Dow Jones, Hang Seng, ASX 200 Outlook: Strong PMI Data Buoys Markets

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DOW JONES, HANG SENG, ASX 200 INDEX OUTLOOK:

  • Dow Jones, S&P 500 and Nasdaq 100 indexes closed +0.36%, -0.08% and -0.61% respectively
  • US Markit manufacturing PMI reading came in at 61.5, beating a baseline forecast of 60.2
  • US core PCE price index dominates the economic docket this week as inflation concerns weigh on market sentiment

US Markit PMIs, Inflation, Bitcoin, HSI Rebalancing, Asia-Pacific Week-Ahead:

The Dow Jones index closed modestly higher on Friday as investors applauded upbeat US manufacturing and service PMI readings, which boosted reflation optimism. The Nasdaq 100 index lost 0.6% however as investors rotated out of growth and into value in the face of strong economic readings.

The flash Markit US Composite PMI Index came in at 68.1, a big leap forward from April’s reading of 63.5. This also marks a record high for the gauge, pointing to a full-blown recovery in the US economy. It is worth noting that the service PMI gauge soared to 70.1 in May, up from 64.7 a month ago as the reopening of non-essential businesses boosted demand for services.

The report highlighted that “the rate of expansion was unprecedented” and “goods producers and service providers alike noted strong … activity growth midway through the second quarter”. The Composite PMI gauge shows a historically strong correlation with US GDP growth, hinting that the economy may be expanding at an accelerated pace (chart below).

Businesses are concerned about rising cost burdens due to raw material shortages, wage increases and efforts to stockpile. The resulting higher output prices may eventually be passed through to end consumers, boosting inflation in the months ahead.

Across the Atlantic, the Euro area also registered stronger-than-expected PMI readings, with expansion in the service sector quickening in early May. This painted a rosy picture of economic recovery as vaccine rollouts helped to heal the pandemic’s impact.

Looking ahead, the RBNZ interest rate decision leads the economic docket alongside US GDP and corePCE data this week. Find out more from the DailyFX calendar.

HIS Markit Composite PMI and US GDP

Source: Trading Economics

Asia-Pacific markets look set to kick off the week in a mixed mood. Futures in Japan, South Korea, Singapore and Thailand are modestly higher, whereas those in Australia, Hong Kong, Taiwan, Malaysia and India are in the red. Lingering inflationary pressure and viral concerns may continue to dampen sentiment in risk assets across the Asia Pacific region.

Bitcoin led the decline in cryptocurrencies over the weekend, falling 7.6% to around $ 34,600 on Monday morning. This came after Chinese and US authorities tightened regulation and tax compliance on digital tokens last week. The Treasury Department announced on May 20th that it will require any transfer in cryptocurrencies over $10,000 to be reported to the IRS to avoid tax evasion and contain illegal activity. The price of Bitcoin has fallen almost 50% from its all-time high seen in mid-April. Debate surrounding Main Street adoption and regulatory headwinds may continue to drive volatility.

The Hang Seng Index (HSI) will add 3 new constituents to its basket starting on June 7th. Those are electric vehicle producer BYD, solar panel glass manufacturer Xinyi Solar and property management firm Country Garden Services. The index is moving towards expanding its current holdings of 55 to 80 by mid-2022. The rebalance will bring down the weighting of Tencent, AIA and HSBC to 8% from 10% as a new cap rule is applied. The weight of AlibabaGroup will increase from 5% to 7.3%.

Looking back to Friday’s close, 6 out of 9 Dow Jones sectors ended higher, with 56.7% of the index’s constituents closing in the green. Industrials (+1.21%), financials (+1.19%) and materials (+0.84%) were among the best performers, while information technology (-0.32%) trailed behind.

Dow Jones Sector Performance 21-05-2021

Source: Bloomberg, DailyFX

Dow Jones Index Technical Analysis

The Dow Jones index hit the 200% Fibonacci extension level (34,920) and has since pulled back slightly. Prices remain within an “Ascending Channel” formed since early November, the ceiling and the floor of which serve as key support and resistance levels respectively. Bearish MACD divergence suggests that a technical correction may be underway.

Dow Jones Index Daily Chart

Hang Seng Index Technical Analysis:

The Hang Seng Index (HSI) breached below an “Ascending Channel” and has since entered a consolidative period over the last two weeks (chart below). The index is challenging the 50-day SMA line for an attempt to reverse its downward trajectory. A successful attempt may open the door for upside potential with an eye on 28,910 (the 61.8% Fibonacci retracement). The MACD indicator is about to form a bullish crossover beneath the neutral midpoint, suggesting that bullish momentum may be building.

Hang Seng Index Daily Chart

ASX 200 Index Technical Analysis:

The ASX 200 index pulled back from record highs after a failed attempt to breach the 261.8% Fibonacci extension level at 7,126. Prices have also breached below a “Rising Wedge”, hinting at further downside potential with an eye on 6,920 (the 50-day SMA) for support. The MACD indicator formed a bearish crossover and trended lower, suggesting that upward momentum may be fading.

ASX 200 Index – Daily Chart

— Written by Margaret Yang, Strategist for DailyFX.com

To contact Margaret, use the Comments section below or @margaretyjy on Twitter