The RBA was forced to let yields on some short-term bonds rise on Friday, after a weight of bond selling forced yields higher. This capitulation caused massive yield spikes for all Australian government bonds. These events suggest that many in the market believe that the RBA will raise interest rates before they have previously suggested. We will see an RBA meeting tomorrow at 2:30 PM and it will be very interesting to see if their commentary is updated.
The rise in yields and interest rate expectations sent shockwaves through our XJO on Friday, with the index falling extremely strongly, even in the face of strength overseas. The selling looks like a bit of an overreaction, with our futures pointing to a 68 point rise on open this morning.
US markets are continuing to fare particularly well, with the S&P500, DOW, and NASDAQ again finishing in the green on Friday. Prices are continuing to rally on the back of positive company earnings reporting, with this season shaping up to be one of the best in recent history with regards to the market’s reaction.
At this stage, the typical seasonal pattern is playing out perfectly here. We would expect the bullish momentum to continue through the US reporting, then a pullback at some point in November / early December. This then sets things up for a rally into Christmas. This year the US will need to deal with headwinds in Nov and Dec from the debt ceiling issues and the FED starting to taper. The FED will meet next in the first week of November.
Daily virus numbers worldwide continue to decline. Locally Australia has now surpassed the 70% second does target and will likely hit 80% within weeks. NSW is on its way to hitting 90% double dose targets with Vic now at 80%. This will end all lockdowns in Australia but with some states still yet to hit 70% targets the freedom of travel from within Australia is still perhaps a few months away. NSW and Vic are both looking to start accepting vaccinated overseas travellers back in without a 2-week quarantine period. This is all very positive as we are slowly reopening Australia, and we will see immigration back next year, which has been one of the main drivers of our economy.
Australian Outlook
The XJO is expected to open higher following another rise in the U.S on Friday and their positive futures this morning. Our snap sell down on Friday was due to the RBA unexpectedly dropping its yield target framework. Apr’24s yield flew higher and our market dumped along with it. It is expected the RBA will announce an adjustment to the framework in its announcement tomorrow.
Today’s open will have us sheepishly retake almost half of Friday’s falls, though uncertainty will likely remain going into the RBA meeting tomorrow. Otherwise, sentiment around the world remains strong going into the end of the year. Sometimes we see a pullback before the Santa Rally, but some analysts are predicting a continued run higher with perhaps only minor hiccups along the way.
Technically, 7,400 may now act as resistance. If Friday turns out to be just a flash in the pan, then the market may simply push back above 7,400 like Friday never happened. Otherwise, aside from 7,400, our market will also need to contend with the 50 and 100 day MAs. If we see continued selling, the next key support is 7,200, though the market may grapple with 7,250 along the way.
Overall, if the U.S continues higher, our market will find it hard to resist the rally, or by the very least, fall. A rising tide lifts all boats. For this to happen we will need to see stability in the XFJ and/or the XMJ. The XFJ fell with the market on Friday but stalled at the recent key resistance. WBC reported this morning and NAB is due next week. If ANZ is anything to go off, we may see rises in the banks which will in turn help the XFJ stabilise if not rise. The XMJ on the other hand has had a continued sell down after failing at key resistance. With volatile base commodities and a rising AUD, our miners have had a tough time the past few months. It seems like the unease is likely to continue in the short term.
Aside from our RBA on Tuesday, we will also see the Fed’s interest rate announcement on Thursday, where they are expected to give an update on tapering and further insight into monetary policy in 2022. Aside from that, U.S unemployment data will be released Friday.
US Markets
US shares closed higher on Friday, with all three of the major indices closing higher. It was again the strong corporate earnings that sent prices higher, with this season shaping up to be the best of the past few years, with just about every major reporting stock beating expectations, while misses have been largely ignored by the market. US economic data has also been largely positive and that continued on Friday as well, with Chicago PMI and Michigan Consumer Sentiment coming in better than expected. There was also a personal spending report that was a bit mixed. Health Care was the strongest sector on Friday, followed by Communications and Technology. Real Estate stocks fared the worst, followed by Energy.
Tim Michaelides is the Head Trader at Emerald Financial Group.
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