Holiday-shortened week may see S&P 500 riding on its near-term positive momentum

Market Recap

The US equity markets snapped their recent losing streaks by delivering their first weekly gain in two months, as the US core Personal Consumption Expenditures (PCE) price index coming in line with market expectations provided the green light for a continuation of the relief rally last Friday. The Fed’s closely-watched core inflation measure came in at a 4.9% increase year-on-year, down from the previous 5.2%. Resilient consumer spending in the US economy has provided some long-awaited market relief but the key question remains as to whether it can continue to support the economy moving forward with further rate hikes ahead and the start of balance sheet reduction in June. Thus far, US consumers are dipping into their savings to drive spending, with April’s savings rate at 4.4% marking the lowest since 2008. The final reading for University of Michigan (UoM) consumer sentiments in May also deteriorated further to a fresh decade low of 58.4, down from its preliminary reading of 59.1. Therefore, headwinds may remain, leaving economic data in the coming months on watch for further confirmation.

The shortened trading week may lead to a relatively light session to kickstart the new week, with the quiet US economic calendar today potentially paving the way for a continued recovery in risk sentiments. The US markets will be closed for Memorial Day today. Several economic data will then come into focus as the week progresses, with PMI figures out of US and China on watch for fresh updates on economic conditions, along with the key US non-farm payroll report to end the week.

For the weekly chart of the S&P 500, recent up-move has closed above a previous hammer candlestick and seemingly marked a rejection below a head-and-shoulder pattern, pointing to some short-term bullishness. That said, it clearly remains to be seen if this marks the eventual bottom, as there is the risk of a formation of another lower high ahead. Recent upward moves are also met with declining volume thus far, suggesting that some reservations remain.

Asia Open

Asian stocks look set for a positive open, with Nikkei +1.41%, ASX +0.98%, KOSPI +0.66% at the time of writing. The strong closing for major US indices (DJIA +1.76%; S&P 500 +2.47%; Nasdaq +3.33%) to end last week may provide a positive backdrop for Asian equities today, with US futures pushing higher this morning as well.

The economic calendar in the region is relatively light to start the week and market participants may place their focus on recent economic support measures from Shanghai to tackle the economic impact from Covid-19 lockdowns. Financial support for corporates in tax rebates and reduced rents, along with plans to shift towards normalcy, may aid to downplay some concerns of Covid-19 risks in the region for now. Virus cases in Shanghai and Beijing have also trended lower over the weekend. That said, previous fiscal measures announced were met with only a lukewarm reaction in the markets, suggesting that some reservations may remain for market participants to take up more aggressive positioning with China’s zero-Covid policy. Its strict virus stance suggests that any outbreaks will still be met with heavy economic restrictions.

China’s NBS PMI figures for May will be released tomorrow, which are expected to lift off its April’s low but remained in contractionary territory. Greater clarity on the path out of China’s zero-Covid situation and a reversion in economic indicators to higher growth may be needed to drive a longer-term shift in bullish sentiments.

For the Hang Seng index, it has been trading within a tight range since April, with recent moves potentially moving to retest a key resistance at the 21,200 level. The overall trend may still offer a downward bias for now with the series of lower highs and lower lows presented, and while a break above a downward trendline may aid to provide some near-term bullishness, we may have to look out for further signs to indicate a longer-term reversal in trend.

On the watchlist: US dollar index trading within a descending channel pattern on four-hour chart

On the four-hour chart, the US dollar index seems to be trading within a descending channel pattern over the past two weeks, with recent moves retesting the upper channel trendline for the fourth occasion. The release of the US core PCE index last week has not provided a catalyst for an upward breakout by coming in line with expectations at a 4.9% increase year-on-year, although it remained at its fastest pace since 1982. Amid the improved risk sentiments, failure to break above the channel pattern over the coming days may bring the US dollar index to retest the 100.80 level as potential support, where a confluence of trendlines is observed.

Friday: DJIA +1.76%; S&P 500 +2.47%; Nasdaq +3.33%, DAX +1.62%, FTSE 100 +0.27%