Daily Market Reports | Jun 05 2024
This story features TREASURY WINE ESTATES LIMITED, and other companies. For more info SHARE ANALYSIS: TWE
| World Overnight | |||
| SPI Overnight | 7751.00 | – 4.00 | – 0.05% |
| S&P ASX 200 | 7737.10 | – 23.90 | – 0.31% |
| S&P500 | 5291.34 | + 7.94 | 0.15% |
| Nasdaq Comp | 16857.05 | + 28.38 | 0.17% |
| DJIA | 38711.29 | + 140.26 | 0.36% |
| S&P500 VIX | 13.16 | + 0.05 | 0.38% |
| US 10-year yield | 4.34 | – 0.07 | – 1.50% |
| USD Index | 104.16 | + 0.08 | 0.08% |
| FTSE100 | 8232.04 | – 30.71 | – 0.37% |
| DAX30 | 18405.64 | – 202.52 | – 1.09% |
The local market looks poised for a polarised, yet flat opening this morning. Elections in Mexico and India, in particular the former, have been responsible for volatility in asset markets, and more US economic data are suggesting economic momentum is slowing. Commodities have been sold (mostly).
Today's Report includes oil market analysis by RBC Capital (see further below).
By Chris Weston, Head of Research, Pepperstone
Good morning,
-What went down in EM FX markets – MXNJPY the central focus
-USDJPY below 155
-US Treasuries rally further on a pleasing JOLTS report
-Commodities sold across the board
-A look ahead to Asia trade
It’s been a lively day across markets, where arguably the central theme of the day has been a vicious unwind of Emerging Markets FX carry positions, where various election outcomes have driven an intense repositioning.
Politics married with a further normalisation in US economic data, and headlines the BoJ will look to cut back on its JGB purchases as early as the upcoming June meeting, have collided with various flow dynamics (stops, technical selling, and changes in underlying liquidity).
At the epicentre of the flows has been MXNJPY – perhaps the global posterchild of a well-owned carry position – along with COPMXN, have both been hit hard, and the news and moves have caught many offside, with stops and liquidity a major factor.
The trigger for the unwind has been the pricing that the Morena party’s majority in Congress, have a mandate to push forward with major structural reforms and see greater government control over businesses and the economy – a factor that potentially reduces Mexico’s standing as an international hub to do business.
Traders attempt to model the impact this may have on economics and foreign investment, even future Banxico monetary policy and see limited visibility – a big enough red flag to pull capital out of high-yielding MXN positions, where the spill over into other high-yielding currencies is evident.
The election results in India have also been widely dissected, but a greater influence were headlines the BoJ might look to cut back on bond purchases in the June BoJ meeting. This was almost a momentum play from the Japanese central bank – that is, add in JPY positive news flow when funding currencies – JPY and CHF – were already being covered and bought back, and the result was the JPY rally gaining additional legs.
With MXNJPY having fallen -6.3% in two days we ask if the shakeout has largely played out and if this is a time to re-engage with longs. That trade feels aggressive, but let’s see how Japanese traders play the JPY moves today.
USDJPY has been well traded, with the pair pushing below 155 and eyeing trend support at 154.18 – one for the scalpers. Notably, USDJPY was impacted on the USD side by a below consensus US JOLTS read, where we saw 8.059m job openings – the lowest since February 2021 – an outcome that will please the Fed.
A further rally in US Treasuries with yields lower across the board has been a tailwind to USDJPY shorts, and it puts the market on notice that the ISM services print in the session ahead could promote cross asset volatility. The consensus expects growth in the service space with the index eyed at 51. Clearly, the risk to markets is for a print below 50 (the expansion/contraction line), where USDJPY and the USD more broadly goes lower, which may spill out into further selling in EM FX vs JPY and CHF.
The interesting angle is we’ve seen a solid sell-off in commodities across the board. Whether this is related to the political developments in India or Mexico, idiosyncratic factors (i.e. a further liquidation in crude post-Sunday’s OPEC-Plus meeting) or just a basket sell-down across commodities is debatable.
