Wall Street finished lower, with Nasdaq snapping a four-day winning streak, while Dow ended the month in the red, and S&P 500 pulled back from a 9-month high. The AI-powered tech rally lost steam as Nvidia fell 5% and AMD slid 6% after a one-week surge. Risk sentiment is in check as investors are eyeing the House vote on the debt ceiling bill.

On the economic front, The US Jolts job openings unexpectedly rose above 10 million after a two consecutive monthly decline, suggesting the labor markets may stay tight, and inflation could remain above the Fed’s targeted level for longer. The Fed Governor Philip Jefferson signalled a rate hike pause in June but likely more hikes afterward.

Overall, risk-off guided the last trading day in May as haven assets, such as gold, bonds, the Japanese Yen, and the US dollar index, all finished higher, while risk assets, including crude oil and commodity currencies, all slumped following China’s disappointing manufacturing PMI data. The world economy is certainly not healthy, with a recession risk mounting in the US, faltering China’s economic rebound, and stagnation in the EU. A possible selloff may start to set once the AI euphoria faded off in May, though Nasdaq was up 7% in the month and rose 24% year-to-date.

Asian markets all ended in the red on Wednesday as sentiment soured amid China’s weaker-than-expected economic data. Australian monthly CPI for April was much higher than expected, sparking concerns for more rate hikes by the RBA, dragging the ASX down. Futures are pointing to a lower open across Asia, with ASX 200 futures down 0.18%, the Hang Seng Index futures down 0.20%, and Nikkei 225 slipping 0.29%.

Price movers:

7 out of 11 sectors in the S&P 500 finished lower, with energy and financials leading losses, down 1.88% and 1.14%, respectively. Notably, the rally on technology stocks took a breather, down 1%. And the defensive sectors, including consumer staples, healthcare, and utilities, were higher as investors sought safety. Real estate also climbed due to a slump in rates.
The artificial intelligence tech company, C3.ai’s shares tumbled 20% despite a beat on earnings expectations. The company provided less rosy-than-expected revenue guidance of between US470 million and $72. million for the current quarter. Its shares soared more than 160% in May amid the prevailing AI euphoria.
The Chinese offshore Yuan weakened to the lowest level against the US dollar since November 2022, with USD/CNH rising to 7.12.  The recent disappointing Chinese economic data and the geopolitical tension between the US and China continued to shift funds out of the world’s second-largest economy.  
Crude oil accelerated falling for the second straight trading day, reflecting the deteriorated economic outlook. WTI futures tumbled 2.7%, heading towards an 18-month low of above US$63 per barrel.
Gold extended gains on risk-off sentiment, despite a strengthened USD. However, the precious metal still faces technical resistance of about 1 990 as the double-top pattern is still in play.

ASX and NZX announcements/news:

Fonterra announced Anna Palairet as acting Chief Operating Officer (COO) to replace the current COO Fraser Whineray.

Today’s agenda:

Australian Q1 private capital expenditure.
China Caixin Manufacturing PMI. 

Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

Recently, semiconductor giant Nvidia hit new all-time highs thanks to its concerted efforts towards establishing a niche in artificial intelligence. This seems to have also ushered in a bull run as the Nasdaq is up almost 30% year-to-date. While bullish investors and traders welcome this rally with open arms, critics are calling this the calm before the storm as they bring up the concern of valuations. During times of euphoria and emotion-driven stock rallies, it’s important to fall back on key financial metrics so investors and traders are aware of the fundamentals that the stocks are growing upon.

One such metric is the price-to-earnings (PE) ratio, which provides insights into a company’s valuation relative to its earnings. For many investors and traders, understanding the significance of a good PE ratio is crucial for identifying potentially lucrative opportunities.  In this article, we will delve into the world of PE ratios, examine both high and low PE ratio stocks and highlight the factors that influence them.

What is PE Ratio

Also known as the price multiple or earnings multiple, the PE ratio is calculated by dividing the current market price of a stock by its earnings per share (EPS). It serves as a valuation metric, reflecting how much investors are willing to pay for each dollar that a company earns.

When it comes to basic valuation assessment metrics, the PE ratio is the go-to metric for analysts to quickly gauge if a security is undervalued or overvalued based on how much the company is earning as per its annual net profits. In a nutshell, the PE ratio offers insights into investors’ expectations and sentiments regarding a company’s prospects. For many old-school investors, the PE ratio is an essential valuation metric for comparing different stocks within the same industry or across sectors. By analysing high and low PE ratio stocks, investors can gain valuable insights into the market’s perception of a company’s growth potential and overall performance.

PE Ratio Formula & Calculation

The PE ratio of a company is calculated by dividing the current market price of a stock by its earnings per share (EPS). To calculate a company’s PE ratio, make use of the following PE ratio formula: PE Ratio = Market Price per Share / EPS

Let’s take Apple Inc.’s current market price and EPS as an example using its most recent quarterly data.

Apple Inc. (AAPL) Share Price = $177.30

EPS = 1.52 + 1.88 + 1.29 + 1.2 = 5.89

PE Ratio = Market Price per Share / EPS

= 177.30 / 5.89

= 30.10

Now that we have AAPL’s trailing-twelve-month (TTM) PE ratio of 30.10, we know that this figure implies Apple is currently trading at a premium of 30 times its weighted average earnings. With that understood, let’s now take a look at variations to the PE ratios we’re used to.

