The XJO is expected to edge higher on open this morning, with an expected open just above 8,560 at time of writing.
The U.S made fresh all-time highs on Friday, and their futures are firmly in the green. Our muted response may be for a few reasons. Wholistically, we have outpaced them, and they are playing catchup; we may be cynical of their move as there are plenty of headwinds for markets ahead; and quite simply, their Financials and Materials were fairly muted, pushing only marginally in the green.
Our market made fresh highs weeks ago, as we clearly outpaced the U.S despite their weakness and uncertainty. There is good reason to believe some foreign capital escaped the U.S (who was at the epicentre of the tariffs) and invested in some of our key stable players like CBA. It helps explain how CBA became the most expensive bank in the world from a valuation perspective.
However, the tariff situation has simmered down. Coupled with a combination in the belief that Trump Always Chickens Out, and the media shifting its focus to both conflict in the middle east and mass deportations, helps perhaps explain the strong U.S catchup. Perhaps some of that foreign capital is returning. Regardless, CBA (the biggest stock on our market) was due for a pullback and has saw some decent profit taking on Friday.
We may also just be cynical of the U.S move. For much of the bull run last year, our market was reluctant to make fresh all-time highs. The U.S would almost always need to do so first, and our market would need to see them hold ground and continue higher before we committed to our own break. Even though that cynical mind frame has been absent for much of this year, it could be a momentary relapse or a regression.
There are also plenty of good reasons to be cynical. Headwinds are building and have been for a while. The writing is on the wall: The global economy is slowing. Indeed, the U.S last Thursday night revised their last quarter GDP reading even lower, from -0.2% to -0.5%. Powell however is still worried about inflation and has not committed to rate cuts. In response, Trump has flared up again saying he is looking for people to replace him. The Tariff deadlines are creeping closer too. If the media returns its focus to them, it would be reasonable to expect a spike in volatility. Locally, despite full employment, our economic data is weakening too. The RBA is in a better position to cut rates, which is likely the only thing keeping our market elevated. But one must wonder how long that sugar rush will last.
Technically, we continue to consolidate in a rough channel. The resistance seems to be roughly 8,600, which also represents our all-time high. The bottom of the channel is roughly 8,450 to 8,500. We tested the top of the channel roughly on Friday. We may do so again today if U.S futures continue to herald fresh highs tonight.
We should expect the channel to hold for now. Don’t be surprised if we see a break to the upside soon however, especially with strength having returned to the U.S. Furthermore, prior to this consolidation, our market had a stella run from the lows back in April. That momentum could easily return.
In the week ahead: Powell is expected to speak tomorrow night and the has U.S PMI data. On Wednesday, we local retail sales numbers. On Thursday night the U.S has employment data and further PMI data.
US Markets
US share closed higher again on Friday night despite a PCE (inflation) reading, which initially sent them lower. The reading showed that US inflation was higher than expected in May, decreasing the likelihood of rate cuts in the short-term. While US markets did initially trade flat to slightly lower on this news, they rebounded to close notably higher, even after Trump said he was ending negotiations with Canada on a trade deal. The gains look a little surprising given the news. Additionally, over the weekend he also stated that the temporary pause in the reciprocal tariffs was unlikely to be extended, something that should also be considered a negative for markets. Still, the upwards momentum is holding for now – but for how long is the question.
Ten of the eleven sector groups of the SP500 closed higher on Friday, with Discretionary, Communications, and Industrials stocks the best performers. Most sectors were fairly flat, with only Energy seeing notable selling.
Technically, the SP500 has now pushed through the previous all time high resistance at 6,150. With this level breaking, we would expect further upside, though prices are elevated and gains may be smaller from here. 6,150 is now the potential support to watch to the downside.
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