While Nat Gas has had the outsized move on the day (-6.2%), it's gold and crude (-1.8%) that attract the bulk of client flows. On crude, while there is some residual selling on the idea that OPEC will look to cut back on its production cuts in October, the move below US$73 looks like it got the tailwind of momentum accounts (CTAs) adding to short exposures, while the fact Mexico is a major oil exporter may also be in play.
In equity land, it’s been a messy picture – granted, we saw a third session where the S&P500 was heavy in the early stage of the cash session, but the buyers once again stepped in mid-way through the day and pushed the index into the green.
However, defence won the day, with REITS, staples, tech, and healthcare outperforming, with small caps and high short interest plays under pressure. We saw limited buying of volatility (the VIX sits at 13.16%) and there was no significant increase in traders buying S&P500 downside puts to hedge – but there was a rotation into the more defensive and less cyclical areas of the market.
Asia should be an interesting session and while our index calls suggest a flat open for the ASX200 and HK50, the NKY225 should open -1% lower. There will be a big focus on the Japanese bond market, and the extent of selling in the 10-year JGB could influence JPY and equity sentiment, a factor that may well force the BoJ to step in and purchase bonds to keep yields from rising too far.
We see Aussie Q1 GDP, which shouldn’t cause too much in the way of movement from the AUD unless we see a contraction in the quarter. We also get Japan’s labour cash earnings (09:30 AEST) and that may again impact the JPY and NKY225, while we also gear up to the Bank of Canada meeting, where the markets price 18bp of cut or a 72% chance the bank ease by 25bp on today’s meeting.
Clearly, if the BoC leaves policy unchanged we should get a solid pop in the CAD, but the extent could be limited by the fact that they’ll strongly guide to a cut in the July meeting.
On the Australian calendar today:
-GDP, Q1
–investor briefing from Treasury Wine Estates ((TWE))
And elsewhere:
-China Caixin Services PMI
-New Zealand trade balance, Q1
-global services PMIs, May
In corporate news:
-Rio Tinto ((RIO)) is investing $215m to build a facility in Australia to test BioIronTM
-Xero ((XRO)) launched a $1.27bn convertible notes deal, including a $380m block trade managed by Morgan Stanley and Goldman Sachs. Market whispers suggest investors should expect M&A
-Life360 ((360)) just went public on the Nasdaq
Ordell Minerals is launching a 20c IPO
Plus: rare earths developer Northern Minerals ((NTU)) has been subjected to cyber attacks in the slipstream of Chinese companies being forced to sell their equities. Coincidence?
| Spot Metals,Minerals & Energy Futures | |||
| Gold (oz) | 2326.30 | – 24.20 | – 1.03% |
| Silver (oz) | 29.44 | – 1.24 | – 4.04% |
| Copper (lb) | 4.56 | – 0.03 | – 0.70% |
| Aluminium (lb) | 1.21 | + 0.00 | 0.37% |
| Nickel (lb) | 8.78 | – 0.00 | – 0.06% |
| Zinc (lb) | 1.33 | + 0.01 | 0.42% |
| West Texas Crude | 72.90 | – 1.10 | – 1.49% |
| Brent Crude | 77.12 | – 1.05 | – 1.34% |
| Iron Ore (t) | 107.69 | – 2.41 | – 2.19% |
Helima Croft, Head of Global Commodity Strategy and MENA Research, RBC Capital Markets:
“Brent remains under pressure as a corner of the market continues to view OPEC’s proposed taper timeline for the voluntary cuts as a binding commitment to increase by 500 kb/d in 4Q’24 irrespective of the fundamental oil outlook or sentiment come summer's end.
"Certainly, any indication of more OPEC barrels on the market was bound to be seized on by those waiting with bated breath for the producer group to throw in the towel and party like it is 2015. The abundant supply picture at present undoubtedly is generating queasiness even from those not in the perennial OPEC-skeptic camp.
“Our conversations over the weekend, on the other hand, have led us to conclude that the group’s most consequential producer will hit the kill switch on a Q4 increase in the event of an oversupply/poor sentiment situation come September. The intention has always been to slow roll the barrels back in and not to send the market into a tailspin with a supply surge.
“Sunday’s OPEC statement was the result of an intense and protracted round of energy diplomacy. The proposed voluntary cut taper schedule in turn seems to have been part of a compromise to conclude an 18-month agreement that would include the extension of the May 2023 group cut until the end of December 2025.