PE Ratio Variations

Forward PE Ratios

Forward price-to-earnings ratio (FPE) is an evaluation tool used to measure the value of a company’s stock in relation to its current earnings. It is calculated by dividing the current stock price by the company’s forecasted earnings over the next 12 months. In essence, FPE ratios, like other price-to-earnings ratios, look at the potential rate of return on investment that an investor can expect when buying a particular stock. However, unlike other PE ratios, FPE ratios do not consider the company’s past performance or its historical levels of profitability. This makes the FPE ratio particularly useful for making short-term investments and evaluating stocks with high growth potential.

PEG Ratios

Like PE ratios, the Price/Earnings-to-Growth (PEG) ratio is a way for investors to assess the value of stocks through the lens of a company’s earnings growth rate. It takes into account the company’s expected earnings growth rate in addition to its PE ratio. By using both the PE ratio and the expected growth rate, PEG provides a more accurate representation of a stock’s current valuation relative to its future performance. It offers a better look at whether a company’s stock is undervalued or overvalued when compared to its sector peers. However, it should be noted that PEG ratios aren’t always reliable since the accuracy of this metric depends heavily on how accurately analysts can predict the company’s future growth rates

What is a Good PE Ratio?

Now that we have discussed how to calculate the PE ratio, it’s essential to understand what constitutes a good or bad PE ratio. A good PE ratio should be lower than its industry peers and the overall market average. As such, investors should compare different stocks within the same sector or across other sectors to gauge whether the PE ratio is low enough to constitute a potential buying opportunity. In this instance, we should look at similar big tech companies like Alphabet (NASDAQ: GOOGL) and Microsoft (NASDAQ: MSFT). With GOOGL’s PE ratio of 27.92 and MSFT’s PE ratio of 35.90, we can see that AAPL shares can be considered a decent buy compared to MSFT. On the other hand, Apple may seem overvalued when pitted against Alphabet.

All in all, while deciding whether something is a buy or sell goes beyond PE ratios, it’s a handy metric to keep in mind when determining whether a stock is undervalued or overvalued when compared to its peers. With this covered, our next seciton will look into what investors and traders should account for when looking at high and low PE ratio stocks.

Interpreting Stocks With High PE Ratios: Good or Bad?

Although some investors might immediately decry stocks with high PE ratios as ‘bad’ and ‘overvalued’, that isn’t always the case. Here’s what investors and traders need to take away when researching companies with high PE ratios:

Growth Expectations

A high PE ratio typically suggests that investors are optimistic about a company’s future growth prospects. It indicates that the market anticipates higher earnings growth and is willing to pay a premium for the stock. High PE ratio stocks are often associated with companies operating in fast-growing industries or those with innovative products and services. Examples include Tesla (NASDAQ: TSLA) and Nvidia (NASDAQ: NVDA), both of which are hugely popular stocks that tout the potential to revolutionise the world with their technology. From self-driving robotaxis to a world run by artificial intelligence, these stocks possess astronomical growth expectations. As such, this is reflected in their high PE ratios and market capitalisation.

Market Sentiment

Market sentiment plays a crucial role in determining a stock’s PE ratio. During periods of optimism, investors may be willing to pay higher multiples for stocks, leading to elevated PE ratios. However, it is essential to consider the underlying fundamentals and industry trends to assess if the high PE ratio is justified. An example would be during the 2020 bull market when plenty of tech stocks possessed sky-high PE ratios as investors and traders bought in because of the bullish market sentiment. At its peak, the S&P 500 reached a PE ratio of 39.9, an amount that was last seen in the early 2000s during the dot com bubble.

Industry Comparison

Comparing a company’s PE ratio to its industry peers is vital in understanding whether a high PE ratio is reasonable. Industries with high growth potential, such as technology or biotech, often command higher PE ratios. Conversely, mature and stable industries may have lower PE ratios due to their more predictable earnings. An obvious comparison would be the likes of Tesla against defensive stocks like Coca-Cola (NYSE: KO).

Evaluating Stocks With Low PE Ratios: Is It Always Good?

Undervalued: that’s the word that will immediately come to mind when discussing the long-term prospect of low PE ratio stocks. Here’s everything you need to consider when researching low PE ratio stocks and discovering if they’re truly undervalued gems.

Low for a Reason?

While a low PE ratio may present attractive investment prospects, it can also indicate possible underlying weakness. Due to a lack of growth in a company, its earnings could stagnate, signifying that it’s at risk of failing to exist in the near future. In such instances, it is vital to assess why a company has a low PE ratio and ensure that such reasoning is sound before taking any further actions. Examples of such weakness can range from being in a sunset industry and the company’s inability to grow further to failing financial health that requires a scaleback in operations.

The Essence of Value Investing

A low PE ratio may indicate that a stock is undervalued or out of favour with investors. However, value investors will often seek out such stocks with low PE ratios and consider them potential bargains. A recent example would be the GameStop (NYSE: GME) short-selling saga, which started because one investor felt that the stock was heavily undervalued because of its low PE ratios and bought in with a significant position.

The Bottom Line

In conclusion, it is crucial for investors and traders to understand the nuances of PE ratios and their implications for stock valuation. In general, high PE ratio stocks often indicate optimism about a company’s growth potential. In contrast, low PE ratio stocks can present opportunities for value investors. By understanding this, investors and traders can quickly perform a surface-level analysis of a company and understand the relative value of its shares to its peers. On top of this, investors can also conduct comprehensive research and compare ratios to make the most informed decision when assessing their buying and selling decisions.

Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

European markets have undergone a slow start to the month after yesterday’s sell-off, as attention switches away from the US debt ceiling, and towards the broader economic outlook, and increasing evidence that inflation is slowing sharply.

