The XJO is expected to edge higher on open this morning following a rally in the U.S on Friday that practically put their market back to all-time highs. Their futures are also marginally in the green.
As usual, following our clean break into fresh all-time highs Wednesday, our market consolidated the following two sessions. We sold off slightly, but are clearly happy to maintain these fresh highs for now, especially with the U.S returning to theirs. However last week was fairly quiet in both earnings and macroeconomic data. This week could be quite different.
Our earnings season begins in earnest this week and it will be hard for the market to justify what is likely to be a slew of stretched valuations. RIO and QBE stand out as two that have already reported and subsequently tanked. If they are a sign of how our market will be reacting to earnings, then we could be in for a spike of volatility over the next couple of weeks.
For macroeconomic data, the big news this week is the RBA interest rate decision tomorrow and U.S CPI tomorrow night. Our market had largely priced in a rate cut from the RBA during their last meeting six weeks ago. However, the RBA, ever cautious and ever reluctant to do anything, decided to hold. Instead of falling, our market just expected an August cut instead, which had previously been expected to be a hold if they cut in July. In essence, the RBA just delayed six weeks.
Our market tomorrow will be focused on Bullock’s future guidance. Our market is largely expecting another cut before the year is out, but some pundits expecting more. However, Bullock could deliver a sobering message. Considering the rally for the past couple of years has been built largely on rate cut expectations, hawkish tones from the RBA could cause a spike in volatility. Indeed, coupled with poor earnings, it could be the catalyst for what seems like an overdue correction.
CPI in the U.S could also spell trouble. The U.S economy is showing signs of slowing, but their inflation has also ticked up over the past few months. This trend ends in stagflation – an economy killer. Though this seems unlikely at this stage. The U.S will want to CPI lower if they want any hope for further cuts and a stable economy. A higher-than-expected reading could be devastating.
Outside of these two key reports, we also have local employment data on Thursday and the U.S will finish the week with Retail Sales numbers.
Looking at the week ahead, it seems like there is a greater chance for volatility than for further rallies. However, markets have largely had blinders on to the reality of what has been trending. Indeed, they have been trading quite technically. Locally, we have largely shrugged off any bad news and kept moving sidewards to higher, and at this stage, there is little point in expecting anything else. However, we remain very cautious.
8,750 is the next key level of support, and 8,650 beyond that. Both levels roughly represent our previous all-time high resistances. The underlying uptrend line comes in at roughly 8,700, which was an inflection point for our market during its consolidation recently. These are the levels we should be expecting to hold if our market does see some selling. Otherwise, 8,850 is now our new level of resistance and represents our all-time highs.
US Markets
US shares rose on Friday, with prices heading back towards resistance levels. US shares have been buoyed by weak data recently, which investors hope will cause the Federal Reserve to cut interest rates. US inflation data for July will be released on Tuesday night and this will have big implications as to whether the Fed will cut interest rates from here. Inflation is expected to continue slowly creeping up, with the Trump tariffs and extreme government spending pushing consumer prices higher. If inflation does come out stronger than expected, don’t be surprised to see selling in global equity markets.
Eight of the eleven sector groups of the SP500 closed higher on Friday, with Technology, Communications, and Financials the best performers. Real Estate stocks saw the most selling.
Technically, the SP500 has rallied back to the all-time high resistance at 6,400. The index held below this level on Friday so we will need to wait to see if it breaks before further upside will look likely. For now though, the index remains on an uptrend with higher peaks and troughs, so we must assume further upside from here.
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