May Week 4, Looking Back and Looking Forward

Pre-Holiday Trading: Debt-Ceiling Optimism Drives Risk Asset Rally

Looking forward to the next week, the week is expected to begin on a relatively calm note, with public holidays in the UK and US resulting in the closure of key trading hubs on Monday. Low-liquidity sessions can be both quiet and volatile, as a small catalyst can have a significant impact on less actively traded markets. However, the optimism surrounding the debt-ceiling being raised has led to a strong rally in risk assets, including the Nasdaq and S&P 500, ahead of the long weekend. Additionally, the week ahead holds key economic data releases, such as final PMI data for Asia, Europe, and the US, as well as crucial inflation data for Australia, influencing market sentiments.

Market Concerns Ease as Debt-Ceiling Talks Show Progress

Looking back to May week 4, the first half of the week witnessed prolonged discussions on raising the debt ceiling, leading to growing concerns in the equity markets. The S&P 500 even experienced a decline, hitting a 6-day low before finding support around 4100. However, as the week progressed, reports emerged suggesting that a deal to raise the debt ceiling was imminent, which restored optimism among investors. Consequently, Wall Street recorded significant gains on Friday, buoyed by the prospects of a resolution on the debt-ceiling issue. Stronger US data further contributed to market optimism, increasing the likelihood of a 25bp Fed hike.

Impact of Public Holidays: Lower Volumes, Potential Volatility

Monday's public holidays in the US and UK, although not direct trading events are expected to impact the markets. The closure of key exchanges and lower trading volumes, particularly in forex and some futures markets, may lead to reduced volatility and limited economic data releases. However, the lower liquidity environment can also create heightened volatility if a significant macro event occurs. One potential theme that traders will closely monitor is the outcome of the debt-ceiling negotiations, assuming they are not resolved before the weekend.

S&P Bears Under Pressure Amid Debt-Ceiling Optimism

The high level of bearish bets on the S&P 500 is facing potential challenges as hopes for raising the debt ceiling gain credibility. Net-short exposure on the S&P 500 reached a 12-year high last Tuesday, making the bears vulnerable to a short-covering rally. With the S&P 500 approaching its year-to-date high and the crucial level of 4200, bullish momentum could intensify as bearish investors scramble to minimize losses and contribute to upward price movements.

Focus on US Employment Data and Australian Inflation Report

Traders and investors continue to closely monitor US employment data and economic figures as the possibility of a June Fed hike gains traction. Key data points, including JOLTS job openings, Challenger layoffs, and the ADP employment report, will be released before the eagerly anticipated Nonfarm payroll report on Friday. Positive figures in these employment indicators are likely to support the perception of a tight job market, favoring the US dollar and strengthening expectations for further rate hikes. Additionally, the upcoming Australian inflation report holds significance, following the Reserve Bank of Australia's recent rate hike decision and their focus on inflationary pressures.