Optimism fizzles out with XJO expected to open lower

Australian Markets

The XJO is expected to edge lower on open this morning. The S&P500 last night tried to break through their recent highs. Had they held their ground, they would be close to highs they hadn’t see since August last year. However, they sold off intraday to finish fairly flat. Coupled with their flat futures, our market remains uninspired.

We have a local CPI indicator reading today at 11:30 (AEST). CPI is expected to come in at 6.4% for the month, down from 7%. Our market will want to see 6.4% or lower. If we see a higher reading, there is a high likelihood our market doesn’t respond well. Over roughly the past month we have deviated from the U.S. Our market is trending lower, and their market is trending higher. A large factor contributing to this deviation would likely be that we are pricing in further rate rises than previously anticipated, whereas the U.S. up until very recently was expected to stall.

Our market continues to trade in a broad pennant. There seems to be a broad underlying uptrend line play, however, the medium-term downtrend line looks more reliable with more touch points and has been affecting our market in more recent trading. All three moving averages are converging around here, indicating that our market is trading at a point where it doesn’t want to be too oversold or too overbought by that metric. As we all know, we are waiting for something to get us trending again.

US Markets

US shares closed flat as optimism around the debt ceiling deal faded soon after the opening. The deal is still yet to be passed by US Congress but most analysts remain confident that lawmakers won’t risk putting the economy in jeopardy. Still, even though a debt default is likely to be avoided, the situation for shares remains mostly negative, with earnings forecasts being downgraded, economic data slowing, and a potential US recession in the next six to twelve months. Additionally, there is still a chance of more US Federal Reserve interest rate rises, though this will likely depend on how strong May’s economic data looks.

Four of the eleven sector groups of the S&P500 closed higher overnight, with Discretionary and Technology stocks seeing the strongest gains. Energy, Staples, and Healthcare stocks saw the most selling overnight.

The S&P500 tried to break above the sideways consolidation range overnight, but it was unable to and came back to close right at the 4,200 resistance. Should we see a break above this level, we will likely see an uptrend for the S&P500, with a possible upside target of 4,300. While should the index fall from here, it will likely head the recent support levels around 4,050.

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