We are expected to open lower this morning following a strong pullback in the U.S on Friday night.
Ironically, our market finished last week with some atypical optimism that the U.S would bounce higher, as we slightly outpaced their markets from last week’s lows. On Friday night however, the U.S clearly did not like their jobs data and fell lower. This morning, our market will obviously follow suit. U.S futures are also marginally in the red, which at least indicates their market is not reacting to the selling with immediate buying.
The past while has felt a bit ridiculous. Our market has had very uncharacteristically optimistic in the face of U.S jitters. Our banks are arguably very expensive and overvalued, pushing into record highs on multiple occasions. For a moment, even some of our miners were resilient in the face of continued iron ore selling. All whilst out economy pushes towards stagflation.
Our last GDP reading came in at 0.2%, up from 0.1% from last quarter, continuing the slow malaise our economy has experience the past couple of years. Retail sales also remain at virtually zero growth, all the while inflation remains uncomfortably high, and our economy at virtually full employment. It is no wonder the RBA has no idea what to do, and therefore continues to do nothing. Our pump has only really been driven by the U.S, which will be moving to cuts sooner rather than later.
If the U.S cuts once this year, it will nudge our RBA to follow suit, as our central bank will not want too much dissonance between our monetary policy and the U.S’s. Our market likes the idea of the RBA moving to cuts, even though the RBA cannot justify the cuts with the current inflation rate. On the other hand, if the U.S cuts twice this year, or twice in the next six months, it will put even more pressure on a reluctant RBA and increase the dissonance between the two central banks’ monetary policies. In essence, one cut in the U.S is considered positive for our market, two could be considered negative. Two cuts in quick succession also would also add fuel to recession fears.
We should open near 7,900, just below our 50 day MA. Don’t be surprised if we see 7,850 today. Equally, don’t be surprised if the market rebounds intraday and finishes just above 7,900 at the comfort of the 50 day MA. Afterall, it seems unlikely that the irrational bullish sentiment that has underpinned our market the past while suddenly vanishes. The former seems more likely at this stage though. Beyond 7,850, our market has key levels of support at practically every 50 point increment – thanks to our market tracking sideward for so long before the bullish sentiment settled in. The bottom of the range, and the broader uptrend line come in at roughly 7,650 to 7,700. This is the key target for our market if selling persists, especially considering it is also roughly where 200 day MA comes in. The uptrend line helps form the broader ascending triangle we are trading in, with the top of the triangle being the key resistance at roughly 8,100 which also represents our all-time high resistance levels. We should expect this triangle to continue until we see evidence of otherwise.
US Markets
US shares saw strong selling on Friday, with prices falling for the fourth straight session. The selling was accelerated by weaker than expected US jobs data, which showed fewer jobs were created than expected. The report exacerbated worries that the US economy may be headed towards a recession, and with share prices extremely elevated, some profit taking wasn’t unexpected. US shares saw a similar move after the jobs report in late July/early August. Following the data, many will be calling for a 0.50% rate cut in mid-September from the Fed, though with inflation still well above target levels and with the US government running record deficits, there is definitely risk in cutting too hard too fast. This week will be a fairly quiet one until US CPI data on Wednesday night. CPI growth is expected to continue drifting lower, which could provide some support to the market.
Ten of the eleven sector groups of the SP500 closed lower on Friday, with Communications, Discretionary, and Technology stocks the worst performers. Most sectors saw notable selling, except for Real Estate, which closed flat.
Technically, the SP500 broke below the support at 5,500, and it fell immediately to the next support level at 5,400. There is plenty of support between 5,340-5,400 and if those levels break, the next targets would be 5,250. Should the index bounce from here, the first upside target would be the previous 5,500 level.
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