The XJO is expected to open flat this morning following a small gain in the U.S. overnight which showed their willingness to hold resistance going into their holiday. Their futures however have edged into the red, which may cause our market to follow suit in our morning session.
Yesterday our market rallied stronger than expected as we head into another RBA interest rate decision today at 2:30. With the last inflation reading (5.6) coming in a decent measure lower than expected (6.1), it would be reasonable to believe that chances of a rate rise today are smaller than prior to the CPI reading. However, much of the reduction in inflation was on the back of falling oil prices – but lower inflation is lower inflation. Commentators are unsure, putting it to roughly a coin flip and we feel much the same way in the office. The RBA needs to get inflation under control, but will also want to space out the rises to both monitor the effect of the recent rises and perhaps for political reasons.
If we see a rate rise today, we should expect a selldown. Recent history has seen our market lower on the back of rate rises and hawkish statements. However, it is hard to suggest our market will make a move back to the top of the channel if the RBA holds. On the other hand, the U.S is trading at the top of the range, and our market may feel invigorated to play some catch up – but this feels the least likely outcome. The office mostly feels the RBA will raise today, but we are less certain than we were last month.
It’s important to remember that even if the market is moving fundamentally (and not technically) from events like an interest rate announcement, it will still likely move and stall at key resistances or support. Keep an eye on important levels such as 7,150, 7,100, and 7,075 to the downside, and 7,280 and 7,370 to the upside.
US Markets
US shares closed slightly higher overnight, with US markets trading for a shortened session ahead of tonight’s independence day holiday. US markets will therefore be closed tonight, and then on Wednesday night we will see the release of US Federal Reserve meeting minutes, which will suggest to the market the likelihood of more US rate rises moving forwards. Despite this potentially volatility inducing event, US markets remain at yearly highs, perhaps suggesting an optimism that rates will soon peak and that a soft economic landing will be achieved.
Nine of the eleven sector groups of the SP500 closed higher overnight, with Discretionary stocks the standout performers. Healthcare stocks were the only ones to see notable selling.
The SP500 closed very slightly above the key resistance at 4,450 overnight, in a shortened session with light volumes. This level would have to break convincingly for further gains to look likely. Overall the index remains on a strong uptrend so there is every chance this level does break. Should the index resume falling from here, the recently broken resistance of 4,300 could act as support against a downside move. This level is also roughly where the uptrend line sits, which could also act as support.
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Sam Green is the Portfolio Manager at Emerald Financial, whilst also being an Equities and Derivatives expert for his clients at TradersCircle.
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