The XJO is expected to open higher this morning following a strong rally in the U.S on Friday which saw their market make fresh all-time highs. Their futures are flat this morning.

The rally in the U.S was largely led by big tech, which is not as represented in our market. We are expected to open just above 7,450. We could see our market extend the gains towards 7,500 during our session, however we would likely need to see the U.S not turn negative, if not move into the green.

The expected move higher on open will have us bouncing from the underlying uptrend, breaking the countertrend line, and thus also breaking the broad pennant pattern to the upside. 7,500 to 7,550 is the next key level of resistance that is marked by the roughly two weeks of consolidation we had at the start of the year.

Ultimately, even though our market is due to play some catch up, there are few things that are likely to hold us back despite the U.S showing that it is willing to continue the grind higher. Iron ore has stabilised for now, however if it continues its downtrend, our miners are likely to continue suffering. They have fallen almost 10% over the past few weeks, which has certainly put pressure on our index. If there is a rotation from the banks, which look a bit toppy, into the miners (presuming iron ore remains stable), that can also keep our market subdued. Finally, much of the rally is built on the belief that the U.S has a 50% chance of a rate cut in March.

It is our belief at this stage, that the chances of a U.S rate cut in March are much smaller than what markets expect, considering the sticky economic data of late. Bond yields have risen lately, and it is our belief at this point that markets will draw down those expectations, which in turn will lead to selling. When this happens is hard to know, as it is as hard to pick a top as it is a bottom, but the U.S is once again looking overly optimistic, whilst our market looks overly pessimistic. This may simply translate to further range trading between our all-time highs near 7,600 and our recent lows at roughly 7,350.

Key economic data remains the likely market movers because it helps the market focus in on what the future of monetary policy might look like. Despite our market trading quite technically, key economic factors like unemployment data, CPI, GDP, retails sales etc, all can push and pull markets. If the chances of a U.S rate being less than 50% in March flows into markets, it seems likely it will be triggered by a strong economic reading, or basket of strong economic readings.

In the week ahead, there is not much going on locally. Last week we had local unemployment come in as expected at 3.9% which is the same as the last reading. This week, there is U.S manufacturing and services PMI on Wednesday night, and an ECB interest rate decision on Thursday night.

US Markets

US shares jumped strongly higher on Friday, with each of the three major indices seeing notable gains. US shares reached fresh all-time highs during the session, with the strength led by large-cap technology companies that have been the driver of gains for the past year. The move came despite investors reducing bets on Fed rate cuts in March, with the probability of a March rate cut dropping below 50 percent according to the ‘Fedwatch’ tool. Importantly, economic data did show 1-year and 5-year inflation expectations were continuing to fall.

The momentum upwards does seem to be being maintained in US markets for the time being, and there is a fair chance that we see further upwards movement given Friday’s break higher. However, the fundamental factors that led to the huge gains in November and December are no longer quite as positive. We do need to watch closely and look for potential events that could trigger a pullback.

Nine of the eleven sector groups of the SP500 closed higher on Friday, with Technology, Financial, and Communications stocks the strongest performers. Utilities and Consumer staples were the only stocks to close lower on average.

Technically, the SP500 broke above the key 4,800 level on Friday, which was the all-time high resistance level. With this break higher, we could expect further upwards movement, although its hard to say where this move might stall. Should the index fall from here, the 4,800 level could act as support against any selling.

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