Another strong US session to drive Australian market higher

The XJO is expected to rally on open this morning following another strong move higher in the U.S overnight. Their futures are flat this morning.

We should open just above key resistance at 7,700 and test the 50 day MA. It seems reasonable that we hold the gains today, provided U.S futures don’t move too hard into the red. 7,750 is the next level of resistance, and every 50 points beyond that to the all-time highs of 7,900.

It seems we have moved back to a risk on environment, led by a U.S that has been invigorated by renewed optimism of rate cuts this year. We have our own RBA meeting at 2:30pm (AEST) today, which is more likely to exacerbate or dampen the leads from the U.S rather than cause us to break ranks and move on our own accord. If Bullock is dovish, we will feel more confident to follow the U.S back to what seems a likely target of all-time highs. However, if she maintains a hawkish stance, which seems more likely that not, our market will likely translate positive U.S moves to meek gains and sideward movement.

US Markets

Renewed optimism around the potential for US rate cuts is driving US markets higher. This comes after the FED meeting last week where the FED stayed as dovish as possible given April’s economic data, as well as Friday’s unemployment report, which was weaker than expected – a deflationary signal. Over the past week, market talking heads have gone from predicting no rate cuts this year, to again predicting cuts around the end of the year – and this has been very positive for prices. This week there is a lack of major US economic data, so it is possible we see prices continue to drift higher. We will also see the company earnings season restart tomorrow night, with Disney reporting results among others. So far the season has been mostly positive for the top end of stocks, though results for smaller companies have been more negative.

Ten of the eleven sectors of the SP500 closed higher on overnight, with Technology and Communications again the strongest performers, followed by Financials stocks. Most other sectors also saw notable gains, except for Real Estate stocks, who closed lower on average.

Technically, the SP500 continued higher after pushed through the medium term downtrend line on Friday night. The the index also broke above the next resistance at 5,150 overnight, which was previously support. Given the break, we are likely to see further upwards movement, perhaps to the 5,200 level. Should the index fall from here, the recent low around 5,000 is likely the support level to the downside.

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