The XJO is expected to open flat this morning.
The U.S rallied Friday night, however they stalled at key resistance which roughly represents both their all-time high and the ceiling of their recent consolidation range. Alongside their flat futures, our market is pausing this morning as we wait to see where they trade from here.
We have kept up well with the U.S. Both our XJO and the SP500 look rather similar. We too are trading at roughly our all-time high resistance (~8,100). It did take our market longer than the U.S to get back to these levels, but we with positive sentiment still underpinning markets, we have managed to practically match them.
From here it is difficult to say with much confidence where markets will move next. This sentiment is clearly shared, reflected in the sideward consolidation which is particularly present in the U.S. Will markets crack through all-time high resistance and set new highs? Or will they pullback with some overdue profit taking and mean reversion? There are reasonable arguments for both, but no signals to suggest either.
Markets remain data driven, particularly in the U.S. Our market has largely been ignoring our own economic situation, which is quite different to the U.S. Whilst it is practically confirmed they will receive a rate cut this year, it is becoming clear that our economy will not. This is because they believe their economy is cooling at an appropriate rate, where they get to enjoy both lowering inflation, and the “soft landing”. In contrast, our economy is heading towards stagflation. We have cooled in consumer spending and GDP to the point of stagnation, however our inflation remains steadily high, and we continue to be at full employment. The numbers are confusing, to the point it seems like the RBA doesn’t really know what to do. For the past few announcements, they have positioned themselves as neutral, but threating another rate rise.
The reason we are likely following the U.S so closely is because regardless of the realities of our own economy, we are still likely to follow them into a cut cycle – albeit with delay. And in the end, our market likes that idea. If they cut once, it puts pressure on our RBA to move to a cut cycle at some point perhaps early next year. However, if they cut twice this year, their will be a large dissonance between their monetary policy and ours, which we are unlikely to be fond of.
The miners seem to be recovering for now, forming a small uptrend – driven by similar moves in iron ore. However, it seems like the XMJ has returned to a downtrend line, forming a major pennant. We would typically expect the downtrend to win and continue, however iron ore is bouncing from key lows, and are well oversold in the longer to medium term. The financials, led by the big four banks, remain expensive and the main way our market has kept up with the U.S. These levels are very hard to justify with any logic bar that they need to be bought to keep our market elevated, especially with a sad materials sector. If the materials do continue their small uptrend, we could see some pressure release from the banks that bolsters our miners. Otherwise, if selling hits our market as a whole – driven by a U.S, it will almost certainly come from the burst of what is likely a bubble in our banks.
In the week ahead, the big local news is our GDP on Wednesday which is expected to come in at 0.2% from 0.1% the previous quarter – highlighting that our economy is stagnating. For the U.S, the big release is employment data Thursday and Friday night.
US Markets
US shares closed firmly higher on Friday, with each of the three major indices closing notably in the green. Prices did trade back and forth a bit before closing firmly higher. Prices were buoyed by the PCE report, which showed that prices aren’t rising as quickly as expected – a positive thing for the US economy, which is anticipating rate cuts this month. Other US economic data has been fairly strong however, so rate cuts are likely to come in fairly slowly at first, unless data deteriorates further. In general, US markets remain in an overall upwards move, but they are definitely overbought at the current levels, meaning further upside might be slow. US markets will be closed tonight for the Labor Day holiday.
All eleven sectors of the SP500 closed higher on Friday, with Discretionary the strongest performer, followed by Industrails, and Technology stocks. Most other sectorrs saw moderate buying.
Technically, despite some strength over the past few sessions, the SP500 has been unable to exceed resistance at roughly 5,650. The index does remain on an upwards movement, but should we see a bearish candlestick from here, that would indicate a move lower. Should the market rise beyond the resistance, at 5,650, that would indicate a rise to the all-time high at 5,680.
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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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