The XJO is expected to edge lower on open this morning following a pullback in the U.S overnight.
One might argue that it was indeed Trump’s seemingly warmongering posts on social media, his flee from the G7, and his warning to escape Tehran that caused the U.S pullback overnight. However, the pullback overnight was also largely instep with their recent consolidation range and would have made sense regardless as they head into their Fed meeting tonight. Furthermore, markets seem to be building a tolerance to the POTUS’s rhetoric and tantrums. There is after all plenty of evidence that any his short-term demands that would negatively impact the market, like tariffs, are short-lived anyway. Wall Street coined it the TACO trade.
However, the U.S is the largest economy in the world, the global hegemony, the global currency, and has the biggest army in the world to back it up. Israel is arguably a foothold for the U.S in the middle east. As such, the U.S could be dragged into this conflict (albeit reluctantly) quite easily. Trump is showing no signs of backing down, and so markets are on edge, and rightly so.
Yesterday, U.S futures were firmly in the red, which likely caused a reversal in our marginal opening gains to finish practically flat. Our market seems to want to rise but is struggling with all this going on. We managed to arguably hold the uptrend line, but with our expected open near 8,500 this morning, we will break it. The break will be meek, and unless the conflict escalates enough to properly spook markets, we should expect our market to continue to track sideward at the top of the range for now.
With the Fed meeting early tomorrow morning (4am AEST), we could see the U.S break either way. How it will be digested amongst the current backdrop of potential war is hard to know. Monetary policy has been the main driver behind markets, and we should not underestimate how bullish markets can be on the back of it. But outside of that, there is little to be hopeful for. Valuations are stretched (particularly locally), the global economy is slowing down, there is domestic unrest in the U.S, potential tariffs and further trade isolationism from the U.S, and now potential war with Iran. It is hard to know how this will play out, but it seems unreasonable that we are trading near all-time highs whilst all of this goes on.
US Markets
US shares shares fell fairly strongly overnight with terrible retail sales numbers and with the conflict continuing between Israel and Iran. The retail sales numbers are a bad sign for the economy moving forward, but they could lead to an increased likelihood of rate cuts.The major event this week will occur on tonight, with the US Federal Reserve meeting for June. The “FED” is expected to keep interest rates unchanged, so instead the market will be looking for changes to the expected rate cuts this year. The previous FED rate cut projection (dot-plot) still showed two additional rate cuts in 2025, and if that remains the case at this meeting, markets would likely react positively. Should the Israel – Iran conflict deescalate markets will also likely rebound. Markets are also looking extremely overpriced, but these short-term disturbances could actually work to keep them higher for longer, as markets will likely rebound as the short-term issues are resolves, while their attention is focused away from the longer-term issues; Declining growth, rising unemployment, rising inflation.
Ten of the eleven sector groups of the SP500 closed lower overnight, with Energy the only sector to rise on average. Healthcare, Discretionary, and Staples were the worst performers.
Technically, despite the overnight selling the SP500 held above the previous resistance levels at roughly 5,975, which acted as support. This level would have to break for further selling to look likely. The index has now arguably broke its uptrend line but assuming this support holds, we would expect an eventual bounce with an upside target at the all-time high at roughly 6,120.
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