S&P 500 and Dow Jones Hit Fresh Records on Strong Data

US equities rallied yesterday, with the S&P 500 and the Dow Jones hitting fresh record highs as US economic data continued to come on the strong side. On Friday, NFPs surged by 916k, while yesterday, the ISM non-manufacturing PMI hit an all-time high. As for today, during the Asian session, we had an RBA monetary policy decision, but the Bank refrained from acting or hinting that it could do so soon.

EQUITIES RALLY POST-HOLIDAY ON STELLAR US ECONOMIC DATA

The US dollar fell against all the other G10 currencies on Monday and during the Asian session Tuesday. It lost the most ground versus CHF, GBP, and AUD in that order, while it underperformed the least versus SEK.

The strengthening of the safe-haven franc suggests that markets traded in a risk-off fashion yesterday and today in Asia, but the strengthening of the risk-linked Aussie points otherwise. Thus, in order to get a clearer picture with regards to the broader market sentiment, we prefer to turn our gaze to the equity world. EU markets remained closed in celebration of the Easter Monday, while in the US, all three of Wall Street’s main indices gained more than 1.0%, with the Down Jones and the S&P 500 hitting fresh record highs. Investors’ appetite softened during the Asian session today. Although China’s Shanghai Composite and South Korea’s KOSPI inched up 0.07% and 0.20% respectively, Japan’s Nikkei 225 fell 1.30%.

In our view, the rally in US stocks may have been the result of strong US economic data. On Friday, nonfarm payrolls for March surged by 916k, while the unemployment rate slid to 6.0% from 6.2%. Yesterday, the ISM non-manufacturing PMI surged to 63.7 from 55.3, its highest level ever, highlighting that the world’s largest economy is recovering from the damages of the COVID-19 pandemic at a very fast pace. However, Treasury yield failed to gain, and instead retreated somewhat, something that weighed on the US dollar.

In our view, this may have been due to market participants digesting that the robust economic recovery in the US is unlikely to lead to high inflation and monetary policy tightening. Yes, the Fed has projected that inflation could rise above 2% this year, specifically the forecast is at 2.4% yoy, but they clearly said that this would likely to be temporary. An inflation rate above 2% for some time, which is their goal for the beginning of normalization, is not expected until in the years after 2023. On top of that, Fed Chair Powell made it clear that it is too early to start discussing tapering QE, while the latest “dot plot” pointed to no rate hikes, even in 2023.

All this comes in line with our view that inflation fears are likely to continue to ease, which could allow equities and other risk-linked assets to continue trending north. At the same time, safe havens, like the yen and the franc, may come back under renewed selling interest. As for the dollar, that’s the tricky part. Sometimes, it has been strengthening on signs of a fast recovery in the US, while other times, it’s been pulling back when Treasury yields do so as well. With its recent performance pointing to no clear direction, we prefer to stay sidelined for now with regards to the greenback and wait to see how traders will eventually decide to treat it.

Overnight, during the Asian session today, we had an RBA monetary policy decision, with the Bank deciding to keep its interest rate and the target of its 3-year government bond yields unchanged at 0.10%. They also kept untouched the parameters of the Term Funding Facility and the government purchase program untouched. In the accompanying statement, officials repeated that the economic recovery in Australia is well underway and that it is stronger than had been expected. However, they added again that wage and price pressures are subdued and are expected to remain so for some years, which means that they are unlikely to start thinking normalization any time soon. That said, they are unlikely to ease policy further either as they maintained their optimism with regards to the economy and as they did not appear much worried with regards to the Aussie’s trading levels. They just said that the Australian dollar remains in the upper end of the range of recent years.

The currency did not react at the time of the release, suggesting that with the RBA now seen sidelined for the months, or even the years, to come, its broader direction is likely to depend on the overall market sentiment. Given that we see the case for further improvement, we believe that the Aussie is likely to perform relatively well, at least against the safe havens, like the Japanese yen.

NASDAQ 100 — TECHNICAL OUTLOOK

Nasdaq 100 continues grind higher, while balancing above a short-term tentative upside support line taken from the low of March 31st. Given the recent steep upmove, this morning the cash index is already correcting slightly lower. That said, if the above-mentioned upside line holds, we could see another move higher. Hence our positive approach for now.

As mentioned above, the index may drift a bit lower, but if the buyers take advantage of the lower price somewhere near the aforementioned upside line, Nasdaq 100 could end up traveling north again. If it is able to overcome the current highest point of April, at 13631, this will confirm a forthcoming higher high and send the index to the 13731 obstacle, or to the 13789 hurdle, marked by the high of February 17th. If the buying doesn’t stop there, the next possible target might be at 13908, marked by the highest point of February.

Alternatively, if the previously discussed upside line breaks and the price falls below the 13401 hurdle, marked by the high of April 2nd, that could spook new buyers from the field temporarily. Nasdaq 100 might drift to the 13313 obstacle, a break of which may lead to the 13171 zone, marked by the high of March 31st. The slide might get halted there for a bit, but if there are still no new buyers in sight, the price could continue drifting south, potentially targeting the 13020 level, marked by the high of March 29th.

AUD/JPY — TECHNICAL OUTLOOK

Although AUD/JPY is still trading above a short-term upside support line taken from the low of March 24th, it remains below one of its key resistance barriers, at 84.48, marked near the highs of March 31st and April 2nd. There is a good chance the rate may continue drifting north, however, to get a bit more comfortable with that idea, a push above that barrier would be needed. We will remain positive for now.

If, eventually, the pair rises above that barrier, at 84.48, this will confirm a forthcoming higher high, potentially clearing the way for further advances. AUD/JPY might travel to the 84.73 obstacle, a break of which could set the stage for a move to the 85.09 level, marked by an intraday swing low of March 18th.

On the other hand, if the previously discussed upside line breaks and the rate falls below the 84.00 territory, marked by the low of April 2nd, this might attract a few more sellers into the game. AUD/JPY may then drift to the 83.69 obstacle, a break of which might lead the pair to the current lowest point of April, at 83.43, or to the 83.33 level, marked by the low of March 29th.

AS FOR THE REST OF TODAY’S EVENTS

During the European session, we get Eurozone’s unemployment rate for February and the Sentix Investor Confidence index for April. The bloc’s unemployment rate is forecast to have held steady at 8.1%, while the Sentix index is anticipated to have risen to 7.5 from 5.0.

Later, in the US, we have the API (American Petroleum Institute) report on crude oil inventories for last week, but as it is always the case, no forecast is available.

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