The Overnight Report: ASX200 To Test 7800

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This story features CETTIRE LIMITED, and other companies.
For more info SHARE ANALYSIS: CTT

Today's Overnight Report also includes a brief summary of yesterday's local share market action and a separate commentary on global oil markets, see further below.

By Chris Weston, Head of Research, Pepperstone

Good morning,

-US & EU index flow supportive for Asia
-ASX200 to test 7800 on open, can it break and hold the big number?
-NOK the star of the FX show
-Commodities looking strong, notably silver

Event risk for the session ahead 

With US cash equity and bonds closed for Memorial Day, S&P500 and NAS100 futures have been a guide, with both markets trading up until 3 am AEST, but closing on their highs, with volumes predictably very poor – futures have just reopened a touch higher from the closing levels, and again this should support for risk.

We have also seen a constructive session for the bulls in Europe as well, and US equity futures would have taken direction here – we see short-term trend breaks in the DAX40, and EUSTX50, with the CAC40 also finding better buyers. 

Our 24-Hour US shares reopen at 10 am AEST, so it will be interesting to see any flows/price moves in individual names – Notably Nvidia, which has run hard in the past 3 sessions into US$1065, and we’ll see if anyone is prepared to chase this on the open, or whether patience is the better strategy. 

The ASX200 should unwind into 7800, building on the 0.8% gain we saw in the prior session, where a small victory would be if the bulls can push the index to close above the round number. Aus SPI futures (now 7826) really need a push through 7855 to get the momentum buyers interested again, a factor which would increase the potential that we go on to test the 16 May highs.

Banks are naturally key when calling the direction of the ASX200, and notably if long the index, I would want CBA to fill the gap and push above $121.30. BHP’s ADR was closed, so making a call on open is tough, but the bulls would want to see the stock break and hold $45.45 to get the resource sector pumping. 

We saw the HK50 supported into 18,500 yesterday, and the index has pushed back towards 18,829 – the price action needs work to get traders chasing and one day’s stability isn’t the swallow that makes their summer, but at least we have a better idea of where the market is happy to step and accumulate. 

While US cash equity and bonds were closed, we’ve seen some pockets of upbeat flow in commodity markets once again – silver has gained 4.5%, with the underlying market closing early at 04:30 AEST – liquidity is clearly a factor in driving the extent of the move, so we’ll see if Asia sees this as a justified rally, or whether traders fade this move into $32.63.

Gold sits up 0.7% at $2350, printing a higher high, and again there have been no real catalysts other than just broadly positive flow into commodities – the upside in the session ahead should be capped into US$2373, so this is a level for the scalpers to have on the radar. Copper has gained 1.6%, while crude trades 1% firmer. 

In FX, AUDUSD trades firmer into 0.6654, following the HK50/Chinese equity markets higher. It’s the NOK though that has been the powerhouse once again, with USDNOK breaking 10.50 and extending the bear move from 1 May -5.8%. EURNOK breaks 11.4000, where rallies are to be sold. However, it's the NOKJPY that is the flyer with the cross closing higher for a 14th straight day – tactically, this is too extended to chase but too hot to short (on the higher timeframes). 

One consideration for JPY shorts is that there is rising chatter in the local press about Japan’s major electricity companies raising prices in June by as much as 42% – hotter wages and potential energy bill increases could see the rate hike debate ramp up again, and while traders are using the JPY as funding currency (for the carry trade), with JPY shorts building increased talk of hikes from the BoJ may see that position reassessed. 

EURUSD saw some upbeat flow, with intraday dips below 1.0850 well supported by traders. Talk that the ECB could possibly cut in July after the initial cut in June from ECB Governing Council member Villeroy (a centrist) did weigh on the EUR. That said, the effect was limited with the EUR swaps market still pricing back-to-back -25bp rate cuts as a very low probability, with just -3bp of cuts priced for July. 

In the session ahead we hear from ECB members Schnable and Centeno, so comments here could move the EUR. The bull flag on the EURUSD daily still stands out and needs work. 