Europe

The FTSE100 has edged higher with a rebound in copper prices helping to support the miners. Other strong performers are the likes of surgical equipment group ConvaTec, after an upgrade from Morgan Stanley, while B&M European Retail has continued its gains from yesterday, pushing up to 13-month highs.

Amongst some of today’s biggest fallers have been National Grid and Severn Trent after both stocks went ex-dividend, while continued weakness in luxury is weighing on the CAC 40

Auto Trader shares are also under pressure after seeing operating profits decline by 9%, due to costs of £44.1m incurred as a result of the Autorama acquisition. Today’s full year results showed solid revenue growth of 16%, as group revenue rose to £500.2m, however the reluctance to raise guidance after a decent rebound from last year’s lows is prompting some share price weakness.

Dr Martens shares haven’t had a good time of it of late, and the pain continued today, after investors reacted to a miss on profits.

Today’s full year results were expected to see revenue to rise to £1bn, which is still a respectable improvement on last year’s £908m, however net profits fell short of the £140m estimate, coming in at £128.9m. This was due to a £3.9m impairment charge, as well as a £10.7m hit in relation to FX effects on euro bank debt.

On current trading management have maintained revenue guidance for fiscal year 2024 to mid to high single digit growth, with H2 expected to perform better than H1.

US

After yesterday’s sharp falls US markets have opened slightly lower with the latest May ADP payrolls report and weekly jobless claims still pointing to a resilient labour market.

ADP saw a total of 278k jobs added in May, well over the 170k predicted while jobless claims remained low at 232k.

In a sign that consumer discretionary spending is slowing in the US, we’ve seen both Macys and Dollar General cut their guidance for the rest of the year, citing evidence that demand trends have weakened, and that the macroeconomic environment is becoming more challenging, sending the shares in both sharply lower.

Target shares are also getting clipped on the back of a downgrade from JPMorgan who have cited similar trends to those being cited by Macy’s and Dollar General.  

The AI rally already looks as if it’s run out of road with sharp falls in the NVidia share price yesterday after peaking at $420 earlier this week, while C3.ai shares also slipped back yesterday, and are also plunging today, after reporting disappointing forecasts for the upcoming financial year.

Q4 revenues were able to beat forecasts coming in at $72.4m, however its predictions for Q1 were disappointing, targeting a range of $70.5m to $72.5m, with a full year forecast of between $295m and $320m. Full year adjusted net losses are expected to improve slightly with only a modest improvement to -$35m.  

Salesforce shares have been on a slow road to recovery after hitting their lowest levels since March 2020, back in December last year, closing at one-year highs yesterday, but have slumped sharply today after keeping full year guidance unchanged.  

When the company reported in Q4, the outlook for Q1 revenues was estimated at $8.16bn to $8.18bn, which was comfortably achieved with $8.25bn while profits also beat, coming in at $1.69c a share. For Q2 the company raised its revenue outlook to $8.51bn to $8.53bn while keeping its annual 2024 revenue guidance unchanged at a minimum of $34.5bn, a decent increase from 2023’s $31.35bn.

Broadcom shares have been on a decent run of late, boosted by optimism that strong demand for its variety of end markets including hyperscale data centres, service providers, and enterprise customers will continue. For Q2 revenues are expected to slow modestly from Q1 levels to $8.72bn, along with profits of $10.16c a share. These past few days have seen the shares hit record highs after the company signed a billion-dollar multiyear deal with Apple for 5G radio frequency components for the iPhone. It also got a lift from Nvidia’s blowout earnings numbers as well.   

FX

It’s been a choppy session for currencies with the US dollar seesawing as a result of today’s economic numbers. A strong ADP payrolls report for May saw yields push higher, however this move proved short-lived after a weaker than expected Q1 unit labour costs report saw yields slide and the greenback move back to the lows of the day, with the move accelerating after ISM prices paid slid sharply in May to 44.2.  

Along with this morning’s EU CPI report there is increasing evidence that inflation is starting to slow sharply, after May core CPI fell back more than expected, from 5.6% to 5.3%. While in itself it doesn’t suggest that the ECB will stop hiking rates it does suggest that the upcoming hikes are likely to be of the 25bps variety, and will be fewer than expected.

The pound is performing slightly better than its peers moving to within touching distance of the 1.2500 level against the US dollar and a 2-week high, despite similarly weak economic data today.

Commodities

Crude oil prices have rebounded from 4-week lows ahead of this weekend’s OPEC+ meeting, with the outside risk that oil ministers could surprise the markets with another production cut, given the recent weakness seen in prices. Despite the modest rebound being seen today there appears little appetite to drive prices significantly higher with today’s manufacturing PMI numbers still pointing to lacklustre economic activity through May. The weak numbers, along with evidence that input prices are falling sharply suggests that confidence is low when it comes to the demand outlook.

Gold prices appear to have found a short-term base in the past few days, with the recent decline in yields helping to put a floor under prices. Today’s economic numbers which show that inflation appears to be slowing is helping to push prices higher and could well see it push up to the $1,980 area.    

Volatility

Tesla’s stock has been on the up throughout May, adding around 25% over the course of the month and seeing Elon Musk regain his title of being the world’s richest person as he met with Chinese government officials on Wednesday. Yesterday’s stuttering break above the $200 mark was sufficient to lift one day vol on the stock to 101.52% against 67.75% on the month, something which is notable for an entity with such a weighty market cap.

