There was strong buying across all sectors overnight apart from Staples which closed lower. Walmart led the selloff in staples closing 11.27% lower. Although we are seeing buying the jury is still out on how long it will last. The S&P500 is 2% away from its downtrend line. With the current mood around interest rates it is likely they will hold that level.
The key issues remain which will likely hold markets weak in the near term. Central banks are set to aggressively raise rates (Front Load) to lower demand and tame inflation. But the situation is more complicated than that, with most of the issues coming from supply-side disruptions, due to Covid and the war in Ukraine.
The likelihood of the FED being able to bring inflation down whilst avoiding a recession is going to be a tough juggle. Many investors are still very concerned that the US economy will have a hard landing if the FED tightness too much too quickly. The FED doesn’t meet again until the 14th of June, they are expected to raise rates but 0.50% again. This will likely continue to weigh on sentiment in the coming months.
The big thing that changed overnight is commodities which were up almost across the board. This is typically positive for the Australian market which we are seeing in our futures this morning. The move could be from talks that Shanghai could be coming out of lockdown. We are in the green even though the US closed slightly lower. If this continues there is a high chance our market could push higher than the US.
Australian Outlook
The XJO is expected to open higher this morning following a strong move higher in the U.S overnight. Their futures are also flat, giving no indication at this stage as to whether the recent run is another bull trap or lower peak in a downtrend, or the beginning of something more substantial.
Our market is trading in a descending channel. The past couple of days have seen us reluctant to break the downtrend line, pulling back intraday from it. Our open this morning should once again test it, perhaps even break it if strength is held.
This recent run up doesn’t feel like a change in the status quo, but rather a typical relief rally when the short-term looks too cheap. Commentary online points to good economic data, but with strong rhetoric from the Fed continuing, its hard to trust the recent bounce. We also face key resistance around these levels (7,175 – 7,200).
US Markets
US shares closed moderately lower overnight, with prices trading in a tight range between red and green. The overnight selling follows on from the weak Chinese economic data yesterday, which sent global futures markets lower. US economic data overnight, was also relatively poor, with the NY state manufacturing index contracting. A key test will come for US markets tonight, with Federal Reserve Chair Jerome Powell making a speech. Markets will be looking for commentary from Mr Powell around the pace of the upcoming interest rate rises from the Central Bank. It is now very likely that we will see a 0.5% lift in rates at the next meeting and perhaps another 0.5% lift in the meeting after that.
Discretionary stocks were again the worst performers overnight, followed by Technology and Real Estate stocks. Energy stocks were the strongest of the risers after further strength in the oil price.
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Tim Michaelides is the Head Trader at Emerald Financial Group.
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