While news of strong US job growth is good news for economies, it looks like triggering a downward adjustment in stock prices as investors adapt to the increasing likelihood of higher US interest rates. The early stage of Fed tightening cycles tends to be bullish for stock markets as growth improves. In this case, however, markets are starting from a high valuation base creating the potential for some “froth” to be knocked off valuations as markets adjust for the possibility of higher US bond yields.
The strength of US jobs growth now looks likely to impact the Feds thinking on the timing of its move to lift rates. The Fed has made it plain that it wants comfort that inflation is heading back towards 2% before it moves on interest rates. Wage growth will be a key factor in providing the Fed with that comfort. While growth in hourly earnings was a disappointing aspect of Friday’s US employment data, the ongoing momentum of jobs growth now means that higher wage growth is unlikely to be far away.
Weekend news of strong China’s strong export growth is encouraging and may soften the extent of today’s sell off. However, commodity stocks, especially gold miners are likely to be lower as investors factor in the likely impact of a stronger US Dollar on commodity prices.
Weaker prices today will see the ASX 200 index get well below recent support levels, including the 20 day moving average. This sets the market up for an ongoing correction with the 38.2% Fibonacci retracement level around 5700 providing initial support. However, with dividend yield stocks having been pushed to high valuation levels in recent weeks, a deeper correction is possible in a scenario in which strong US data increases the likelihood of a June rate hike in the US. Potential support levels for a deeper correction include the 200 day moving average around 5500.
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