Keeping with the sector, a somewhat different narrative was seen across CMC’s proprietary basket of stocks involved with driverless cars. Profit taking at NVIDIA – the basket’s biggest constituent – following last week’s stellar gains for the firm saw the underlying value fall back around 1.25%. One day vol stood at 37.61% against 29.43% on the month.

The Nikkei was again the most active equity index, rallying off the back of the last few days of losses. Ratification of the US debt ceiling resolution has the potential to be lending further support here in the near term, but one day volatility posted 18.29% against 14.41% for the month.

Oil prices snapped back from 4-week lows on Wednesday. We have seen support kick in around these levels on several occasions this year as it aligns with the lower end of the bracket where the US will buy up strategic oil reserves. Brent Crude proved to be the most active, with one day vol of 42.73% against 33.12% for the month.

Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

While the last few days have been dominated by concerns over the US debt ceiling, which passed its first vote obstacle overnight, yesterday’s declines in equity markets were largely driven by worries over weakness in the Chinese economy.

A slide in commodity prices, most notably copper, iron ore and crude oil was driven by a weaker than expected manufacturing PMI number, as the optimism that characterised the rebound in economic activity in the early part of this year has given way to a realisation that Chinese demand may well remain lacklustre for a while to come. It’s not as if the signs of a weakening Chinese economy haven’t been there, they’ve been apparent in Chinese factory gate inflation which has been stuck in negative territory since October of last year, with the fear that this could well be coming in our general direction.

Yesterday we saw those concerns manifest themselves in some sharp slowdowns in headline PPI, as well as weaker than expected CPI inflation numbers from France, Germany and Italy. This trend may well find itself repeated in today’s flash EU CPI numbers for May, on both headline and core prices. These slowdowns in headline inflation have been largely driven by sharp declines in energy prices over the last few months, in a trend that appears to be being replicated across the board in varying degrees across continents.

Having hit a peak of 10.7% back in October EU headline inflation fell back to 6 9% in March, only to tick higher in April to 7%. The bigger question thus far has been the lack of a reaction, where core prices are concerned and here, they’ve been stickier. Core prices hit a record high of 5.7% in March, and only slipped back to 5.6% in April. If this trend of slowing prices continues it could present a problem for the European Central Bank, with growing splits between hawks and the doves on the governing council as to how many more rate hikes we are likely to see over the next few months.

The chatter from central bank officials has been hawkish of late, with talk of more 50bps rate hikes, although yesterday’s declines in the CPI month-on-month figures have tempered some of that, prompting some euro weakness. If we see similar weakness in today’s EU core CPI numbers, in the same we saw earlier this with Spanish core CPI, then we could well see the euro slide further, as the prospect of further 50bps rate hikes melts away. Expectations are for core prices to slip back to 5.5% from 5.6%, while on the headline number we are expecting to see a slowdown to 6.3% from 7%, and on a month-on-month basis, a rise of 0.2%. 

Before the inflation numbers we have the small matter of the final manufacturing PMIs from across Europe. Last week saw the latest flash PMIs show that manufacturing activity in France and Germany remained weak, with manufacturing activity in the German economy deteriorating to the lowest levels since June 2020, when economies were still reeling from the effects of pandemic lockdowns. We also found out that the German economy was in recession after Q1 GDP was revised lower to -0.3%. Italy and Spain economic activity is also expected to see further weakness in manufacturing to 45.8 and 48, when their latest PMIs are released later today.

The UK and US, on the other hand, were able to see a modest pickup in economic activity. It is clear that manufacturing globally is in a difficult place, with yesterday’s weakness in China, as well as copper and iron ore prices, which suggests that global demand is slowing sharply. Moving on to the UK economy, we’ve started to see a modest improvement in mortgage approvals since the start of the year, after they hit a low of 39,600 back in January, as the sharp rise in interest rates at the end of last year weighed on demand for property, as well as house prices.

As energy prices have come down, along with lower rates, demand for mortgages has started to pick up again with March approvals rising to 52,000, while net consumer credit has also started to improve after similar weakness at the end of last year. Assuming the recent spike in core CPI is a one-off, and rates start to come back down again after last week’ s move higher, and inflationary pressures continue to subside we may see this trend of slowing prices continue in the coming months. This of course will depend on energy prices remaining at, or declining from their current levels, and the Bank of England signalling that it is close to being done on raising rates, something that doesn’t look likely at the moment.

On a more positive note, the MPC may well find that the Federal Reserve could come to its rescue on the rate hike front, if it signals it is close to being done when it comes to raising rates, as a dovish Fed could help keep a floor under the pound. On that score, today’s ISM manufacturing report may offer some insight, especially if that weakens in a similar fashion to yesterday’s Chicago PMI and other regional surveys. 

EUR/USD – continues to look soft as we head towards the 1.0610 area, and the next key support. We need to see a rebound above 1.0820 to stabilise.

GBP/USD – has found resistance at the 1.2450 area and the 50-day SMA for the second day in a row. Currently finding support around the 1.2300 area with further support at the April lows at 1.2270. A move through 1.2460 is needed to open up the 1.2520 area.

EUR/GBP – looks to be heading back to the December 2022 lows at 0.8558, having slipped below the 0.8620 area. This now becomes resistance with major resistance behind that at the 0.8720 area.

USD/JPY – has slipped back for the third day in a row, after running selling pressure at the 140.90 level earlier this week. Having slipped back below the 139.60 area the risk is for further weakness back towards the 137.00 area, which would delay a potential move towards 142.50 which is the 61.8% retracement of the down move from the recent highs at 151.95 and lows at 127.20.

Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

With the saga of the US debt ceiling now in the rear-view mirror, attention has shifted over the past couple of days to how the global economy is doing, and more significantly increasing evidence that inflation is slowing sharply.

While we’ve known for some time the manufacturing sector has been struggling, with resilience of the services sector, and robust employment numbers has offered encouragement that this is likely to be manageable.

This week’s economic data has prompted a modest reassessment of this, as bigger than expected slowdowns in headline inflation has prompted concern that a wave of deflation is on the way. On some level this is welcome particularly since it is sharp falls in energy prices that have been driving it, however we are also seeing evidence of weak demand, and that is more worrying with the China recovery story already running on fumes.

While price pressures have been subsiding for several months, as shown by sharp slowdowns in the headline rates of inflation, core prices have proved to be stickier, however this week we saw the first signs that here may also be starting to see prices turning lower.

This has been reflected in a move lower in yields and a decline in the US dollar over the last couple of days, while stock markets have also seen a modest rebound, after this week’s early weakness, with some Fed speakers becoming more vocal in signalling a rate pause in June. 

All of this is very welcome; however, it makes the next move for central banks trickier when it comes to whether to slow or pause their rate hike pathway. There is already much debate over whether the Fed may pause on rate hikes when it meets in just under two weeks’ time, with pricing split over whether we’ll see another 25bps hike or a pause and a hike in July.

Today’s US payrolls numbers could go some way to answering that question, along with the May CPI numbers which come a day before the Fed is next due to meet.      

The resilience of the US economy has continued to manifest itself in the jobs data this week, despite concerns that a slowing economy will start to see jobs growth falter.

While the monthly payrolls numbers have been slowing in terms of the numbers of jobs being added on a monthly basis, economists have consistently underestimated the resilience of the labour market over the last few months, even with the recent turmoil in the banking sector hitting business and consumer confidence.

This week we saw the number of job vacancies push back above 10m in April, while the ADP payrolls report yesterday for May, saw 278k jobs added, well above forecasts of 170k.

Today’s non-farm payrolls numbers for May could follow the trend of the last few months, which has seen the headline numbers consistently beat forecasts, with the April jobs numbers being the latest, adding 253k jobs, while the unemployment rate fell to 3.4%.

Wages growth has also remained sticky edging up to 4.4%, although there have been pockets of weakness in the form of downside revisions, which saw a negative -149k adjustment to the previous 2 months, last month, taking some of the gloss over the broader numbers.

What the numbers don’t do is support the idea that the US economy is struggling, particularly when vacancy rates continue to remain high, even as the overall number has fallen by more than 2m since the peaks of March last year.

Nonetheless the number of vacancies remains eye-wateringly high and well above the levels before the pandemic, which would suggest the labour market is likely to remain resilient for some time to come.

The participation rate has also been rising and is at its highest level since before the pandemic at 62.6%. Today’s jobs numbers are expected to see 195k jobs added, and for the unemployment rate to edge higher to 3.5%.       

EUR/USD – has pulled away from the lows of the week at 1.0635, with short term resistance currently at the 1.0780 area. A break here could see a further move towards the 1.0820 area.  

GBP/USD – broke above the 1.2450 area and the 50-day SMA, pushing up through the 1.2520 area, with the prospect of a move towards 1.2630 and trend line resistance from the 2021 highs. This, along with the May highs at 1.2680 is a key barrier for a move towards the 1.3000 area. 

EUR/GBP – continues to look heavy with the December 2022 lows at 0.8558, the next key support. A break of 0.8550 targets 0.8480. The 0.8620 area now becomes resistance with major resistance behind that at the 0.8720 area.

USD/JPY – has declined for 4 days in succession, after running into selling pressure at the 140.90 level earlier this week. Now we’re back below the 139.60 area the risk is for further weakness back towards the 137.00 area.

Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

MetaTrader 4 (MT4) is a popular trading platform that offers a wide range of charting tools to help traders analyse financial markets. While there are dozens of different tools available, some are more essential than others. In this post, we’ll take a look at five essential MT4 charting tools that every trader should know about.

You can sign up for your MT4 account here.

CMC Markets also offers you Autochartist for free when you open an account with us. For more information on Autochartist, how it works and why you should use it, head here.

1. Candlestick Charts

Candlestick charts are one of the most popular chart types in MT4. They provide a visual representation of price movements over a given time period, with each candlestick representing the open, close, high, and low prices for that period. Candlestick charts can help traders identify trends, support and resistance levels, and potential reversals.

2. Moving Averages

Moving averages are another popular MT4 charting tool. They provide a smoothed-out view of price movements by averaging out the price data over a given time period. Traders often use moving averages to identify trends and potential entry and exit points. The most commonly used moving averages are the simple moving average (SMA) and the exponential moving average (EMA).

3. Bollinger Bands

Bollinger Bands are a volatility-based MT4 charting tool that consist of three lines: an upper band, a lower band, and a middle band. The middle band is typically a 20-period moving average, while the upper and lower bands are calculated based on the standard deviation of price movements over the same period. Traders often use Bollinger Bands to identify overbought and oversold conditions and potential trend reversals.

4. Fibonacci Retracement

Fibonacci retracement is an MT4 charting tool that uses horizontal lines to indicate areas of support or resistance at the key Fibonacci levels before the price continues in the original direction. The most commonly used Fibonacci retracement levels are 38.2%, 50%, and 61.8%. Traders often use these levels to identify potential entry and exit points, as well as to set stop-loss and take-profit levels.

