The XJO is expected to open higher this morning following a strong night in the U.S on Friday. Their futures have also edged into the green.
Over the past few sessions our market has been meekly rising, with Thursday’s strong day breaking the flag pattern (signalled by the break of the short-term descending channel). We ran out of steam on Friday, which can be chalked up to our market’s reluctance to do anything without permission from the U.S first – which had been quietly tracking sideward. However, with the renewed vigour in the U.S on Friday night, our market should feel comfortable extending last week’s rally.
We should open near 7,140. This will have us peeking our head above the recent resistance which comes in at roughly 7,125. With the U.S is trading a handful of points below their all-time highs, our market may be reluctant to play too much catchup today (though we certainly deserve to).
7,150 is a key level of resistance which is also where the 200-day MA comes in. Our market will likely find some comfort around these levels as we wait to see if the U.S can make fresh highs.
The rally in the U.S has largely been on the back of the belief that the Fed has hit peak interest rates. Some commentators even suggest cuts could come as early as the first quarter next year, whilst others suggest that cuts won’t be warranted until the last quarter of next year. Regardless, speculation now focuses on cuts, rather than worrying about rises.
Locally however, we have not been in the same monetary policy boat. Our RBA has been reluctant to signal an end to the rate hike cycle. Whilst the U.S is celebrating peak rates, we have been alone outside in the cold, looking in through the window and wondering when we will be invited.
Recently however, the our local narrative has slowly shifted to align with the U.S. Retail sales came in lower than expected, entrenching the belief that inflation is not consumer driven. Indeed, our positivity today is bolstered by the shift in narrative we have seen over the past week or so. We should be invited inside to join the celebrations soon. The RBA decision tomorrow may be the ticket we need to enter.
Finally, its worth noting that the recent run we have seen from the U.S is not sustainable. They have consolidated recently, which has translated to a dog-leg higher. This can be extended in the short-term and it wouldn’t be surprising to see them set new all-time highs. But broadly, the U.S is due for some healthy profit taking. If we fail around 7,150 to 7,200 (roughly where the 200 day MA comes in) we shouldn’t expect excessive falls as we didn’t get to enjoy half as much of the rally the U.S did. Ultimately, this should translate to a slow grind higher into the end of the year however there is plenty of room for upset if there are wild swings in economic data.
In the week ahead, we have more retail sales numbers today and an RBA interest rate decision tomorrow. It is largely expected that the RBA will keep rates on hold, however we will be looking closely at Bulloch’s future guidance. We will want to see a dovish tone that supports the recent shift in sentiment to the belief that we are indeed at peak rates. On Tuesday night we have U.S PMI data. On Wednesday we have local GDP data. Again, we will want to see these numbers come in soft (but not too soft). And Thursday and Friday night we have some U.S employment data.
US Markets
US shares closed higher again on Friday, with the three major indices all recording notable gains. It comes after comments from Fed Chair Jerome Powell, which suggested that rates are at there peak, adding that “well into restrictive territory”. This was another buy signal for markets, with the SP500 returning to its yearly high. Overall, US markets have received all that they could want in November, with rates seemingly peaking, economic data pointing to an economic soft landing, and with inflation (in the US) demonstrably slowing. Though prices look overbought in the short-term, it doesn’t look like selling is about to hit just yet.
Ten of the eleven sector groups of the SP500 closed higher on Friday, with Real Estate, Industrials, and Discretionary stocks the strongest performers. Communications stocks were the only stocks to close (slightly) lower on average.
Technically, the SP500 returned to the yearly high level of 4,600 on Friday, and this level is likely to act as resistance. Should the index break higher from here, it is hard to say where it will stall. Should it fall from here, we would expect an eventual higher trough for the index, perhaps around 4,450 index points.
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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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