The XJO is expected to edge higher on open following a decent recovery from the U.S last night and their flat futures this morning.
Yesterday we managed to hold gains as we rebounded from the bottom of the range at roughly 7,100. For a moment there it looked like we were going to break lower, but our market at least showed a willingness to hold the channel as we head into the CPI reading today at 11:30.
The last reading came in higher than expected at 6.8% on the back of a cut in a fuel excise in April last year – so it could be argued the data was a bit skewed. With that taken out, it would have been closer to 6.5%. Regardless, this has kept our RBA on the warpath, with higher interest rates the only lever it can pull to combat the exceedingly high inflation and low unemployment. Today’s reading is expected to decline to 6.1%, which seems a lot lower, but taking out the skewed data, would be only a gradual decline. If data comes in as expected, we expect our market to hold. If CPI comes in lower than expected, we expect a relief rally – albeit nothing as significant as to what we recently saw before the large swathes of selling. Finally, if the reading is larger than expected, then expect our market to break lower with gusto.
If we indeed break lower, then 7,000 to 6,950 is the next clear target and represents the lows of our market for roughly the past six months. If we see a relief rally then a move back to the converged 50 and 100 day MAs which come in at roughly 7,200 seems likely. We will just have to wait and see how our market digests the CPI reading. It is good to see that the U.S is holding strength though, which would help facilitate a relief rally in our market and likely help stem any bleeding if we do break lower.
US Markets
US shares closed strongly higher overnight, with markets jumping after a surprise lift in consumer confidence, as well as better than expected building permits, durable goods orders, and with a drawdown in oil inventories. Also helping sentiment was lower than expected Canadian CPI growth, which slowed during the month of May. In general, it is looking increasingly likely that the US economy will manage to avoid a recession despite the rapid interest rate rises, which seem to be reducing inflation while other economic data remains strong. Still, it is likely there will be at least one more rate rise from the US Federal Reserve, with most economists expecting a raise in rates at the July meeting. Regardless, US markets remain in an overall upwards move, and it doesn’t look like there is anything in the short-term that can change this.
Ten of the eleven sectors of the SP500 closed higher overnight, with only Healthcare closing (slightly) lower. Discretionary and Technology stocks saw the most buying, while Materials stocks also jumped notably.
The SP500 showed a bullish candlestick after drifting lower across the past week. The index remains in a longer-term uptrend with resistance at 4,450 which would have to break for further gains to look likely. Should the index resume falling from here, the recently broken resistance of 4,300 could act as support against 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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