5. Relative Strength Index (RSI)

The Relative Strength Index (RSI) is an MT4 charting tool that measures the strength of price movements by comparing the average gains and losses over a given period. The RSI is typically displayed as an oscillator that ranges from 0 to 100. Traders often use the RSI to identify overbought and oversold conditions and potential trend reversals.

These five MT4 charting tools can help traders looking to analyse the financial markets. By using these tools, traders can potentially identify trends, support and resistance levels, entry and exit points, and much more.

Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

Wall Street finished higher on a broad-based rally as rates slid for the third straight trading day amid positive progress on the US debt deal progress, while Fed officials signalled a rate hike pause in the June meeting. The tech rally returned, with all the mega-cap companies’ shares up between 1-5% and Nasdaq jumped 1.3%, closing at the highest level since April 2022. The US non-farm payroll will be in the spotlight tonight when markets expect a slowdown in hiring.

On the economic front, the US ISM manufacturing PMI for May contracted for the seventh consecutive month, and is also the longest contraction stretch since Great Recession. The factory gate price index decreased to 44.2, the lowest since January, suggesting inflation may extend its decline. The data pressed on the US dollar and sent all the other major currencies higher, lifting commodity prices, particularly crude prices. WTI futures reversed losses from a day earlier and finished above US$70 per barrel ahead of a key OPEC+ meeting at the weekend, as the recent steep slump in oil prices may lead the cartel to cut output further.

In Asia, the US-listed Chinese tech shares sharply rebounded, with Alibaba up 4.3% and Baidu up 6.5%. Futures point to a higher open across the APAC, with ASX 200 futures up 0.63%, the Hang Seng Index futures up 1.8%, and Nikkei 225 advancing 0.80%.

Price movers:

9 out of 11 sectors in the S&P 500 finished higher, with technology leading gains, up 1.33%. Consumer staples and utilities are the only two sectors that ended in the red, suggesting that funds again flew into riskier sectors, typically in the growth stocks.
Lululemon’s shares soared 13% amid a beat on the first quarter’s earnings expectations and positive outlooks. The retailer reported earnings per share at US$2.28, higher than an expected US$1.98. The revenue was US$2 billion, up 24% from a year ago, topping a US$1.93 billion estimated. The company upgraded the full-year revenue guidance to between US$9.44 billion and US$9.51 billion from between US$9.31 billion and US$9.41 billion.
Apple is expected to announce its first mixed-reality headset at the software-focused developer conference on Monday. The announcement may mark a development of a new series of major product lines concentrating on AR/VR technology. The new product is to compete with Meta’s Quest series VR headsets and Microsoft’s HoloLens.
Microsoft agreed to invest billions of dollars in cloud computing infrastructure from CoreWeave, a startup that sells simplified access to Nvidia’s GPUs, according to CNBC. The company’s shares rose 1.3% on Thursday.
Tesla CEO Elon was encouraged by Chinese officials to boost investment in Shanghai during his trip to China. The statement also said Tesla hoped to strengthen collaboration with Shanghai and better serve both the Chinese and global markets, according to Bloomberg.  
Crude oil swung back on traders’ bets for a further production cut by OPEC+.  The organization announced a voluntary cut of 1.15 million bpd in April, on top of a 2 million bps reduction from November last year to stabilize oil markets. as
Gold rose for the third straight trading day as the USD slid further and bond yields fell. The metal’s price faces potential resistance of the 50-day moving average in the near term. A breakout of this level may take it to head off an all-time high of above 2,070 again.

ASX and NZX announcements/news:

No major announcement.

Today’s agenda:

US non-farm payroll for May. 

Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

European markets have had a much better tone today on reports that China is looking at new support measures for its property market, which are giving a lift to basic resources, and helping to lift commodity prices, along with the FTSE 100.

Europe

The weak China recovery story has acted as a drag on the wider mining and commodity sector thus far year to date with the likes of Anglo American, Rio Tinto and Antofagasta all down heavily. Today’s reports of a possible stimulus plan have prompted a strong rebound for the whole sector, and those same miners,  while other China exposed companies are also seeing a lift, with Prudential and Standard Chartered also higher.  

JD Sports is also gaining a decent tailwind on the back of last night’s positive reaction to sector peer in the US, Lululemon, and its strong start to its fiscal year, and upgraded guidance.

On the downside BT Group and Vodafone could be slipping on reports that Amazon is in talks to offer a mobile phone service to its US Prime customers in a move that if successful could see them try and offer a similar service in Europe.    

In M&A News private equity group EQT has finally agreed a deal to buy the UK veterinary drugmaker Dechra Pharmaceutical’s for the price of £4.46bn or 3,875p per share. In its recent trading update Dechra issued a warning that operating profits would be below expectations of £186m for the current financial year. Today’s deal puts the final bid price close to the recent record highs back in April when a deal was first touted.  

US

US markets opened strongly higher after the latest non-farm payrolls report showed 339,000 jobs were added in May, beating forecasts for the 14th month in a row, but also giving the Federal Reserve a rather sticky problem as to whether to stick or twist when it comes to another rate hike on the 14 June.

On the balance of probabilities, it keeps another hike on the table, however it also means that we could start to see some dissent, with some on the FOMC pushing for some caution given some of the weakness seen this week from some of the earnings announcements from lower and mid-tier retailers.   

