The XJO is expected to edge lower on open this morning following another indecisive night of trading in the US which saw their market finish slightly in the red.

Over the past month or so, our market has also been making slightly lower peaks, and slightly higher troughs as we slowly form a broad pennant. We are spending less time away from the middle of the range, which is also where the 50 day MA comes in. It seems our market is not comfortable committing to an extended move one way or the other as we digest the push and pull of conflicting forces. Alternatively, it may be that our market is only being propped up by continued strength in the US, where otherwise we would collapse – like a “Weekend at Bernie’s” situation, our market is not standing on its own two feet.

The US is enjoying key economic readings that fall into the goldilocks range which shows their economy cooling, but not cooling too quickly. Their market wants to see interest rate cuts, but not a tanking economy. Their bullishness keeps our market elevated, but unfortunately, we cannot keep pace with their moves. Firstly, much of their bullish movement is through tech, which is not well represented in our market. Secondly, our two biggest sectors are conflicting with one another. The banks have done much of the heavy lifting to keep our market elevated, but remain expensive and arguably very overbought. Indeed, CBA is likely the most expensive bank in the developed world. However, our second largest sector, the materials, has lamented with falling iron ore prices. Both these sectors represent over half the entire market, and with them moving against each other, it is not surprising to see our market range bound. As a side note, it would make sense to see a rotation out of the overheated banks and into some of our cheaper miners. Of course, we would need to see iron ore stabilise and rally first. This would lead to continued subdued movement, but help keep our market elevated in the face of continued strength in the US.

Finally, our economy is in a different situation to the US – or at least our market is perceiving it to be. Whilst the US is enjoying their goldilocks readings and moving towards rate cuts, our economy is heading towards stagflation – one of the worst-case scenarios for an economy. We are seeing sticky inflation, and in response, the head of our RBA, Michelle Bullock, has warned that we will need to raise rates further if that doesn’t change soon. Furthermore, our GDP has declined rapidly to the point that if things continue to trend as they are now, we will be in a recession. Nobody (except perhaps the shorters) want to see a scenario where we are both in a recession and a tightening cycle. There is plenty of time before that scenario is realised, but we would need to see key macro-economic data start to cool, and we aren’t seeing it in some key areas. For example, late last week it was confirmed that we remain at full employment. The RBA will want to see people lose their livelihoods in order to reduce inflation, but the issue remains that much of the inflation has not been driven by demand, but rather by company profiteering. We see this reflected in the poor retail sales numbers which have remained flat since roughly the start of the year.

In essence, we continue to be push and pulled by our own economic situation, market composition, and lamenting iron or prices – and in contrast, a revelling US. This has largely kept our market range bound and we should continue to expect it to do so until we see some meaningful selling in the US, or better data locally.

Tomorrow at 11:30am (AEST) we have an RBA statement, and we should expect Bullock to remain hawkish. Tomorrow night there is US retail sales numbers, and on Thursday night there is US Fed manufacturing index numbers. The US will finish the week with further manufacturing data and a Fed. Reserve monetary policy report.

US Markets

US shares closed slightly lower on Friday, though once again they were able to rise late in the session to close relatively flat. There was a lack of major news an events, though a report from the University of Michigan did show that consumer inflation expectations rose faster than expected, which isn’t a good sign for the battle against inflation. Regardless, shares appeared happy to largely drift sideways along the recent all-time high resistance levels. This week will be a quieter one for data from the US, so don’t be surprised to see more sideways movement, with prices looking mostly bullish but unlikely to jump strongly higher (as recent fresh highs have been very incremental at best). US retail sales on Thursday night will probably be the biggest release of the week. 

Only three of the eleven sector groups of the SP500 closed higher on Friday, with Communications and Technology stocks the only ones to rise notably. Industrials stocks saw the most selling, followed by Materials and Energy stocks. 

Technically, the SP500 recently gapped through the previous all-time high at 5,375 and continued into blue sky territory. Its hard to say where the upwards movement will stall, but for the past week the index reached 5,450 before pulling back. That 5,450 level would have to break for further gains to look likely. To the downside, the previous resistance at 5,375 is now likely to act as support; should it break, we are likely to see further selling.

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