The XJO is expected to edge higher on open this morning following a rebound in the U.S on Friday. Their futures are also in the green.
On Friday, we practically managed to hold 7,600 key support. U.S futures were in the green during that session, which is what likely helped keep our market from tumbling further and breaking through. This morning, we should bounce off key support and move higher. If U.S futures remain positive, then we should expect a move back towards 7,650. Following that, we have key resistance at 7,700 which is also roughly where the 50 day MA comes in.
The market remains in a bit of limbo – not particularly overbought or oversold. We are trying our best to follow the U.S, but their market is largely moving on the back of tech which is not well represented in our market. Instead, we have a bloated banking sector which remains overvalued, and mining sector that seems to be struggling despite steady commodity prices and a low AUD. They should end up being the hero for our market if we are to rally (or at least hold ground). It would be hard to expect too much heavy lifting from the banks, which means the miners are perhaps the opportunity if the U.S continues higher from here.
Broadly speaking, the undercurrent of delayed rate cuts has been building. It is fair to suggest that the recent pullback we have seen both locally and in the U.S has been largely built off the reality that we will not get the rate cuts as quickly as expected. Of course, uncertainty in the middle east has not helped, though that seems to have calmed down for now.
Data remains strong. Indeed, last week Wednesday, our CPI came in stronger than expected, likely exacerbating the falls on Friday (ANZAC day delayed our response). When the year began, the U.S was expecting roughly five rate cuts. Now they are expecting two. The reality could be that we actually rase rates again if data remains resilient. Unfortunately, the more data remains strong, the more likely the market sells off. The rally in October was built off the Fed pivoting. One could hazard an educated guess as to what would happen if the Fed returned to a tightening cycle. At this stage though, we just need to keep an eye on data and trade the technicals.
Our market is now trading in an underlying downtrend in the medium term, characterised by lower peaks and troughs since our highs at the start of the month. It is possible that in the longer-term we remain trading in an uptrend, but we would want to see further evidence of that before allowing it to affect our decision making. The U.S also looks like it is forming a downtrend, but it is clearer in our market. Despite this however, we should recover today like the U.S on Friday, and it seems more likely that we go through another period of consolidation. 7,500 to 7,600 remains the floor, and 7,700 is the local ceiling. This is also roughly where the 50 and 100 day MAs come in. Of course, what can upset everything are data releases that come in stronger than expected.
Tomorrow, we have local retails sales numbers at 11:30am AEST. They are expected to weaken slightly. Retail sales have largely been poor in Australia, indicating that inflation remains steady despite a lack of consumerism. However, we have seen a strong recovery in the U.S in retail sales and we may see a similar result tomorrow. Tomorrow night we have Eurozone CPI, which is expected to remain sticky at 2.4 per cent. On Wednesday night the U.S has an interest rate decision, but markets will be looking for future guidance from the Fed. We should expect a tone of warning, but keeping to the broader narrative of ‘wait and see’. On Friday night, we have U.S employment data.
US Markets
US shares closed firmly higher on Friday, with each of the three major indices finishing strongly in the green. The tech-heavy NASDAQ was the strongest performer, with US markets rising after better than expected earnings results from Microsoft and Google. On top of this, we saw the release of further US inflation data on Friday, with US PCE data for March coming in in-line with expectations on Friday, which though not great, at least was not another piece of shocking inflation data for the market. This will be a big week for US markets on the news front; we will see many more large companies report earnings results. However, the most important event will be the US Federal Reserve meeting on Wednesday night/Thursday morning, where we will see policy makers respond to the recent strong inflation data and pointing to the path for interest rates moving forwards.
Six of the eleven sector groups of the SP500 closed higher on Friday night, with Communications and Technology stocks the best performers. Utilities stocks saw the most selling, followed by Energy stocks.
Over the past few sessions the SP500 has seemingly bounced from the support around 4,950-5,000 index points. Bouncing back towards the downtrend line, which roughly sits at the close from Friday’s session. Should the index head any higher, that would be breaking that downtrend and we could expect a move to the next major support/resistance around 5,150. Should we see selling from here, 4,950-5,000 would be the first downside target.
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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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