The XJO index of Australia’s 200 largest listed companies has today closed 27 points higher (+0.34%) at 8,285 index points. This follows a mostly positive US session, with the flagship SP500 index closing 32 points higher overnight (+0.55%) at 5,975 index points.
Aussie shares have largely seen buying over the past week. The last couple of sessions have seen our index peter out, stalling at roughly 8,300 key resistance. Like the SP500 (our leaders for short-term movement), we have also returned to the comfort of the 50 day moving average. At this level, the XJO, by this metric, can be considered neither overbought nor oversold, as it is trading at roughly the same price it has traded at (on average) for the past few months. Whilst markets continue through the quiet holiday period, and with not much in the way of key reporting, it makes sense that both our index and the U.S continue to track sideward in a broader range.
However, we should expect things to heat up again soon. Tomorrow night, the minutes from the last Federal Reserve meeting will be released. The last Fed meeting spooked markets following a more hawkish than expected tone from Powell. The subsequent selling has dissipated, but we could see old embers reignite or be extinguished depending on how the detail is interpreted. U.S unemployment numbers on Friday night should also have some effect, adding to the narrative surrounding the future of monetary policy, the economy, and the big question mark surrounding Trump.
Trump’s inauguration is on the 20th of January, and his election has caused some friction across the board. U.S markets have reacted positively so far (as it typically does to all POTUS elections). Even with the selling they have seen from their highs at the start of December, they did not break below the new levels they set following election day. Indeed, the key support the U.S bounced off recently at roughly 5,870 was roughly their previous all-time high prior to the election.
Volatility has largely gone to bed, but we should expect things to heat up as we head towards the inauguration. There is infighting in Washington (as always), but Trump may struggle to get through his appointments if the Republicans, Republican’t, unite. Furthermore, any friction may be compounded if worries around inflationary tariffs come to the forefront, or his ambitious (not to mention perhaps callous) promise to deport and denaturalise millions looks like it is not just an empty campaign promise.
There is good reason for markets to sell. We have not seen a correction (~10% pullback) since August. This is more applicable to our market than the U.S, which is in a very different situation micro and macro economically. However, the U.S seems likely to keep going until something actually happens (like announcing Tariffs). Sure, they may get a pullback like we have seen recently, but these ultimately just strengthen the underlying up-trend. If that is the case, our own local issues are likely to continue to be swept under the rug.
What issues? Well for one, the future of our monetary policy looks quite different from the U.S. For the most part the U.S is heading towards rate cuts, having enjoyed a couple already. Their macro-economic readings keep coming in at acceptable ranges which both facilitate rate cuts, and don’t spook fears of recession. Their major companies are also doing “well” enough to justify their positions if you sort of squint and hand wave a little bit. Locally, it’s a very different story. Retail sales and GDP continue to stagnate. But our inflation remains steadily high, and we remain at full employment. In fact, we somehow had fuller employment during our last reading. People are working, but they aren’t spending and we aren’t growing, and worse, cost of living keeps increasing. That’s stagflation territory.
Though there is some expectation of a rate cut from the RBA early this year, it will be hard to justify. It seems more likely at this stage we get a cut later in the year, unless the U.S initiates a global recession for whatever reason. Furthermore, our companies are not doing so well. Iron Ore has supressed our miners. They look reasonable from a valuations perspective, and China is expected to stimulate soon which gives opportunity in that space, but for the most part they have lamented. Conversely, our financials, led by the major banks, are incredibly overvalued. They have done most of the heavy lifting to keep our market following the U.S. Finally, our companies as a whole are expected to earn less, and pay less dividends than they did in 2022 (calendar year). Yet our market is trading over 1000 points higher.
Regardless, we will still likely follow the U.S. If they continue higher, which seems the most likely for now, then we should follow (albeit reluctantly).