"As we wrote over the weekend, the only thing that appears set in stone is that the UAE will receive its official 300 kb/d increase next year in order to ensure that the country’s quota relative to spare capacity achieves parity with Saudi Arabia’s current capacity utilization.
“Since July 2021, there have been market concerns about the UAE’s commitment to staying in the group. Key individuals in Abu Dhabi have previously signaled their desire to monetize their investments in increasing their spare capacity and to provide the barrels necessary to ensure the success of their Murban benchmark.
"There has also been background noise about a brewing rivalry between the traditional Gulf allies as Riyadh emerged as an ascendant challenger for the commercial capital of the region crown.
“And yet, as of late we have seen a closing of the ranks in the region and public displays of unity by the Gulf leaders as they seek to navigate a fraught security landscape. We see this quota adjustment in keeping with these broader cohesion dynamics and designed to settle the UAE OPEC commitment question for the next 18 months.
"Again, while the taper timeline language may have been the necessary price for securing broader buy-in for a deal running through end of December 2025, it is not hardwired like the official UAE increase.
“The OPEC leadership remains very serious about having a rigorous examination of market conditions at the August JMMC meeting. Officials noted that the meeting can be turned into a full OPEC ministerial with the authority to make additional supply adjustments and certainly to pause taper plans at a minimum. Since Saudi Arabia will be providing the lion’s share of the new barrels, it will not be bound by Sunday’s supply schedule if it is not in their national interest.
"Proceeding with Vision 2030 appears non-negotiable. With oil prices alone insufficient to fund the entirety of the ambitious infrastructure buildout, Riyadh has tapped debt markets and pushed out the implementation timelines for some projects to make the overall Vision 2030 math work.
"The follow-on Aramco IPO and the decision to forgo the 1 mb/d spare capacity increase can also be viewed as part of the effort to bolster balance sheets. But just because Saudi Arabia is spending with a calculator does not in any way mean that it is oil price agnostic or that there is increasing nostalgia for 2015 or March 2020.
“We do wonder whether there will be an OPEC rethink about broadcasting the post-meeting press/analyst briefings again. We see something of a divergence in the post-meeting analysis about the rigidity of the taper timeline between those accredited analysts and journalists that participated in the Sunday question and answer session and those that based their instant assessments almost exclusively on the written OPEC statement.
"In the absence of OPEC TV, the written statement may be serving as something of a Rorschach test for how one views the efficacy of the producer group.”
The Australian share market over the past thirty days…
| Index | 04 Jun 2024 | Week To Date | Month To Date (Jun) | Quarter To Date (Apr-Jun) | Year To Date (2024) |
|---|---|---|---|---|---|
| S&P ASX 200 (ex-div) | 7737.10 | 0.46% | 0.46% | -2.02% | 1.93% |
| BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS | |||
| AMA | AMA Group | Speculative Buy | Bell Potter |
| BKW | Brickworks | Upgrade to Buy from Hold | Bell Potter |
| CRN | Coronado Global Resources | Downgrade to Speculative Buy from Add | Morgans |
| LOV | Lovisa Holdings | Downgrade to Neutral from Buy | Citi |
| Downgrade to Equal-weight from Overweight | Morgan Stanley | ||
| NGI | Navigator Global Investments | Downgrade to Neutral from Outperform | Macquarie |
| PME | Pro Medicus | Upgrade to Hold from Sell | Bell Potter |
| PWR | Peter Warren Automotive | Downgrade to Equal-weight from Overweight | Morgan Stanley |
| TLC | Lottery Corp | Upgrade to Buy from Neutral | Citi |
For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.
All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website. Click here. (Subscribers can access prices on the website.)
(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)
All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts on the website and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com
FNArena is proud about its track record and past achievements: Ten Years On
Click to view our Glossary of Financial Terms
CHARTS
For more info SHARE ANALYSIS: 360 - LIFE360 INC
For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED
For more info SHARE ANALYSIS: TWE - TREASURY WINE ESTATES LIMITED
For more info SHARE ANALYSIS: XRO - XERO LIMITED