Shares in the next week will run a gauntlet of data expected to indicate a slowing economic recovery, but a few positive reports may prove enough to draw investors into a market accustomed to negative sentiment. Equity markets managed to pare losses by the end of the week, following a raft of mostly negative economic data including higher jobless claims, weaker-than-expected first-quarter economic growth, and a slump in pending home sales. One bright spot in economic data on Friday came from an increase in consumer sentiment for May. The fact the market has held in light of weak data is in itself a positive indication.
Small gains on both Thursday and Friday leading into Monday’s Memorial Day holiday weekend helped the major indexes trim weekly losses. The Dow Jones Industrial Average fell 0.6% for the week to close at 12,441.58, and the S&P 500 Index declined 0.2% to finish at 1,331.10, logging the fourth straight week of losses for both exchanges. The Nasdaq Composite Index fell 0.2% for the week to close at 2,796.86, its second weekly loss in a row. Because of the impressive bullish run of recent weeks, we expect a moderate pullback in the face of negative news.
Economists expect fewer nonfarm payrolls added in May compared with the 244,000 added in April, and a decline in the Chicago PMI. We are looking for the S&P 500 to close above 1,343 for a few sessions, without reverting lower, as an indication that equity markets are breaking free from the sluggishness of the past month. We also have a positive seasonal and end-of-the month bias going into next week and believe Chicago PMI data and consumer confidence data will be the key numbers and drivers. Economists expect consumer confidence to rise slightly for May compared with 65.4% in April.
Today’s Important Economic Announcements (GMT)
12:30 PM CAD GDP m/m
12:30 PM CAD Current Account
11:30 PM JPY Household Spending y/y
11:50 PM JPY Prelim Industrial Production m/m
Forex & Commodities Technical Analysis
The British Pound has been somewhat of an anomaly among the major currencies since the beginning of the month. While the majority of its counterparts fell in with broad-based trends in investors’ risk appetite, the UK unit remained uniquely focused on domestic matters, with traders most concerned about how the Bank of England will resolve the conflicting objectives of capping the sharp surge in inflation while keeping the fragile economy from slipping back into recession. Needless to say, the central bank has proven willing to remain accommodative despite uncomfortably high CPI growth rates, opting to make growth the policy priority. The economic data set due for release in the week ahead promises to reinforce the status quo, putting the Pound on the defensive. These points to further downward pressure on BOE rate hike bets, keeping a firm lid on the Pound.
Stop Loss: 1.6514
Take Profit: 1.6388
The Yen fought back against the U.S. Dollar this week, gaining a shade over 1.00 percent, as the currency fell below the 81.00 exchange rate once again. The last time the Pacific Rim nation’s currency closed at such a rate was back on May 17. The data out of Japan this past week was relatively unremarkable, as it had very little impact on moving Yen-crosses, nor was there any data that is historically considered to be market moving. The only reports that were of interest to the markets came in near expectations – the National CPI reading, and the retail trade reading – such that underlying market trends overpowered the two key releases out of Japan this week. It is important to note that if the USD/JPY pair exchange rate drops below 80.00, there will likely be rampant speculation about a potential coordinated intervention on behalf of a weaker Yen. Our daily target is set at the 80.50 level.
Stop Loss: 81.00
Take Profit: 80.50
The Canadian Dollar’s exchange rate to its US namesake remains closely correlated with the S&P 500. The relationship makes sense. Broadly speaking, the benchmark stock index represents investors’ collective earnings outlook for the world’s top companies, making it a de-facto proxy for global economic growth. Meanwhile, Canadian economic growth (and thereby the path of its monetary policy as well as the currency) is firmly anchored to trends in US demand considering some 80 percent of the country’s wares are exported to its southern neighbour. BOC Governor Mark Carney’s protested against early tightening amid concerns that such action would bid up the exchange rate and crush exports. This suggests traders are clearly unconvinced that rate hikes are not a near-term prospect and the currency likely to find its way higher. We are bullish with caution.
Stop Loss: 0.9773
Take Profit: 0.9743
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