Tech-induced rally drove new higher high for S&P 500, Nasdaq: S&P 500, Nikkei 225, Gold

Market Recap

Wall Street ended last Friday on a strong positive note (DJIA +1.00%; S&P 500 +1.30%; Nasdaq +2.19%), with semiconductor stocks and big tech following through with its recent AI-induced rally, while risk sentiments largely shrugged off the hawkish recalibration in rate expectations in the background. The VIX has once again failed to reclaim its key 20 level upon another retest last week, reinforcing the overall risk-on environment. The catch is that we may have to see further improvement in the indices’ market breadth to support the rally's durability, failing which could bring a wider retracement on the table.

Persistence in inflation brought on by an upside surprise in US core PCE price index has led broad consensus to price for an additional 25 basis-point hike in the June Federal Open Market Committee (FOMC) meeting (66% probability), which is a hawkish shift from the rate pause priced just a week ago. Market expectations are also more aligned for a high-for-longer tightening process, with 25 basis-point of cuts being priced by the end of this year at best.

The hawkish recalibration allows the US dollar to hold onto its recent gains, alongside an upmove in short-term Treasury yields, which kept gold price’s upside in check. Over the weekend, a tentative debt ceiling deal to be voted on later this week seems to mark a significant progress in the US debt ceiling situation, which kept the risk-on sentiments going. The US markets will be closed for Memorial Day today so we may expect a quieter start to the week.

The S&P 500 has managed to reclaim its 4,200 level, which will leave the 4,320 level in sight as the next resistance to overcome. Staying above the 4,200 level will be key for the index, as a break above this level back in August 2022 was marked with a false breakout, which leave some questions on whether a similar scenario may occur. For now, as long as the 4,200 level is defended, the upward bias for the index may continue.

Asia Open

Asian stocks look set for a positive open, with Nikkei +1.55%, ASX +1.02% and KOSPI +0.96% at the time of writing, following through with the positive handover from Wall Street last week, along with a positive first-hand reaction to abating US debt default risks with a tentative deal over the weekend. The Nasdaq Golden Dragon China Index has managed to recover close to 3% last Friday, but the formation of lower highs and lower lows since the start of the year could still suggest that any bounce could be short-lived.

Positive surprises in economic data may be needed to reassure market participants of China’s growth conditions and to provide the conviction for taking up more risk exposure in Chinese equities. This week will leave the official manufacturing purchasing managers’ index (PMI) on watch, with expectations for another read in contractionary territory.

On another front, the Nikkei 225 continued to push to another new high since 1990, but the bearish divergence formed on moving average convergence/divergence (MACD) in the near term could still leave a buy-on-retracement as the lower-risk option. That may leave the 30,400 level on watch.

On the watchlist: Gold prices back to retest key upward trendline support

Gold prices have struggled for upside lately, as a stronger US dollar and higher Treasury yields on the back of a hawkish repricing of rate expectations continue to serve as headwinds for the yellow metal. That said, prices are back to retest a key support confluence at the US$1,940 level at the moment, where an upward trendline support stands in confluence with its 100-day moving average (MA). For now, any bounce could still seem to be short-lived with US dollar on a near-term upward trend. Any break below the trendline support may leave the US$1,900 level on watch, followed by the US$1,850 level.

The latest Commodity Futures Trading Commission (CFTC) revealed further moderation in long-positioning among money managers for the second straight week, with potentially more room for unwinding from previous extreme bullish build-up. In terms of the IG client sentiment data, the fact that retail traders are net-long with further net-long build-up from last week may give a stronger gold-bearish contrarian trading bias.

Friday: DJIA +1.00%; S&P 500 +1.30%; Nasdaq +2.19%, DAX +1.20%, FTSE +0.74%