Cautious start to the new week: S&P 500, China A50, US dollar

Market Recap

With broad expectations for an impending rate pause and mounting probability of a US recession, ‘bad news (on the economy) is bad news (for markets)’ seems to be the current underlying theme. In May, the New York Federal Reserve (Fed) recession probability indicator points to a 68% probability of a recession over the next twelve months, up from the 58% just a month ago.

With that, major US indices reacted negatively to the significantly lower-than-expected US consumer sentiment data (57.7 versus 63 forecast) to end last week, although a last-hour paring of some losses still suggest the bulls putting on a fight. With consumer spending accounting for two-thirds of the US economy, the consumer sentiment index is generally looked upon as a gauge of economic conditions ahead. Sharp declines in the consumer sentiment index tends to precede a recession, so if the decline continues over coming months, this may support higher recession risks.

Falling market breadth suggests that indices’ performance continue to be heavy lifted by the big tech. Any signs of economic resilience may be on the lookout this week to support more broad-based strength. For now, the rush to relieve pressures on US regional banks continues, but downbeat performance in the financial sector suggests that investors remain unconvinced. The race against time for the US debt ceiling lingers as well, but at least some progress is being made with intensive talks in place.

For the S&P 500, it remains forced into a phase of indecision for now, as it hovers near its year-to-date high. Any breakout could further reinforce its upward trend by forming a new higher high, leaving the 4,200 level as a key resistance to overcome. On the downside, the key psychological 4,000 level will be on watch as a key support confluence.

Asia Open

Asian stocks look set for a mixed open, with Nikkei +0.49%, ASX -0.21% and KOSPI -0.69% at the time of writing. The sharp moderation in China’s economic surprise index since the start of the month suggests that economic data are turning in less optimistic than before, which puts some doubts on markets’ reopening bets. Base metals such as copper, aluminium, nickel and zinc have reacted strongly to the downside towards the end of last week, pushing to lower lows on a shaky demand outlook from China.

Further economic data will be on watch this week to revive any confidence. A low base effect from April last year may beautify the upcoming year-on-year (YoY) numbers significantly, with broad expectations for retail sales to come in at 20.1% from previous 10.6%, while industrial production may come in at 10.1% (from previous 3.9%). But with the low-base effect being a known fact, the extent of any upside (or downside) surprises may be what markets are watching for.

For now, the China A50 index continues to trade in a range, seemingly setting its sight to retest the lower consolidation base at the 12,800 level. Any breakdown of the level could pave the way to retest the 12,300 level next.

On the watchlist: US dollar at one-month high

Weaker-than-expected US consumer sentiment data and some persistence in five-year consumer inflation expectations triggered an upmove for the US Dollar last week, with the dollar overcoming a key downward trendline resistance and its 50-day moving average (MA). A further push in aggregate dollar positioning vs G10 into net-short territory last week provides a mixed view however, generally with a move into net-long territory providing confirmation for a renewed upward trend from past occasions.

Therefore, while building moving average convergence/divergence (MACD) points towards upward momentum in the near-term, much still awaits to be seen if this is the start of a bull trend. Ahead, the 103.12 level will be on watch as the next level of resistance, where a support-turned-resistance coincides with the upper edge of the Ichimoku cloud. On the downside, the 100.50 level remains as a key support to hold.

Friday: DJIA -0.03%; S&P 500 -0.16%; Nasdaq -0.35%, DAX +0.50%, FTSE +0.31%