The month of April was a good one for equity markets. U.S. stocks saw big advances, and both the Nasdaq Composite and S&P 500 benchmarks briefly hit new all-time highs, exceeding the previous record peaks from August-September of last year.
In other key markets, government bond yields generally rose off their late March lows as strongly positive U.S. economic data boosted the case for more hawkishness from the Federal Reserve than we've been seeing lately.
The same dynamics pointing to a stronger economy than previously expected helped continue the push to the upside for the U.S. dollar. In April, the U.S. dollar index hit nearly a two-year high.
At the same time, that dollar strength in conjunction with surging equity markets helped to extend the down-move for gold prices. Since its February peak, gold was down nearly 5% as of the end of April.
Finally, China markets continue to be in focus as the U.S.-China trade deal appears very close to a resolution. The benchmark Shanghai Composite began April with a bang, but fell back sharply towards the end of the month.
Going forward into the month of May and beyond, the key macro themes will continue to be U.S. and global economic growth, the Fed's monetary policy trajectory (though there won't be another FOMC meeting until mid-June), U.S. dollar strength and a potential U.S.-China trade deal.
Here, we bring you our monthly '5 Important Charts to Watch' – markets and instruments that will likely be impacted significantly in May by the factors noted above.
Nasdaq Composite Index
The Nasdaq Composite is a major benchmark U.S. index with a heavier weighting towards technology stocks than its other large-cap counterparts. As noted above, the Nasdaq Composite hit a new record high in April around 8176. While the first few days of May saw a pullback for the index, a big rally on May 3rd has almost pared those losses.
On a longer-term basis, Nasdaq is in a clear and strong uptrend from its late-December lows. The index broke below that trend slightly in the very beginning of May, but should be poised to regain the trendline shortly if the bull run continues.
While we could see a pullback occur in May, momentum is clearly to the upside. If and when the index makes a new all-time high, we could see an acceleration of that upside momentum.
U.S. 10-Year Treasury Yield
Late March saw a long-term trough for the U.S. 10-Year Treasury Yield that reached as low as 2.34%. Not since December 2017 had this benchmark government bond yield fallen to such a low level.
In April, however, yields rose off those lows in part due to strongly positive economic data. With any more upbeat signs for the economy, a Fed interest rate cut may become less of a factor, and yields could continue to rise. During the May 1st FOMC announcement, Fed Chair Jerome Powell appeared to discourage speculation over rate cuts on the horizon.
If this continues to be the case, and the economy continues on its path, yields could recover back up towards the 2.80% level. A key wildcard here, however, remains the inflation outlook. With persistently low inflation readings, despite surging economic growth, yields could remain low for the foreseeable future.
U.S. Dollar Index
The U.S. dollar index is a widely-used gauge of dollar strength that compares the value of the greenback against a basket of currencies, of which the euro occupies the greatest proportion.
Despite a halt to Fed rate increases that began early this year, the dollar has continued to gain momentum on strengthening U.S. economic data, a falling euro, and other key macro factors. Since early 2018, the dollar index has risen steadily in a sharp bullish trend.
If the U.S. economy remains on the upswing, and the Fed refrains from getting too dovish, the dollar index could soon be poised to make a new two-year high above April's 98.30-area highs.
As of early May, gold continues to decline in a well-formed downtrend from its February highs. The combination of a rising U.S. dollar and strong equity markets has helped to pressure the precious metal.
Since gold is typically denominated in U.S. dollars, it is generally inversely correlated with the value of the greenback. And as a safe-haven asset, gold has seen a decrease in safety flows as equity markets show rising risk appetite among investors.
With any continuation of these two factors – a rising dollar and rising stocks, gold could see further downside. Currently, the price of gold has descended to a key uptrend line extending back to the August 2018 low. With any breakdown below this line, gold could potentially fall towards its 200-day moving average and the $1240 support area once again.
Shanghai Composite Index (SSEC)
The Shanghai Composite is China's most prominent benchmark equity index. It comprises all stocks traded on the Shanghai Stock Exchange, which is the largest equity exchange in the country.
As noted above, the Shanghai Composite began April with a bang, but fell back sharply towards the end of the month. As of early May, the index has fallen to hit its 50-day moving average.
The U.S. and China currently appear very close to striking a major trade deal. China likely stands to benefit more than the U.S. from such a deal. Therefore, any positive developments in these critical talks could prompt an extended rally for Chinese stocks after the current pullback.
Overall, the Shanghai Composite continues to trade within an uptrend from the early January lows. Assuming it does not fall far below its 50-day moving average, the index could be poised to recover from the pullback and extend that uptrend to higher highs.