By way of risk events traders need to be aware of and navigate, we get Aussie retail sales (11:30 AEST – consensus +0.2%), ECB 1 & 3-year CPI expectations (18:00 AEST), US CoreLogic house prices (23:00 AEST) and US consumer confidence (00:00 AEST – 96.0 from 97). 

Snippets from the local price action yesterday:

The ASX200 managed to add 0.7% bouncing back from a rather miserable week last week.

-Cettire ((CTT)) shares rose in excess of 10% as the company rejected claims by the AFR about customers purchasing counterfeit products through its platform

-Neuren ((NEU)) shares rose more than 15% on positive trial results for its proposed treatment for Pitt-Hopkins syndrome

-Long suffering shareholders in Lendlease ((LLC)) finally saw a positive session (up 7.98%) as management used the strategy day to announce a deep corporate restructuring with $4.5bn in international assets on the chopping block

-HMC Capital ((HMC)), also a shareholder in Lendlease, raised $100m in fresh capital for its expansion into private credit

SPI futures are only up minimally this morning.

The Australian share market over the past thirty days…

Rania Gule Market Analyst at XS.com on global oil markets:

Crude oil prices surged since mid-day last Friday and began this week with a significant rise, stabilizing at US$78.28 per barrel. This comes after prices had dropped to their lowest levels in three months, reaching levels not seen since February 26, near US$76.00.

In my view, several major news events contributed to the rise in crude oil prices. For instance, Russia's plans to extend its borders in the Baltic Sea and new missile attacks from Russia to Ukraine could impact crude oil supplies in the markets. Unfortunately, these news items do not align with the statements from the U.S. Federal Reserve, which is currently dismissing any hopes or possibilities of an early interest rate cut. This stance by the Fed is likely to bolster crude oil demand and drive prices up.

At the same time, the U.S. Dollar Index (DXY) is nearing the 105.00 level again after preliminary U.S. PMI figures for May indicated continued growth across all sectors. The PMI figures released last week were also on the rise, which could influence the upcoming CPI figures. This scenario would benefit the dollar index as liquidity flows back into the dollar.

Oil prices also climbed following the second consecutive miss in durable goods estimates. The significantly bearish data from previous figures gives more hope for a rate cut in September, despite the Fed's tight stance.

Additionally, OPEC-Plus (OPEC members and other oil-producing countries) recently confirmed they will not hold their meeting on June 2 in Vienna but will instead participate in a virtual conference. This could imply that no major announcements or changes are expected, making it an event of little significance in my opinion.

Recently, Mexico's oil production in April was approximately -6.4% lower than the previous year, translating to a decrease of about 1.56 million barrels per day.

The markets have completely ruled out the possibility of the Federal Reserve cutting interest rates before summer, and the chances of a cut are diminishing. This means that the support the economy might have received from a rate cut will not materialize, translating to a further slowdown in oil demand for the rest of the year, and consequently, lower prices staying at current levels at the very least.

In summary, I believe that the market's renewed risk appetite has boosted crude oil markets after investor hopes for a Fed rate cut in September dwindled this week. The markets are currently pricing in a slim chance of at least a quarter-point rate cut by the FOMC in September, down sharply from a 70% probability at the start of the trading week. This comes after Federal Reserve policy officials dominated financial headlines this week, continuing to dampen rate cut hopes with warnings that more evidence is needed for inflation to decrease to the 2% annual target.

From my perspective, crude oil prices are largely ignoring geopolitical events and are fully influenced by Federal Reserve decisions. U.S. crude oil production continues to impact barrel prices as American supply numbers defied expected declines, showing another buildup in U.S. crude oil supply lines.

Energy traders had hoped for an extended decline in U.S. oil inventories, but the unexpected accumulation reported by both the American Petroleum Institute (API) and the Energy Information Administration (EIA) has left markets hoping for an unforeseen drop yet to occur. It's important to note that rising demand will eventually weaken production capacity in the U.S., keeping oil prices under pressure.

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