Having hit record highs earlier this week Broadcom announced Q2 numbers that came in line with expectations. Q2 revenues rose almost 8% to $8.73bn, while profits came in at $10.32c a share. The recent move higher was driven by the announcement of the company’s multibillion dollar deal with Apple, as well as its position as a possible beneficiary of the increased focus on AI. It still has to complete the deal with VMWare which is currently facing regulatory scrutiny. For Q3 the company expects to see revenues of $8.85bn, while market consensus on profits is expected to match the numbers for Q2, helping to lift the shares higher on the day.

Dell Technologies shares opened higher after reporting better than expected sales for Q1, helped by stronger than expected demand from businesses for computers, particularly servers, as revenue came in at $20.9bn, while profits came in better than expected at $1.31c a share. A slightly weaker outlook appears to be weighing after Q2 guidance was lower than expected at $20.2bn and $21.2bn, although its recently announced collaboration with Nvidia to facilitate AI chips on its servers could reap dividends.

Lululemon shares have seen a decent move higher after reporting a decent set of Q1 numbers and raising its full year guidance. Q1 revenues came in at $2bn, a rise of 24%, while margins also improved by 360bps compared to a year ago. Profits also saw a sizeable improvement, coming in at $2.28c a share. For the outlook Lululemon said they expected Q2 revenue to rise to between $2.14bn and $2.17bn and for annual revenues to increase to $9.47bn, with annual profits expected to rise to between $11.74 and $11.94 a share. Nike and Foot Locker shares are also higher.

Apple shares are back within touching distance of its record highs last year ahead of next week’s WWDC, where it is expected to announce some new hardware upgrades, along with a potential virtual reality headset.

FX

Having hit a two-month high earlier this week, the US dollar has seen a sharp reversal in the last couple of days and looks set to finish the week lower, even with today’s blowout jobs report for May which saw 339k jobs added and a 93k 2-month upward adjustment.

Speculation has been growing in the last week or so that we could see a pause in the rate hiking cycle when the Fed next meets in less than two weeks. There does appear to be a growing caucus on the FOMC for a wait and see approach with a view to a hike in July if the data supports such a move, however today’s move does muddy the waters somewhat as to whether waiting might be wise.

On a slightly strange note, we also saw the unemployment rate rise by 0.3% to 3.7%, which rather goes against the grain when it comes to looking at the headline numbers. Wages remained resilient at 4.3%.

Despite today’s strong jobs report the Australian dollar has outperformed, helped by the headlines out of China which has supported the rally in the mining sector, and commodity prices. We also have the small matter of an RBA rate meeting next week which could be prompting some short covering in the event the Australian central bank drops another surprise rate hike in the manner it did last month. 

Commodities

Crude oil prices have continued their move up from this week’s 4-week low ahead of this weekend’s OPEC+ meeting, with the outside risk that oil ministers could surprise the markets with another production cut, given the recent weakness seen in prices.

Today’s modest rebound on the back of this morning’s China headlines and US payrolls numbers would suggest that a surprise cut announcement is now less likely, however one also can’t ignore that on the whole this week’s data has been on the weaker side of the ledger.    

Volatility

Hong Kong’s Hang Seng index had a turbulent day on Thursday, with early gains being reversed through the physical trading session, before rallying higher once again in afterhours trade. A number of regional investors are seen as being optimistic that further economic stimulus measures will be deployed by Beijing so this, combined with the expectation of some robust US payroll data later in the session drove one day vol to 32.55% against 25.31% on the month.

The iconic, London-listed footwear company Dr Martens saw its stock tumble on Thursday despite hitting £1 billion in revenues for the first time. Profits were squeezed partly as a result of logistical issues in the US, leaving the underlying to sell off by almost 12%. One day volatility stood at 152.05% against 67.45% for the month.

The Australian dollar proved to be the most active fiat currency trade on Thursday with the pair continuing to pull back from that test of seven-month lows seen earlier in the week. The key driver here is noted as being the increased prospect of the RBA hiking rates this month whilst the Fed could play the waiting game. One day vol printed 11.06% against 9.89% on the month.

Oil prices remained in focus with crude making meaningful gains in the latter part of yesterday’s session. There’s an OPEC+ meeting scheduled for the weekend so despite news of a meaningful build in US oil stocks from the EIA, with prices having been depressed of late, some response from big producer nations could be seen. One day vol on Brent Crude stood at 39% against 33.51% for the month.

Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

AI-Driven Euphoria vs. Recession Risk. How will the Fed guide Wall Street’s further movement?

The AI-powered tech rally defended a recession fear-led selloff on Wall Street, with Nasdaq climbing 7%, the S&P 500 up 1%, and Dow down 3% in May. However, the only sectors that finished higher for the month were the three AI-related components, including technology (XLK), communication services (XLC), and consumer discretionary (XLY), up 10%, 5%, and 4%, respectively. In the meantime, all the other 8 sectors ended in the red, with energy stocks tumbling 8.5% monthly. The extremely divergent moves among sectors imply that the AI-driven euphoria may be in a hype cycle. According to Factset, the blended earnings for the S&P 500 declined for the second straight quarter in Q1 2023, and the forward 12-month P/E ratio was below the 5-year average by 1 June, suggesting that the company’s growth outlook is not rosy.

While a pause in rate hikes by the Fed might be a done deal in June, the inflation data for May will be critical to determine risk sentiment as economic data points to a further slowdown in GDP growth. Investors may need to be mindful of a possible correction on Wall Street in June.   

