The XJO is expected to open higher this morning following a small rally in the U.S on Friday. Their futures are flat.
We finished last week in the red, breaking the uptrend line and returning to the previous trough. We bounced intraday from that key support at 8,100 to retake almost half the session’s losses, and we should follow that on with a small move higher this morning.
We should retake all of Friday’s losses on open this morning, returning to the comfort zone of roughly 8,200. This continues the market’s sidewards trudge as we wait for further signals from the U.S.
The uptrend line that has been in play since roughly the start August broke on Friday. This does not mean we should assume the bullish trend has ended. When trend lines break, it often means a shallowing out of the trend, rather than a change in direction. However, markets are clearly unsure what to do next, and so we should be prepared for continued sideward movement. Considering the market is trading at the top of the range, it could be that the trend has ended but we should trade what we see rather than trying to forecast the top of the market. In essence, we remain cautiously bullish, but with the expectation of sideward movement.
We also expect to wake up one day soon to large falls. There are already good reasons for markets to pullback, however bullish sentiment (perhaps irrational) is holding those reasons back from being priced in like a dam does a river. It may be that there needs to be some trigger that breaks the dam to let those other reasons flow through and into the market. And like when dams break, the force will be dramatic and so will be the news coverage.
8,300 remains key resistance and roughly the top of our market. It is hard to suggest we will push through considering everything that’s going on, but markets have surprised us over and over again this year. We could easily see fresh highs before the falls come.
The U.S election is around the corner. Markets typically have jitters into the run up, but historically rally afterwards. The difference between their two parties is very little when it comes to policy around large corporations, despite what their rhetoric may be leading into elections. The difference may be that if Trump pulls ahead in the polls, markets may not like it. This is because one of his main running policies is to impose tariffs. Markets didn’t like the tariffs last time he imposed them, and considering inflation is a such a hot topic, is likely to dislike them this time around too. Regardless, we would expect those jitters to come through over the coming weeks, but don’t be surprised if they don’t come at all or manifest as a sideward market – again, the market tends to not care who gets elected.
Markets remain data driven, with a close eye being kept on key macro-economic data. Locally we sort of don’t care about our own economic situation which is quite different from the U.S. This will change at some point, but for now we are happy to stick our head in the sand and simply follow what they do.
In the week ahead: U.S Fed members are speaking throughout the week. Markets remain firmly hooked on monetary policy and will be looking to shifts in sentiment and rhetoric from the members speaking. Tomorrow, minutes from the last RBA meeting will be released. We are unlikely to care. On Wednesday night, the minutes from the last Fed meeting will be released. Their market is likely to care. Finally, on Thursday night U.S CPI is due. CPI is expected to fall both MoM and YoY. It is hard to know how their market will take this information. On one hand, it pushes them closer to another interest rate cut, but could also spook recession fears.
US Markets
US shares rose on Friday with a much stronger than expected US jobs report. The report suggests that US markets are a long way away from a potential recession, that some had forecast, though it also implies that maybe the Fed’s 0.50% rate cut was too much too soon. Indeed, following the report, markets started to predict fewer rate cuts in the coming months. US markets are in an interesting position, where they perhaps would be slowing due to the tight monetary policy, except government spending and deficits are at record levels – which means that the government is stimulating the economy in opposition to the tight monetary policy. The risk here is that inflation re-emerges, so the next few inflation reads will need to be watched closely. On Thursday night we will see US inflation data for September, which is expected to remain broadly in-line with August. This week will also see the start of company earnings reporting.
Nine of the eleven sector groups of the SP500 closed higher overnight, with Financials and Discretionary the strongest performers. Communications and Energy also fared well. Real Estate and Utilities saw the most selling.
Technically, the SP500 last week held support at 5,675 and bounced off that level on Friday. It held below the all-time high resistance at 5,770 however. We would need to see a break of either 5,675 or 5,770 before further directional movement looks likely.
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