside, around 5,200. The current downtrend illustrated in chart 1 may continue, i.e. sell bounces of ~200 points and buy fresh lows ~1% below previous. We anticipate that when/if the US market corrects, the Australian market will probably outperform.
• After quiet start, the ASX 200 put on a very strong move up and finished the day up 84 points (+1.5%) to 5,599 as the market took the view that the Greek saga will be finalised and all will be happy with the world. We’ll see if that carries over for tomorrow.• The Consumer Discretionary outperformed the market after investors embraced Pacific Brands’ (PBG) surprise of upgrading its profit guidance. PBG closed 50.1% higher at 49c.• The banks were strong with Commonwealth Bank (CBA) up $1.43 (1.66%) to $87.45 after a high of $87.65, National Australia Bank (NAB) up 1.7% to $34.04 and Westpac Bank (WBC) up 2% to $33.01. Note, further bank dividends were paid today, adding further $$$ to be placed in the market.• Even though both oil and iron ore were weak overnight, BHP Billiton (BHP) and RIO Tinto (RIO) both managed to finish up on the day. BHP closed 35c higher (1.3%) to $27.00 and RIO managed to scrap up 2c to $53.03.
When we sparked up our Bloomberg machines this morning at MarketMatters, what caught our eyes was not the renewed calm in equity markets, amid all the Greek rhetoric, but the plunge in Iron Ore and related stocks. Overnight Vale, the largest Iron Ore producer in the world fell almost 4%, following Iron Ore -3%, to be a whopping 84% below its 2011 highs. As we have discussed at length, investors like to buy what is perceived to be cheap or has fallen a long way, but this generally leads to poor returns. We had some very disbelieving readers when last year MarketMatters predicted BHP, trading in the mid-$30 region at the time, would fall towards $20, this morning when the stock opens close to $26, we are gaining credibility rapidly. Our view on the main Iron Ore stocks remains negative, both fundamentally and technically, with some potential “long trades” later in 2015.
• The ASX 200 had strong start to the financial year, charging 57 points higher (+1%) to 5,516.• The leading news today was Asciano Ltd (AIO) announcing a takeover bid of A$8.83b by Brookfield Asset Management (BAM.US), which is worth approximately A$9.05 a share. Negotiations are continuing and for holders, we would be happy to sell into the $8.50-$9.00 area.• The banking sector led the broader market higher, after ANZ paying its dividend today, with further free cash to come this week from dividends. We are short term bullish the ASX 200 this week.• As mentioned this morning, the Iron Ore sector underperformed, BHP closed 40c lower (-1.5%) at $26.65 and Fortescue (FMG) down 8c (-4.2%) at $1.83, near its recent new lows of $1.75. We remain traders of this sector rather than investors.
Really bullish, there's more to go in the reflation rally
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