The XJO is expected to open flat to lower this morning following a similar move from the U.S on Friday and their negative futures this morning. They held a historic resistance, but this could be just a breather before they continue higher, and our market is likely just waiting this morning.

If their futures stay in the red during our session, then we could see a sell-off today. How excessive it might be is hard to tell. Recently our market has been looking for any excuse to fall, however leading into and since the U.S CPI reading last Wednesday night, we have seen four straight days of strong uninterrupted gains.

We managed to push through key resistance to finish at roughly 7,300, with the next clear target at roughly 7,380 to 7,400. This is the top of the trading range and channel, and marks the highs we have failed to push through over the past several months.

With today’s muted open, trading at the top of the range, negative U.S futures, and being in a different interest rate and inflation environment than the U.S, it’s hard not to expect profit taking soon. The U.S is also due. It seems more likely than not we see some selling this week, but perhaps we have one more leg up to resistance first. 7,280 would be the first soft support, with roughly 7,200 the clear target after that. This is roughly where the 50 and 100 day MA’s have also converged and marks a point of safety for our market.

Lowe came to the end of his term as Governor last week and was replaced by the first female governor – Michelle Bullock. He was willing to stay on for a short amount of time to see this cycle through, but did not want to commit to a full term. He was instead replaced. Perhaps this is a simple decision but of late it has been inferred by some commentators that Lowe has mismanaged the tightening cycle (despite it being a board decision) which could have influenced the decision to change leadership during a pivotal time. It could also be political as families under stress from the dozen or so rate rises want to a fall guy. Equally, the federal government has failed to implement legislation to control large corporate profitisation that is largely responsible for the recent inflation – so they too would want a fall guy for their voter base.

The irony is that Australia still needs rate rises to get inflation under control, and so if Bullock is more dovish then this could be worse in the long run despite being seen as favourable by the average Mom and Pop. Local bond yields followed U.S bond yields down across the board last week, but perhaps this was also bolstered by the change in leadership.

It’s a tough time to change leadership, and Bullock has a lot of responsibility to shoulder come her appointment in September. Being the first female unfortunately means she will likely face more critical scrutiny from parts of the nation whether some like to admit it or not. Again, Australia needs further rate rises at this stage. If by September this hasn’t changed, when the average consumer expects you to potentially save them from the status quo of rate rises, its going to be a tough first day on the job.

In the week ahead: today we have Chinese GDP. Tomorrow, we have an RBA monetary policy statement and U.S retails sales that night. Wednesday night we have UK and Euro CPI. On Thursday we have local employment data. All these are important releases, but arguably local employment data on Thursday and the RBA monetary policy statement tomorrow are the biggest. We have clearly been driven higher largely on the back of the low CPI reading in the U.S. If the RBA tomorrow remains hawkish, we could remain disconnected from the U.S and fall. Again, we are trading at the top of the range, and these types of announcements could be what our market needs to prompt profit taking.

US Markets

US shares closed mostly flat lower on Friday, with the SP500 and NASDAQ finishing in the red, while the DOW JONES finished in the green. There was not a whole heap of major US economic data, though there were lower than expected import and export prices, which supports the narrative that inflation is cooling, which would be positive for share prices. US company earnings on Friday was mostly better than expected, though despite these results, many of the reporting companies did not rise following the announcements. This is likely down to the fact that 75% of company earnings reports in the US beat consensus ‘expectations’, and that investors have wizened up to charade this somewhat. Earnings season continues tomorrow night. We will also see US retail sales tomorrow night, which will illustrate how consumers are spending and whether the economy is cooling. For the time being, investors are happy to buy US shares on the expectation that inflation is cooling and that rates will soon peak.

Eight of the eleven sector groups of the SP500 closed lower on Friday, with Energy stocks seeing the most selling, while Financials also saw notable selling. Healthcare stocks saw the most buying and most other sectors closed fairly flat.

The SP500 held the resistance level at approximately 4,510 index points on Friday and this level would have to break for further gains to look likely. Should it break, The next key level beyond this point is 4,600. The recently broken 4,450 level will now be expected to act as support.

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