Australian markets faced China’s headwind, with commodity price a key gauge for the ASX trajectory

The ASX 200 fell 3% in May, while copper price slumped 5% and crude oil slid about 6%. The commodity-heavy index did not follow through with the tech rally on Wal Street as its biggest export partner, China’s economic rebound was sluggish. Recession fear-led selloff in consumer and financial stocks in the US markets also dragged on the sentiment. At the sector level, information technology was the best performer, up 16% in the month, while both financials and consumer discretionary fell more than 5%. Locally, the inflationary pressure showed signs of easing, but consumer price was still well above the RBA’s target level of 2%. There will be three elements that potentially impact ASX’s trajectory in June – commodity prices, China’s economic playout, and the RBA’s rate decision. A positive scenario is that Fed’s potential rate hike pause could send the USD lower and lift the commodity prices. And hopefully, the RBA will follow suit to suspend a rate hike cycle. China’s rebound may be set to pick up if the government imposes further stimulus measures.

Chinese stock markets may have been oversold, with influential economic data to be eyed in June

The Chinese stocks touched a bear market, with Hang Seng Index down 4.6% and Hang Seng China Enterprises Index down 6.2% year-to-date amid faltering economic recovery as the weak domestic demands and a surge in the youth unemployment rate reined in consumer prices, with the country’s CPI deflated for the third month in April. On a positive note is that China’s exports saw a sharp rebound from a year ago, while economic activities in the services sector expanded for the 5th consecutive month, which could be translating into a slow recovery in consumer demand. Any positive signs in the economic recovery could cause a dip-buy in the possible oversold markets. The recent AI development in Chinese tech companies, such as Alibaba and Baidu could also lead to bottomer reversal moves in these shares. In June, influential economic data such as CPI, PPI, and Chinese manufacturing PMI will be key gauges of the country’s rebounding trajectory.

The New Zealand dollar suffered from RBNZ’s dovish rate hike, with the first quarter GDP in focus

The RBNZ raised the OCR by another 25 basis points but signalled a rate hike pause in the next meeting, which crashed the New Zealand dollar. The NZD/USD fell about 6% from the high of 0.6369 to the month-low of just above 0.60 in May. And the NZD/AUD slumped 2.3% from the peak in the month.  The decline in the dollar may not end just yet as China’s sluggish economic rebound may keep pressing on the commodity currencies, with an absence of RBNZ’s policy meeting in June. The country’s first-quarter GDP will be in the spotlight, and a negative read of the data will mark a technical economic recession following a -0.6% growth in the final quarter of 2022.

Will the OPEC + save oil’s price from a further slump?

Crude prices fell under US$70 per barrel in May but swiftly rebounded in the beginning of June as traders bet the OPEC+ to cut outputs further to stabilize the oil markets. The organization announced a production cut of 2 million barrels per day in November and a further 1.15 million barrels per day in April. Fundamentally, China’s oil demand will still be key to driving the energy market prices. US$60 dollar is likely to be a pivotal support, and US$80 could be a potential price target if OPEC+ determines to support the oil prices.

Gold faces resistance of an all-time high level

Gold pulled back from an all-time high as the AI stock euphoria boosted risk-on sentiment, and the USD strengthened following a rebound in the US bond yields in May. But the precious metal started climbing again in the last few trading days as the king dollar softened on the Fed’s hiking pause bets. A dovish Fed will most likely send the USD lower and give a further lift to gold prices. However, from a technical perspective, a double top in the daily chart and a triple top in the monthly charts are still in play. 

Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

Friday’s strong job data continued to buoy Wall Street, with the three US benchmark indices finishing higher for the week, and all 11 sectors in the S&P 500 ended in the green, suggesting stock markets have switched on the risk-on turbo amid the debt bill’s passage and Fed’s signal for a rate hike pause. At the same time, the tech-rally led Nasdaq to gain for the sixth straight week, up 27% year-to-date, and was the longest winning streak since 2020. Meantime, the fear gauge, the CBOE volatility index, fell to 14.6, also the lowest level since February 2020, before the pandemic-induced market crash. “Go with the flow” may be the case this week, and the economic data we will be watching are primarily from the APAC region, as there will be a relatively quiet week from the US. The RBA’s policy meeting will be in the spotlight, and the country’s first-quarter GDP should also be on investors’ radar.

Notably, the Hong Kong stock markets posted a weekly gain for the first time in the last nine weeks, kicking off June on a front foot. This may suggest that the Chinese stock markets could have been oversold, and the government is expected to further expand its stimulus measures amid the faltering economic reopening. This week, the Chinese trade balance, CPI, PPI, and New Yuan loans are the influential economic data that may impact the APAC region market performance, commodity prices, and related currencies.

What are we watching?

The USD eases gains: The dollar index finished flat for the week after swinging in directions. The USD’s movement is in check as the Fed may be set to pause the tightening campaign after ten consecutive times of rate hikes since January 2022. Notably, the fund rate-sensitive US treasury, the 2-year bond yield spiked 17 basis points amid Friday’s job data, suggesting that the reserve bank may resume the rate hike cycle even if it suspends hiking in June.
Chipmaker’s stocks lose steam: The AI-related chipmakers’ stocks, including Nvidia, AMD, and Broadcom’s shares, all finished lower for the week after an AI-powered surge. This could have been caused by profit-taking, suggesting a technical correction may be near.
Crude oil slips: China’s bumpy economic recovery sparked concerns about weak demands in the oil markets, despite a two-day rebound in crude prices last week as traders bid for a further production cut by the OPEC +. However, any disappointing news from the cartel may continue to crash oil prices.
Gold encounters a technical selloff: Gold has been pressed by a strengthened USD and risk-on sentiment in May, and a double-top pattern was still in play. The precious metal may still face further downside pressure in the near term.

Economic Calendar (5 June – 9 June)

Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.