The XJO is expected to open lower this morning following a large pullback in the U.S which wiped out almost a month’s worth of gains.
Trump heralded tariffs on China, and China is clapping back by increasing barriers on its rare earth exports – which it practically has a global monopoly on. Unfortunately for the west, we rely on much of the rare earths refined in China for many different sectors. Markets reacted appropriately to the escalation.
However, it is common belief now (even the AFR is reporting it), that Trump will once again remain weak-willed, and the TACO traders will come in to buy the dip. It has worked historically – it is reasonable to think so now too. U.S futures have moved hard into the green, with Trump expressing his desire to reach a deal and talking positively about Xi.
Our expected open is roughly 8,900. With positive developments and positive U.S futures, our market will likely not price in the extent of the U.S losses on Friday.
Before rallying to meet all-time high resistance, our market was stuck consolidating in a range between roughly 8,750 and 8,880. 8,880 will likely be the next key support and for now it looks like it should hold.
Finally, the news cycle will likely be focused on the legislative and executive branch’s domestic and foreign actions this week, rather than key macroeconomic data. For the most part, much of that data from the U.S is delayed anyway because their government remains in shutdown.
Locally, we have the minutes from the last RBA meeting being released tomorrow. During the last meeting, it felt like Bullock was a bit more hawkish and reluctant to give much guidance on the future of monetary policy (not exactly what our market wants to hear). It will be interesting to see if the minutes match up. Also, tomorrow night, Powell will speak. Perhaps he will shift his tone now that Trump has returned to the tariff narrative.
On Wednesday night, the U.S is supposed to have CPI data – though it is unclear whether it will be released if their government remains in shutdown. On Thursday, we have local jobs numbers. The unemployment rate is meant to tick up slightly.
If the U.S government reopens, perhaps we will also see retail sales numbers, employment data, and other key figures they need to catch up on.
US Markets
US shares dropped strongly on Friday after Trump announced he would increase the tariffs on Chinese exports to the US. It comes after China tightened export restrictions on rare earth minerals. Over the weekend though, Trump softened the threat by saying that Chinese President Xi had a bad moment and that the US wants to help China, this has sent US futures strongly higher at the time of writing. One has to wonder if either statement (adding the tariffs on China, or walking things back in the tweet) was done with the intention of influencing financial markets. Probably yes. This really isn’t a good sign of where the US has come to, and probably doesn’t bode well for the future. Meanwhile, the shutdown is still ongoing, so we are unlikely to see any major US data this week, though we will see some important company earnings reporting.
Staples was the only sector to close higher on average on Friday, with every other sector finishing lower, the growth sectors of Technology, Discretionary, and Communications saw the most selling.
Technically, the SP500 broke below its trend lines with the strong move lower on Friday. Despite the break of the trend line, the index remains on an uptrend and will remain so until it starts setting some lower peaks and troughs. The index does look very overbought, which perhaps exacerbated Friday’s breakout. With the breakout on Friday we would expect a move to the support level of 6,500, which was a previous level of resistance, and which may now act as support. This is also where the 50-day moving average sits, which may also act as support. Assuming these levels hold, we would anticipate a bounce back to the all-time high resistance level of roughly 6,750.
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