XJO to open lower again with inflation worries on investors’ minds

The XJO is expected to open lower this morning following a pullback in the U.S overnight which saw their market commit to the break of their key support and hold their lows. Their futures have edged into the green however which at least indicates that selling has not snowballed at this stage.

Yesterday we had another strong pullback to finish on 7,200 which had been a major level of support in the past. This morning we should break it with an expected open near 7,170. 7,150 is the next key level and arguably every 50 point increments on the way down to 7,000. Our market has broadly tracked sidewards for about two years now, so there are plenty of key levels of support and resistance nearby.

The current environment that our market and the U.S has been trading in shows that neither market has been willing to commit to several days of directional movement in a row. Indeed, recent trading has been rather indecisive with intraday moves spelling retracements and turn arounds. This could mean we are likely to see a rebound, be it large or small, in the near futures. This would likely return us back to the convergence of the key moving averages near 7,200 to 7,250.

Inflation worries dropped the U.S last night and today we have local unemployment data. Our RBA wants to see the unemployment rate rise which has been resilient in the face of rising interest rates. If the unemployment comes in larger than expected this may help buoy our market.

US Markets

US shares closed lower again overnight, with each of the three major indices seeing selling. The tech-heavy NASDAQ saw the most selling, while the more value based DOW JONES saw more moderate selling. US investors remain concerned around a rebound in inflation and indeed, overnight US data continued to come in hot. Industrial Production and Housing Starts were stronger than expected, though new Building Permits were slightly lower than expected. There was also another big drawdown in US oil inventories. Should data continue to point to further inflationary pressures, there is every chance that we see more interest rate rises from the Federal Reserve. Indeed, we also saw the Fed meeting minutes overnight, with the ‘Fed’ saying that inflation remains a significant risk.

Ten of the eleven sector groups of the SP500 closed lower overnight, with only Utilities stocks finishing in the green. Discretionary stocks were the weakest performers overnight, followed by Real Estate and Communications stocks.

Technically, the SP500 broke below the longer-term uptrend and key support level at 4,450 on Tuesday and it continued lower overnight. This is a break of a key technical level and the break suggests further bearish movement. Possible downside targets include potential support levels at 4,400 – where the index closed overnight. Should this level break, the next level to the downside would be previous support at 4,320.

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