The XJO is expected to open flat this morning following another pullback in the U.S on Friday and their positive futures this morning.
We finished last week with our market wiping out over a week’s worth of gains in two big days of selling. This is likely why the small pullback in the U.S (coupled with their positive futures) is not leading to expected falls on open this morning.
The selling just goes to show that the recent run up was likely built on hot air and largely dragged higher by a strong move in the U.S. All it took was a meek pullback in the U.S and local timid investors took profits, and our market gave up.
The reality is setting in that our local RBA will likely need to continue the path of raising rates. We (4.10%) are far behind other developed western countries like NZ (5%), UK (5%), Canada (4.75%), and the U.S (5-5.25%). To keep our dollar competitive, our RBA will likely need to move closer to these countries. Furthermore, employment data and other key economic indicators remains stronger than what would be considered deflationary. Interestingly, the recent RBA minutes were not that hawkish in what could be considered more a political statement, but the market clearly doesn’t seem convinced.
On Friday we closed at key support at roughly 7,100 which marks the recent lows for our market. Friday’s move put us just below the underlying uptrend which roughly comes in at 7,130, however if we move back above it in the next couple of days then it could be argued to have “held”. Looking at the forest beyond the trees, there is plenty of support around here, including the 200 day MA which we also finished slightly below on Friday. With this morning’s open, we can at least hold onto the hope that our market has stemmed the bleeding and is happy to pause here.
The recent spout of volatility over the past week or two could see our market break the recent broad trading range between roughly 7,400 and 7,100 soon. Unfortunately, with us trading near the bottom of the range, our energized market may have the momentum to break lower – especially considering underlying negative sentiment. It may not be today or even this week, but if volatility stays, it will be harder for our market to remain range bound. This is hard to trade at this stage, but good to be aware of at least.
In the week ahead, Central Bank leaders of key nations in Europe will hold their annual conference over the next few days where no doubt the current climate of interest rates and inflation will be the focus. Powell will also attend. On Tuesday night, the U.S updates building permits, new home sales, core durable goods, and consumer confidence numbers. On Wednesday local CPI is released which is arguably the most market sensitive piece of local economic data. Powell will testify Wednesday night. On Thursday, local retail sales numbers are released, and U.S GDP and pending home sales will be released that night. On Friday we finish the week with Chinese manufacturing PMI, UK GDP, and Eurozone CPI.
All in all, it’s a big week of local data with local retail sales and CPI likely being the most market sensitive for our market. However, with Eurozone CPI, UK GDP, and the U.S with some of their economic data, it would be fair to assume that they will also push and pull global markets which will feed into our own.
In conclusion, the week ahead looks murky. There is clear pressure to the downside for our market, but at this stage we have shown a willingness to hold support. With key data being released this week and volatility now underpinning our moves, it is hard to predict whether we will have held or broken lower come Friday.
US Market
US shares closed lower on Friday, with each of the three major indices finishing in the red. US markets did not have a great week last week, but its worth noting that the move comes after a strongly positive movement throughout the first part of June. US economic data was quite mixed on Friday, with Manufacturing PMI coming in worse than expected, while Services PMI was slightly better than expected. Economists are still unsure on the likelihood and timing of a potential US recession in 2023/24, and as yet, the data is not showing a rapid economic decline. This week is somewhat quiet for US data, so its hard to see a strong directional breakout for US markets in the coming days.
All eleven of the major sectors of the SP500 closed lower on Friday, with Utilities, Discretionary, Technology, and Real Estate stocks seeing the most selling. Healthcare and Communications saw the least selling.
Overall, the SP500 remains in a longer-term uptrend, with prices moving generally higher. The index may have found some resistance around 4,450 however, so this level will have to break for further gains to look likely. Should some profit taking continue, the recently broken 4,300 resistance level may act as support on a downside move.
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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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