The XJO is expected to edge lower on open this morning following a strong pullback in the U.S on Friday. U.S futures are flat.
For a moment there it looked like our market would take any excuse to fall, but perhaps that was a fleeting mood following Trump’s election (and the implication of another trade war and sinophobia). We managed to hold gains on Friday in the face of relatively strong bearish futures during our session. Furthermore, the U.S was down significantly on Friday night, and our response this morning is fairly muted.
Both markets are now trading about one to two per cent above their 50 day MA. So perhaps our market feels at equilibrium once more. Taking a further step back, it may also be that our market is unsure and willing to track sideward for time being.
In the same vein, the air around markets seems to have shifted. Long end bond yields have been driving higher, and the U.S looked like they were gassing out. Their key macro-economic readings are still coming in that goldilocks range, but recession fears are mounting. Trump’s addition is also a big question mark that markets are still likely working through – especially considering his slew of controversial team picks and his inflationary trade protectionism. Locally, we have little to boast about. Economically we remain at full employment, high inflation, but low retail spending, and GDP. Our path to interest rate cuts looks almost non-existent. Our market is the most expensive it has ever been by almost any metric, and we are likely only trading at these levels because the U.S remains elevated.
This is not to suggest that markets are going to fall from here (though there would be good reason to), but rather the positivity underpinning much of the move higher must now stretch further on less good reasoning. Ultimately, this feels why our market is tracking sideward and changing moods so readily.
There is practically key resistance at every 50 point increment until we reach all-time high key resistance at roughly 8,350. We held roughly 8,300 on Friday and this morning we are expected to open near 8,250. There is also key support at practically every 50 point increment until the bottom of the channel at roughly 8,100. The 50 day MA comes in at roughly 8,200 and whilst things remain uncertain, our market seems likely to hang around it for a while. Overall, we should continue to expect the market to track sideward to higher, albeit cautiously.
The financials have once again been doing all the heavy lifting. They broke into fresh highs on Friday and held them convincingly. It is almost certainly trading in a massive bubble, which will pop at some point, but it is hard to know when. For now, it is a space that is hard to trade, as going long feels like buying in at the top end, but trading short would have in recent history proven rather treacherous. The materials have offset the financial’s gains by falling quite strongly over the past week or so (on the back of descending iron ore prices). Don’t be surprised if we see a rotation from the banks into the materials if both sectors mean revert, which would also keep our market trading in the channel. We would need to see iron ore stabilise here first through.
Key macro-economic data remains the focus for markets. There is very little on in the week ahead both locally and in the U.S. The void may be filled by U.S political moves, but otherwise it seems like a suitable environment for our market to just continue tracking sideward.
US Markets
US shares closed notably lower on Friday, with fairly strong selling across each of the three major indices. US shares fell with a view that rate cuts are becoming less likely due to persistently strong economic data (and inflation data) and the ridiculous amounts of US government spending. Additionally, Trump’s economic policies are seen as inflationary, which further reduces the likelihood of rate cuts next year. US economic data was stronger than expected on Friday, adding to these notions, with stronger export and import prices, and better than expected retail sales. This coming week will be a quieter one from the data perspective, so we could see US markets stabilise around current levels as they await the next signal.
Only three of the eleven sector groups of the SP500 closed higher on Friday, with Utilities the only sector to see notable gains. Technology stocks saw the most selling, with Healthcare, Communications, and Discretionary also seeing notable losses.
Techically, the SP500 fell back to the previous all-time high at roughly 5,880, which may now act as support. Should this level break, we could see a move all the way back to 5,760. Should this level hold, we could see a move back to the recent resistance around the 6,000 point level. Should the index rise through 6,000, that would indicate further gains.