The XJO is expected to fall this morning despite a continued rally in the U.S on Friday which saw their market make fresh all-time highs.
We should give up most of Friday’s gains, opening near 7,600. Our market is likely nervous heading into the RBA meeting tomorrow. Rates are expected to remain on hold, but of course the market will be looking for future guidance from Bullock. We should expect a dovish tone considering the week data we have seen lately, though the RBA would likely continue the narrative of being data dependant and maintaining a “we will see” attitude. As we head towards rate cuts this year, each meeting can be pivotal. This one could blow over, with little to no change in the RBA’s stance. We would then look to March.
Technically, our market is consolidating at the top of the range. Recently we have been dragged higher by strength in the U.S market, but we are likely looking too overbought to price their gains on Friday. However, if the U.S maintains strength and the RBA is a non-event, our market will likely (albeit reluctantly) continue to grind higher.
Our banks are looking very overbought in the short-term, with the financial index not far off its all-time highs. If we see some healthy profit taking in these areas, this will obviously put selling pressure on our index, considering it makes up roughly 30% of it. The materials on the other hand look like they could have more room to rally with iron ore showing a decent recovery recently. However, in the immediate term, BHP and RIO in the U.S were sold down strongly on Friday, which should flow into our market – another reason we are expected to open lower this morning.
Ultimately, if the banks are weak, and the miners are weak, then our index is weak. Even though the XJO could have another leg up, perhaps bolstered by both the RBA and strength in the U.S, we are looking overbought as a whole, and the bearish argument is gaining ground.
Aside from the RBA tomorrow there is not much else on this week. We have U.S PMI data tonight, and local retail sales tomorrow. On Thursday we have Chinese CPI data.
US shares closed higher again on Friday in a weird session where strong company earnings reporting from Facebook and Amazon helped markets close higher, when otherwise events were somewhat negative for the market. Facebook closed 20 percent higher after better than expected results and with the company announcing its first ever dividend. Amazon closed around 8 percent higher. However, US unemployment came out much lower than expected, with many more jobs created than expected, which while pointing to a strong economy, also points to continued inflation. As a result bond yields jumped, and the probability of a March rate cut from the Federal Reserve dropped substantially further. Markets have been rallying on a belief of up to seven US rate cuts this year, but now some in the market are predicting as few as two rate cuts in 2024. Should bond yields continue to rise and rate cut expectations diminish, expect to see selling creep into the market.
Six of the eleven sector groups of the SP500 closed higher on Friday, with Communications (Facebook), Discretionary, and Technology the strongest performers. Real Estate and Utilities stocks saw the most selling after bond yields jumped.
The SP500 continued higher on Friday and continues to show technically bullish signals, with the index breaking above the previous high of roughly 4,930 and continuing higher. The index did pare intra-day gains, however. Its hard to say there the move might stall, but the 5,000 could be an eventual target. Should the index fall form here, the recent trough at 4,850 is the level to break before further selling looks likely.
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