The XJO is expected to open lower this morning following a strong pullback in the U.S on Friday night. Their futures are flat this morning but could reopen lower given the strong selling.
For a moment there it looked like our market was going to take a break from all the selling it had seen last week. Alas, those hopes have been dashed with the U.S falling aggressively out of the blue. Of course, the writing had been on the wall for a while, and the U.S was in an elevated position to selldown, but unlike other times, it wasn’t swept under the rug. Perhaps the rug was full.
The news is somewhat trying to pin it on Trump’s pro-Putin foreign policy. He has been pro-Putin for a while, that is not news. But perhaps it was his willingness to turn against the rest of Western Europe and Nato that finally sparked the selldown on Friday night. Commentary from Republican news has been increasingly anti-Ukraine, and pro-Russia leading into the election. Trump has turned against traditional allies in support of Russia (who have been typically seen as the invading aggressors in this conflict by liberal media), and even blamed Zelensky for it.
It is perhaps the division and breakdown of traditional structures that it represents that has worried the markets? It is hard to say, because again, the writing has been on the wall for a while so why now?
Markets are overheated. Earnings can’t justify current prices both locally and in the U.S. The Fed has signalled a pause on rate cuts (which caused the December falls). RBA messaging is also not to expect any more cuts until we see further cooling locally. DOGE has cut funding in key areas in their attempt to remove bureaucracy and waste from government spending. Planes are crashing. Diseases are spreading. Jordan and Egypt aren’t on board with Trump turning Gaza into the “Riviera” of the middle east and displacing the Palestinians. Israel has been given the green light with more weapons, almost certainly signalling a renewal of violence. Consumer and business confidence has tanked. Food prices have gone up, not down as promised by the current administration. Tariffs. Trade wars. Old alliances becoming tenuous. And finally, the fact we have not seen a traditional correction (~10% pullback) since the bull run started in October 2023, any sudden pullback should not be surprising.
But will it continue? The U.S pulled back to their previous all-time high resistance at roughly 6,000, but more importantly, to the comfort of their 50 day MA. It was a swift return, but they could easily pause here. Indeed, their futures are flat this morning (though that could easily change). Yes, they have many reasons to sell, but again, these reasons have been pervasive for a while, albeit slowly building. These reasons so far have not been able to beat the underlying “buy-the-dip” mentality and may not do so again just yet.
Translating all of this to our market, it feels much the same. We have our own reasons to sell down add on top of the moves from the U.S. Our earnings have been arguably worse than the U.S, and our banks have been strenuously overvalued for a long time now. Some kind of sense returned with their selldown last week and we should expect volatility to remain for now. The XJO will struggle to make gains whilst they lament.
We should open near 8,250 interim support. Though the next key level is clearly 8,200 and 8,150. 8,100 is also a strong support and 8,050 represents the ultimate lows for our market – a line we have not crossed since clearing it in earnest back in September. 8,100 is also where our 200 day MA comes in, a solid target in a typical selldown in overheated markets.
Our market is likely due for a relief rally. It is not within our nature to have consecutive bearish days. Today is set to be the sixth. However, it will ultimately come down to the U.S and they have potentially only just begun their selling. If they continue, so will we. If it is indeed just a flash in the pan however, our market shouldn’t find it too hard to make up some lost ground.
Markets will remain sensitive to news in global and U.S politics, and macro-economic data. It is a fairly quiet week on the macro-economic front, with U.S GDP on Thursday night likely being the biggest news. They also have PCE data Friday night, though any effect won’t be felt until next week.
US Markets
US shares fell strongly on Friday, with selling across each of the three major indices. The selling came as the long-standing alliance of the Western world between the US and Europe seemingly disintegrating rapidly under President Trump. Also denting market sentiment has been persistent inflationary data. Additionally, US economic data on Friday showed a massive slowdown in the US services sector, the largest part of their economy. Overall US shares remain way overpriced, but they are likely to remain so as long as the US government spending taps stay on, for all his talk about cutting government spending, it is unlikely Trump will actually reduce it. Regardless, we could see a further spike down before a bit of a recovery and we are likely to see spikes lower become larger and more frequent.
Consumer Staples was the only sector to close higher on Friday, with every other sector seeing notable selling. Discretionary, Technology, and Industrials were the worst performers.
Technically, the SP500 held below the all-time high resistance level which sits just above 6,100. It fell straight to the first key support level at 6,000 points, which is also where the longer-term uptrend line sits. Should it break below this support, we should see a move back towards 5,870 index points. Should we see a rebound, the resistance to the upside remains just above 6,100.
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