We continue to trade range bound, with the top of the range being roughly 7,850 to 7,900 (our all-time highs), and the bottom of the range being roughly 7,550 to 7,500. We got within arms reach of the bottom of the range on Thursday and rebounded. Now it looks like we are heading back to the top. There is also short-term downtrend line that we will contend with on open. Unless U.S futures drive us further today, we shouldn’t expect much more than what our futures are posting this morning. The stochastic have crossed in the oversold area and should normalise today, which makes sense as we normalise to the middle of the broad channel and await further leads.
Markets continue to be sensitive to key macro-economic data that shapes the narrative around monetary policy. Much of the rally since October has been built on the ending of the tightening cycle, and the expectation of the beginning of the expansionary cycle at some point this year. However, that narrative has been shaken by stronger than expected macro-economic data since the start of the year, particularly in the U.S. The Fed maintained a dovish position in the face of this, expressing that the strength was transitory. This sentiment has now largely been vindicated. Economic data in the U.S has started to soften, leading to their market making fresh highs, and as of Friday, holding the gains for now.
We are in a bit of a precarious position. We are seeing conflicting economic data. Retail sales, consumer spending, and wage growth are all slowing at rates that would indicate recession – yet inflation remains sticky alongside our economy being near full employment. Regardless, our RBA will take lead from the U.S, so when they cut, we shouldn’t be too far behind.
All this means we need to be aware of upcoming key macro-economic data, and respect that markets can turn on a dime on the back of them. Tonight, we have U.S Manufacturing PMI. Tomorrow, we have local retail sales, and tomorrow night we have U.S JOLTS. On Wednesday we have local GDP data, which is expected to be flat at 0.2% QoQ, but down 0.3% from the same time last year. On Wednesday night, the U.S has non-farm employment change and more PMI data. On Thursday night, the ECB is expected to cut interest rates from 4.5% to 4.25%. The U.S will finish the week with employment data. Employment is expected to remain sticky around 3.9%, which is practically full employment.
US Markets
US shares closed higher on Friday, despite initially trading firmly in the red. Shares received a boost by the PCE price data coming in in line with expectations, which triggered a fall in bond yields and cemented the idea that we would see US rate cuts this year. Overall, there remains an optimism to US share markets, despite prices being historically expensive.
Technology was again the only sector to close lower from the US on Friday, with every other sector closing in the green. Energy was the strongest performing sector, followed by Real Estate and Utilities, most other sectors also saw strong gains.
Technically, the SP500 initially continued lower after breaking below the support at 5,260, but may have found support at the next level around 5,200. Overall, the index still looks a bit bearish as on Friday it may have held below a short term downtrend line, it could fall back towards the next support level around 5,150. Should the index rise from here we should see a move back towards the all-time high around 5,320.
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Advisor at TradersCircle and Emerald Financial
Joining the team at TradersCircle in 2011, Karo has extensive experience in both investing education and derivatives trading.
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