The XJO is expected to open lower this morning following continued selling in the U.S on Friday. Their futures have also edged into the red.
On Friday, our market showed uncharacteristic resilience despite U.S falls the previous night. There were a few underlying reasons, but one may have simply been an expectation that the U.S would stall and see something of a rebound. Now that those hopes have been dashed, our market has abandoned any courage and looks set to renew its selling.
Futures at this stage are indicating a clear break of the recent support at 6,800, with an expected open near 6,750. This is an interim support for our market, with 6,650 the next key level. Our market has not traded at these levels for almost exactly a year, and so it is hard to know with any certainty which levels our market will listen to.
Despite the break lower that is expected on open this morning, markets are certainly looking oversold in the short-term, and are due for some semblance of a relief rally. Of course, it is hard to pick a bottom, but we can at least say that the bargain chasers will be coming in soon because at some point, stocks just look too cheap. We will need to see the U.S stabilise and lead the charge higher before our market likely commits. The good news is that the U.S is trading at support at 4,100. If that fails, 4,050 is another key level if could bounce from. Furthermore, there is only a handful of times our market has sold this far below the 50 day moving average (MA) in the past couple of years. Aside from the big selldown in June ’22, our market has been unwilling to fall much beyond six per cent below the 50 day MA before stalling and rallying. We are currently about 4.5% below our 50 day MA so 6,650 looks like a decent target which would be roughly 6% below.
The overall monetary policy environment both locally and in the U.S was teetering on an edge until last week when we saw higher than expected GDP numbers from the U.S, and a stubborn inflation reading locally. Following both these readings, it has become clear that inflation will likely need more rate rises to wrangle into submission.
Key economic data releases will be as important as ever heading into monetary policy decisions in December. Today we have local retail sales numbers, Eurozone CPI and U.S consumer confidence on Tuesday night, but the big news is an interest rate decision on Thursday night from the Fed. It is expected to hold rates, and markets will of course be looking for future guidance on monetary policy for the December meeting and early next year. Finally, to finish off the week, we have U.S employment data Friday night, but that’s next week’s problem.
US Markets
US shares closed mostly lower on Friday, with the DOW JONES and SP500 finishing in the red, while the tech-based NASDAQ index managed to close in the green. US shares did start the session in the green, but they pulled back and closed around the daily lows as Israel began their ground invasion of Gaza. The most broad-based SP500 index has now fallen more than 10 percent from its July peak, meeting the mark for a technical correction. US economic data was also not to the benefit of the market, with Personal Consumption coming in stronger than expected, and with inflation expectations coming in higher than expected. This rise in inflation expectations came after strength in Oil prices across the past few weeks with prices jumping with the Israeli-Palestine conflict. We will see a Federal Reserve meeting on Thursday this week, which could be a volatility event for the market. The ‘Fed’ is expected to keep rates on hold, so investors will instead be looking for indications of a rate rise in future meetings.
Three of the eleven sectors of the SP500 closed higher on Friday, with Discretionary stocks the best performers, followed by Technology shares. Energy, Financials, Utilities, and Healthcare stocks fared the worst.
Technically, the SP500 is continuing to break lower after breaking below potential support at 4,200 and then 4,150. The index is definitely in a downtrend with lower peaks and troughs and it is currently in the phase of recording a lower trough. Its hard to say exactly where this will be, but the index almost hit the next potential support level at 4,100 on Friday, and that will be the level that will have to break for further selling to look likely.
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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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