Markets continue to push higher as investors remain cautiously optimistic that there could be a cease-fire in Ukraine, as they continue Peace talks. This comes after Ukrainian president Zelenskyy announced he is prepared to discuss a neutrality deal. Crude continued to pull back trading at 105.29 US a barrel. When Crude falls, inflation fears relax which sees traders move toward growth stocks. This is the second session in a row that we have seen Tech and Discretionary stocks in the US led the charge.
At this point, the main thing that could continue to trouble markets is the situation in Ukraine. Which could see inflation worsen if Crude Oil continues higher from here. Although there are many other factors to inflation Crude can be a key driver as most goods and services will be affected by higher energy prices.
Bond yields in the US have inverted further overnight as the 7-30 Year yields fall overnight. This is investor pricing in short-term rates hikes, but the view the FED rate will top 2.5% and then fall soon after.
Overnight the Australian government announced the 2022 budget, in this budget, they have moved away from a surplus and forecast further deficits. This will continue to see money put into the economy which has some people worried about inflation. Much of what was announced was to support people in a time that inflation is higher. We also need to remember that if things in Ukraine settle and supply chains repair after Covid then we want inflation to remain in the 2-3% RBA target.
Australian Outlook
The XJO is expected to have another strong open this morning following a similar night in the U.S. With the SP500 gaping above their key resistance, our market this morning will have the confidence to move past the 7,475 resistance and immediately test the next key resistance at roughly 7,525. Its worth noting our market has only moved past this level twice. Once back in august last year where it spent eight trading days above it, and once in January this year where it spent barely three days above it. U.S futures have also dipped into the red.
The unrelenting strength of markets is surprising. The steepness of the rally is not sustainable with uptrends typically having moments of respite in the form or sidewards movement or short pull backs. We haven’t really seen that this time around – although there were a couple of moments there where the market looked like it was running out of gas as it contended with key levels.
There are obvious headwinds for markets. Though Russia’s statements overnight drew a positive reaction, U.S officials including Biden were apparently sceptical.
Furthermore, Covid continues to disrupt China. There are also concerns rippling through the marketplace about tightening too quickly and hurting growth in a period of supply-side driven inflation.
If we do see a pullback, 7,400 to 7,300 should help keep us elevated.
US Markets
US shares pushed higher again, with technology stocks doing the heavy lifting and forcing the major indices higher. This came despite a small inversion on the US government bond yield curve, which is sometimes seen as a leading indicator for a potential future recession. Overall, the US yield curve has been flattening for sometime, which suggests that markets think interest rate rises will be confined to the short-term and that these rate rises could eventually lead to economic contractions. US economic data was largely positive overnight as well, with more job openings than expected, while consumer confidence came in higher than expected. There was also a drawdown in US crude inventories, which forced prices of oil down. Energy was the only sector of the SP500 to close lower overnight. Real Estate was the strongest performing sector, followed by Technology, and Discretionary stocks.
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Tim Michaelides is the Head Trader at Emerald Financial Group.
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