The XJO is expected to open flat this morning, despite a small rally in the U.S on Friday. Their futures have edged into the red.

Despite the continued strength in the U.S, our market is simply consolidating at the top of the range. Why, could come down to a few different things, but wholistically, our market becomes sceptical of their extended runs and needs more and more evidence the U.S can hold their highs before pricing in their gains. In this rally, we largely followed them on the way up to previous all-time highs, but where they have continued to make consecutive fresh highs, our market has only done so arguably once (and it was not even that much higher). In essence, from lows in October last year, they have rallied just over 20%, whereas we have rallied only just over 10%.

Iron Ore has been trading in somewhat of a broad channel, making our miners indecisive. This has helped keep our market supressed. Our banks have largely led the charge higher, but look overbought by short-term metrics. Finally, we are entering a reporting season soon, which the market may be hesitant in rallying too aggressively into, considering earnings are meant to contract about two per cent on average this year (and that’s a conservative estimate).

Much of the U.S rally has been built on the prospect of rate cuts this side of the year, with expectations as early as March. Locally, we were expecting rate cuts at the end of the year, but our market is tied to the U.S. Their changes in monetary policy do influence our own as we tend to follow their cycle and try to maintain a balance in our dollar. Bullock came out recently and continued the narrative of “wait and see” much like Powell, however at the end of her statement, she reminded everyone that rate rises are still on the table.

U.S data has been strong lately, which would indicate that they won’t see a cut in March. Their market continues to rally however, perhaps out of spite, or in hopes that they will still cut. Or it could simply be that the strong data is giving hope for the coveted “soft landing” that has been promised by the Fed through this tightening cycle.

Overall, it feels like the music has stopped playing, but everyone is still dancing. In the short-term alone it would be hard not to expect some kind of mean reversion from the U.S. For our market, this would likely translate to further consolidation as we have simply not risen as high as they have. Of course, hard and fast selling from overseas will still cause similar moves locally. 7,550 remains the local support, and the uptrend line at this stage comes in at 7,500. However, with a week’s more worth of movement, that uptrend line will come in at 7,550.

If the U.S starts pricing in a no-cut in March, and spits the dummy, then 7,350 to 7,450 remain the recent lows.

It’s Chinese New Year, so Shanghai is closed this week. We have local business and consumer confidence numbers tomorrow. The big release this week is U.S CPI on Tuesday night. If this comes in stronger than expected, it would be hard not to expect a bearish retaliation. On Thursday we have local unemployment data, where we expect to see a weakening in labour markets. On Thursday night we have U.S retail sales numbers and manufacturing data.

US Markets

US shares closed mostly higher again on Friday, with the NASDAQ and SP500 closing higher, driven by large technology stocks, while the DOW JONES closed lower. Shares powered higher after December CPI numbers were revised slightly lower, though its worth noting that they were still above the initial forecasts. There was otherwise a lack of major US economic data from Friday, and instead markets are looking ahead to the major event of this week, which will be January’s CPI data, released on Tuesday night. Rate rise expectations have been pushed out this year due to consistently strong data, so we will need to see if this report has any bearing on the crazy upwards movement we have seen.

Eight of the eleven sector groups of the SP500 closed higher on Friday, with Technology and Discretionary the strongest performers. Energy stocks saw the most selling, followed by staples stocks.

Technically, the SP500 broke above the 5,000 level on Friday, closing well above that potential level of resistance. Its hard to say where this move may stall, but fundamental and technical indicators do suggest that the market is heavily overbought. This doesn’t mean that it will immediately fall from here however, and it could end up reversing from a higher point. Currently the first downside target would be the previous resistance at 4,800.

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