The XJO is expected to open higher this morning despite a continued selldown in the U.S on Friday. Their futures have moved into the green.
During our session on Friday, U.S futures smashed heavily into the red following an attack on Iran by Israel. The previous night, a Fed member also made hawkish comments on rate cuts this year. Our market dropped almost two percent in response. However, we managed to bounce off key support at roughly 7,500 and retake almost half our intraday losses by the close.
In essence, we had already priced in the falls that the U.S presented on Friday night, thanks to the guidance of their futures. Now, with their futures in the green, and Iran with apparently no intention to retaliate to Israel’s attacks, the market feels comfortable wiping off Friday’s falls. It is also worth noting that much of the falls in the U.S were driven by tech, which is not as well represented in our market. Much of the reason they outpaced us in gains since October is thanks to their tech heavy market, so it seems reasonable we do not share in as much of the falls when tech leads the selling.
7,500 remains the new key support, and represents the lowest our market has traded at since mid-Feb. If it were to break, then roughly 7,450 represents an interim support, with 7,400 to 7,350 being the most reasonable target, especially considering this is roughly where the 200 day MA comes in. Markets don’t go without touching the 200 day MA for too long, and we are well overdue. Coupled with the reality that rate cuts are less likely to happen this year, we should expect our market to meet with the 200 day MA again at some point soon – precisely when, is difficult to know.
May is widely considered to be a strong bearish month for markets. We can’t put too much stock into these types of cyclicals, but it seems we are lining up for it. Of course, on the way down we will have mean reversions and rallies. We should assume that participants have a lingering “buy the dip” mentality that should help keep markets from falling too hard and fast. Indeed, the short-term stochastic are well oversold. Iron ore prices remain strong, and coupled with a low AUD, our miners should be resilient. Our banks on the other hand deserve to pullback as they remain overvalued. This ultimately could lead to a subdued and indecisive market overall if we have our two largest sectors moving against each other.
Finally, markets are well aware that the narrative around rate cuts has begun to sour. The U.S remains hopeful (perhaps to the point of delusion) of a couple of rate cuts this year. However, their data since the start of the year has been strong, and if it continues to be, then the Fed could easily take rate cuts off the table, or even move back to contractionary position. The latter will tank markets, but the former would seem likely to lead to a correction. We will need to wait and see. This ultimately means that major macro data from the U.S needs to be watched closely, as each release could tip markets.
In the week ahead: we have U.S manufacturing and services PMI tomorrow night. On Wednesday at 11:30 (AEST) we have local CPI. CPI is expected to contract on a year-on-year bases, but marginally rise from last quarter. On Thursday night, the U.S has GDP data which is expected to contract. If it does not, expect falls. Finally, on Friday we have local PPI data, and the U.S has PCE data later that night.
US Markets
US shares were mixed on Friday night, with the Tech and Communications stocks dragging the NASDAQ and SP500 lower, while the DOW JONES finished higher. US shares continued to be concerned around the strong inflation data and the potential for further interest rate rises should data not weaken. However, on Friday they had an additional point of negativity with an escalation in the Israel-Iran conflict, which spooked markets about the potential for another large scale war. Over the weekend these fears dissipated somewhat. As a result, we may expect a small bounce in the coming sessions, though it is definitely worth noting that markets have taken a turn for the negative overall – due to the interest rate/inflation situation.
Six of the eleven sector groups of the SP500 closed higher on Friday, with Utilities and Financials the strongest performers. Technology stocks saw the most selling, followed by Communications and Discretionary.
Technically, the SP500 continued lower on Friday, falling for the sixth straight session. The index fell to the next potential support at 4,950, which it bounced off intra-day. That 4,950 level would have to break for further selling to look likely. Should the index rise from here, the previous support at 5,000 may act as resistance. Should we see a break above 5,000, it is likely there will be more upside after that.
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Advisor at TradersCircle and Emerald Financial
Joining the team at TradersCircle in 2011, Karo has extensive experience in both investing education and derivatives trading.
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