Financials and materials were both strong in the U.S on Friday, perhaps helping to partially explain our strength this morning. Iron ore seems to have stabilised here, which is helping our materials do the same. But the star of the show is no doubt the financials, led by the big four major banks.
They have unashamedly kept rallying despite their stretched valuations, carrying our market on their back into fresh highs this year. It is thanks to them that our market has been able to follow the U.S despite our own economic situation, to the point we are now trading at the most expensive we have ever been.
It is not surprising that we are seeing our market follow the U.S, however it is surprising to see how eager we are to do so. In the past, and for a moment recently, we have been reluctant to follow the U.S closely because our economic situation and market composition finds it hard to justify it. However recently we have been more than willing to push higher with any sign of strength from across the water. Perhaps we are playing a bit of catch up. The U.S broke into fresh all-time highs following Trumps election, but we did not. The U.S is trading near three per cent higher from its 50 day MA, and with our expected open, we should be now too.
Looking more broadly, even though we may believe that our economic situation is heading towards stagflation, the simple fact our economy remains at full employment means that worker’s Super is growing. Coupled with the sheer velocity of money printing from the U.S, liquidity is available and no doubt making its way into our index.
All these reasons feel a little loose, and are more about trying to prescribe a reason to what is still an irrationally overpriced market. We have seen irrational behaviour from markets before, and often before bear markets. However, it doesn’t really matter from a trading perspective. Both our market and the U.S is trading quite technically. This is why our position has been, and continues to be, sidewards to bullish – albeit cautiously.
We should test 8,450 resistance today. U.S futures are in the green, so we should hold the gains at least for the morning session. It doesn’t seem likely however that we break through during our session. From here, it would not be surprising to see some kind of stagnation or profit taking, though we shouldn’t underestimate the strength of markets at the moment.
Economic data remains important. There is little in the way of local releases this week. The U.S has GDP data on Wednesday night, and FOMC meeting minutes on Tuesday night – but that’s about it.
US Markets
US shares closed higher again on Friday, with the DOW JONES enjoying a strong session, while the SP500 also saw gains, and the NASDAQ was fairly flat. Once again shares traded back-and-forth before a late spurt closed prices around the highs of the session. There was a lack of major economic data points on Friday, though some reports did show declining consumer confidence and rising inflation expectations. There was also some concerning developements with the Russian invasion of Ukraine, with the use of fresh weapons for Russia, and threats of nuclear war from Russia and North Korea. These geopolitical events did send oil and energy prices strongly higher, but they did little to stop the higher close for US shares. This week will have some major economic data events, beginning on Wednesday with GDP growth and PCE prices (inflation).
Eight of the eleven sector groups of the SP500 closed higher on Friday, with Industrials, Discretionary, Financials, and Staples the strongest performers. Communications saw the most selling, followed by Utilies and Technology shares.
Techically, the SP500 looks to have bounced off support at the previous all-time high at roughly 5,880. Given a bounce off this level, we could see a move back to the recent resistance around the 6,000 point level.
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