The XJO is expected to edge lower on open this morning.
We pushed higher on Friday, with strong opening gains that tested key resistance at roughly 8,400. However, we sold off through the session to give up about half the opening gains into the close. We practically led the U.S, breaking higher on Friday before their market followed Friday night. Coupled with their negative futures this morning following a Moody’s downgrade, it helps explain our muted open.
Both the XJO and SP500 are practically at parity. For a while there we uncharacteristically outpaced the U.S to the upside. We were happy to price in their gains, but reluctant to share in their losses. Usually, it’s the opposite. This was likely because the U.S was, and remains, at the epicenter of the trade war. Australia was fairly unscathed, and some of the capital from the U.S likely fed its way into some of our safe havens. This is expressed in our strong banks, with CBA making consecutive all-time highs.
However now that Trump has bent the knee to China, and capitulated to the pressures of capital markets, the U.S has had an opportunity to play catch up. Some of that capital likely has returned to the largest economy in the world. Both our market and the U.S are now about three per cent away from their all-time highs – a remarkable feat considering the storms brewing on the horizon.
In the short term, markets are huffed up on the promise of rate cuts – especially now that Trump has shown his belly on Tariffs. Powell now has little reason to not cut rates. It’s an addiction we have had for the past couple of years. Ironically, cutting rates is usually a sign we are heading towards recession, but in the short term it typically translates to higher share prices.
Macro-economic numbers both locally and in the U.S have somewhat deteriorated over time. It seems only jobs numbers remain “strong” in both economies. Though, even they have slowly crept higher over the past few years. Trump has also certainly accelerated the U.S towards recession with his trade war. Storm clouds indeed, and the Moody’s downgrade is like a crack of thunder in the distance.
Though our uptrend shallowed out as we waited for the U.S to play catchup, the gradient still looks unsustainable. The stochastic had an opportunity to somewhat normalise with last week’s consolidation, but still remain overbought. 8,400 remains key resistance, which we tested and failed at on Friday. 8,250 remains key support and the bottom of the recent consolidation. The uptrend line comes in at roughly 8,350, but again, it seems likely that it will shallow out soon once again. This could come in the form of some earnest and overdue profit taking, but considering the recent strength of our market, it seems more likely to simply break with another spat of consolidation or slow grind higher.
The big news in the week ahead is the RBA interest rate decision tomorrow at 2:30pm AEST. It is expected they will cut rates by 25 basis points, from 4.1% to 3.85%. Despite the hawkish undertones of the RBA this year, our market is expecting plenty more cuts to come. It will be interesting to hear the future guidance from Bullock tomorrow, though we shouldn’t expect any change in stance.
It is pretty quiet for the rest of the week with only U.S PMI data on Thursday night being noteworthy. Interestingly, Eurozone and UK CPI is expected to come in mixed to higher, perhaps due to the trade war.
US Markets
US shares closed higher on Friday, with gains across the board but particularly in the Dow and SP500. The NASDAQ was lacklustre, unable to break through their short-term consolidation. However, both the Dow and SP500 managed to break through theirs, finishing firmly in the green. U.S futures have come off since following a Moody’s downgrading over the weekend, with much of Friday’s gains lost already.
All but Energy finished in the green, and even Energy was practically flat. Health Care rallied almost two per cent, whilst the rest experience modest gains across the board. Tech was also practically flat.
Technically, the SP500 remains firmly in an uptrend. In the short-term they look primed to reach 6,000. However, if their futures play out tonight then we would expect a reversal and to potentially see a retesting of key support at roughly 5,870. Furthermore, the gradient of the trend remains too steep to be sustainable, and immediate term indicators like the stochastic remain heavily overbought. They are only roughly three per cent away from their all-time highs, but it would hard to suggest they will get there soon. It perhaps seems more likely they will have some profit taking or consolidation before reaching it considering how tired they look.
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