Markets are trading in a tight range, with the S&P500 stuck between 3580 and 3700. Will the negative sentiment from runaway inflation and rising interest rates win, or the positive sentiment coming from the US earnings season? Once again, we are seeing resilient earnings in the US despite 2 quarters of negative GDP. But is that enough to see sustained buying in markets?
Pressure came off in the early hours of trading as bond yields eased giving room for equities to move higher. But the US 10-year traded straight back to 4%. 4.02% is the highest level traded since 2008. This is a very bearish sign for equity markets currently. If yields continue to rise, we could see a significant fall from these levels. We are yet to see any real signs of inflation falling, with geopolitical tensions still on the rising energy prices are likely to continue higher.
The next big test will be Wednesday night, with CPI from Europe and the UK. This morning we saw New Zealand CPI come in at 7.2% which is much higher than the expected 6.6 per cent. US CPI last week was also higher than expected.
The S&P500 breached key support last week but traded back above. This will make it easier to fall below the 200-week MA and key support around 3,600. Even though we are holding now it is becoming more and more likely these levels will break. It seems that the only thing that will save markets now would be a FED pivot, strong earnings, or a signal that inflation is falling.
In the next 3 weeks, we will see many local and US companies report earnings, production, and sales updates. NAB, WBC, ANZ, and MQG report financials in early November.
Australian Outlook
The XJO is expected to open higher this morning following both a strong rally in the U.S overnight and their strong futures this morning.
Our market has been tracking sidewards as the U.S has – the difference is we are near the top of our range, and they are at the bottom. Both markets are flirting with strong downtrend lines that are likely to keep bearish pressure, forcing both markets into the point of a triangle which much eventually break.
For the rest of the week, we have plenty of earnings reports from the U.S, as well as cpi data from the UK and Eurozone. CPI in NZ came in higher than expected this morning following a similar result from the U.S last week. If the CPI narrative doesn’t change, markets are likely to break lower.
US Markets
US shares closed firmly higher overnight, with the three major indices rocketing strongly into the green. The tech and growth heavy NASDAQ index performed the best, but each of the indices saw strong gains. Markets were powered higher by earnings, with many of the banks rising after better-than-expected results from Bank of America, Bank of NY Mellon, and others. If earnings can hold up in this market, current prices for US shares will look relatively cheap compared to historical norms. In other US economic data, the Empire State Manufacturing index fell by a greater amount than expected, though this may not be such a bad thing for the stock market – recently stocks have been rising on bad economic data due to the perception that it could eventually lead to a pivot on interest rate policy from the Fed.
Every major sector of the S&P500 closed strongly higher overnight. The biggest gains were seen in Discretionary, Real Estate, Communications, and Technology stocks.
Technically, the S&P500 has again held the 3,580 level and risen, it seems like the index is unwilling to break this level at the current time. It now looks likely that we will see the index rise back towards the 3,800 level resistance, which is also roughly where the short-term downtrend line sits. Overall the index is down trending however and we would expect to see further lows in the period ahead.
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