The XJO is expected to edge lower on open this morning following a pullback in the U.S on Friday. U.S futures are flat.
We finished last week with a noncommittal pullback, reluctantly dipping as U.S futures tanked on the back of Israel’s attack on Iran. The U.S move on Friday night was fairly mild, despite the conflict only showing signs of holding rather than moving towards peaceful resolution.
It is hard to suggest what exactly will cause a proper selldown. It seems war, declining global economic growth, trade isolationism, and domestic discord in the U.S aren’t enough. It seems markets have blinders on, focusing solely on interest rate cuts.
We managed to make fresh all-time highs last week. An extraordinary feat, all things considered. We made fresh intraday day highs, and marginal fresh all-time high closes. However, it is still fair to argue that we are toying with all-time high resistance somewhere around 8,550 to 8,600. It would be difficult to suggest we have indeed broken.
We continue to trade in ascending channel. The past couple of sessions have seen us return to uptrend line, and it would be reasonable to suggest that we rebounded off it intraday on Friday. The uptrend line comes in at roughly 8,550, and we are set to test it again this morning.
Immediate term indicators, like the stochastic we use, have started to normalise. Coupled with the return to the uptrend line, we should assume that the channel will hold and that our market will retest all-time high resistance soon. Although, considering the current environment, we remain very cautious.
If we do break the uptrend line, don’t be surprised if we do so with sidewards movement, rather than a continued selldown. It is not uncommon to see our market track sidewards at the top of the range as it digests its position against the broader economic backdrop. Again though, it seems more reasonable to suggest a continued selldown, but that thinking has not played out for quite some time.
Macro-economic data continues to drive markets, as it directly affects the market’s expectations on the future of monetary policy. Speaking of which, the big news this week is the Fed’s interest rate decision on Wednesday night (well 4am AEST Thursday morning). It is expected they will hold at 4.5%, however don’t be surprised if they cut. If they do keep it unchanged, markets will instead be looking for future guidance from the Fed’s statement. For other news, the U.S has retail sales numbers tomorrow night, and we have local unemployment data on Thursday which is expected to come in unchanged at full employment.
US Markets
US shares fell on Friday with the war between Israel and Iran. From a broader perspective the market is no doubt worried about the potential for nuclear conflict, as well as the potential for other nations to be dragged into the conflict. From a more narrow perspective, oil prices are rising and this could lift prices and reduce company profitability. Over the weekend, the conflict continued but didn’t seem to noticibly escalate, so don’t be surprised to see a recovering tonight. Elsewhere, major protests occured across the US over the weekend, with millions of Americans protesting Trump and his actions while in office. Markets are also looking extremely overpriced, but these short-term disturbances could actually work to keep them higher for longer, as markets will likely rebound as the short-term issues are resolves, while their attention is focused away from the longer-term issues; Declining growth, rising unemployment, rising inflation, and lower likelihood of rate cuts.
Ten of the eleven sector groups of the SP500 closed lower on Friday, with only the Energy space rising. Every other sector closed lower, with Financials, Technology, and Materials stocks seeing the most selling.
Technically, the SP500 arguably broke its uptrend line on Friday, and fell to the previous resistance levels at roughly 5,975, which acted as support. This support level would have to break for further selling to look likely. Assuming this support holds, we would expect an eventual bounce with an upside target at the all-time high at roughly 6,120.