The XJO is expected to edge lower on open this morning following a small pullback in the U.S on Friday. Their futures are firmly in the green, however.
The U.S has sold off the past few sessions, but we have barely seen any selling in return. Positive U.S futures this morning are likely helping keep us buoyed, but even so, our strength keeps in line with our recent trading of late. We are ultimately translating U.S profit taking or mean reversions into sidewards consolidation with a bullish tilt. That is how it was for the past week, and our futures this morning are keeping in step. To put it into perspective, our market remains roughly 2.5% away from our all-time highs, whilst the SP500 is closer to 6% away.
Our comparative resilience is likely for a couple of reasons. Firstly, the U.S has been haunted by Trump’s Tariffs since their implementation earlier in the year. They are at the epicentre of the trade war. Trump has since backflipped on some of the tariffs, putting in ninety-day pauses. He bent the knee to China, who proved too powerful a rival for typical American bullying. However, he is now picking weaker and more impressionable targets for his trade posturing. Over the weekend he announced tariffs on Europe and on U.S companies like Apple where he wants to see their product manufactured in the states. Not a bad sentiment, but one that seems unrealistic without first having the infrastructure to do so, and seems only likely to increase inflation instead. However, if recent history is anything to go off, it could all just be posturing for now. Indeed, as of 30 minutes ago he just announced a pause on the European tariffs until July 9th.
Because of these issues, some capital from the U.S seems likely to have moved into our market, which is coming out of this whole trade war fairly unscathed. Our safe havens, like CBA, have enjoyed strong rallies in the face of market uncertainty. Indeed, CBA has made consecutive fresh all-time highs over the past week or so.
Another reason for our resilience could be surrounding interest rates. Locally, our market is still expecting a few more cuts by the end of the year, or about another .75% lower from our current cash rate. Furthermore, the RBA’s future guidance from their announcement last week could be considered more dovish than what they have been in recent history. Comparatively, the U.S is less certain. Though much of the recent rally is likely built on the prospect of further rate cuts, Powell will have a tougher time pushing for cuts if Trump continues down the path of trade isolationism. In addition, if Powell does indeed stall rate cuts, Trump may once again sabre rattle and threaten to fire Powell. Technically he can’t, but Trump has shown how willing he is to break systems and undermine their laws and constitution, so it’s not impossible. The last time he threatened Powell, markets were spooked.
Our market does look overbought though. We are trading near key levels of resistance, and seem to be hovering around 8,350 – a key level historically. However, with the U.S having pulled back now, if they decide to rally once again, our market may feel comfortable continuing the sidewards grind higher. Regardless, it looks like we are struggling.
Roughly 8,400 looks like the top of the consolidation, and 8,300 the bottom.
Key Macro economic data remains important, as it continues to shape the future of monetary policy. The U.S is closed tonight for Memorial Day. Powell spoke this morning, and coupled with the Euro tariff pause, U.S futures seem to have reacted well. Tomorrow night the U.S has Consumer Confidence numbers. On Wednesday night, the market will get the minutes from the last Fed meeting and on Thursday night, the U.S has GDP numbers. Their GDP is expected to contract by 0.3% once again. By Australian standards, that would be an official recession.
US Markets
US shares closed firmly lower on Friday, though prices finished well off the lows of the session. Prices fell with Trump threatening a massive 50% tariff on US imports from Europe. Trump also added that he wasn’t looking for a trade deal with Europe. However, this morning Trump announced that the potential tariffs against Europe would be delayed until July. US shares have fallen for four sessions straight, though with the delay in these new European tariffs, we might see a rise tonight. It is no doubt stupid that Trump creates a solution to a problem he created on Friday and that markets rise overall. However, US markets could be approaching a period of reckoning as all of this craziness starts to show up in economic data. Which will likely start being the case from next week.
Four of the eleven sector groups of the SP500 closed higher on Friday, with Utilities the best performers. Technology, Communications, and Discretionary stocks saw the most selling.
Technically, the SP500 fell back to the key 5,800 level on Friday night, which it held at the close. This is also roughly the level of the uptrend line that has formed for the past two months. Should the index bounce from here, it would indicate a move to the recent peak around 5,950, or perhaps even beyond that to 6,000. Should the index break below 5,800, we would likely see a fall to 5,700 and perhaps even further.
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