The major Wall Street indices ended the week (17-21 May) mixed with the Dow and the S&P 500 both lower by about 0.5% while the Nasdaq Composite eked out a 0.1% gain in yet another choppy week of trading as inflation fears continued to weigh on market sentiments amid the backdrop of wild cryptocurrency swings triggered in part by a 30% collapse in Bitcoin on Wednesday.

That was after authorities in China signalled a crackdown on bitcoin mining while also warning financial institutions not to conduct crypto-related business activities which are deemed as risks to financial stability. The US Treasury Department had also said it would be scrutinising cryptocurrency transactions especially transfers above $10,000 for tax purposes.

That is because cryptocurrencies are somewhat regarded as proxy indicators for risk-on or off appetites during a time of liquidity-driven market momentum. Meanwhile, gold seen as an inflation hedge traded at $1,880 on Friday, the highest since January when spot prices were about $200 lower, while tech and growth stocks perceived to be more vulnerable to inflation by dampening earnings as well as rise in borrowing costs in their spending to generate further expansionary growth.

Economic data which are a gauge of economic recovery have stayed robust with the PMI for US manufacturing for May surging to another high at 61.5 (from 60.5 in April) while jobless claims weighing in at 444,000 – the lowest since March 2020 – seem to indicate that the disappointing April figures were likely an aberration rather than a sign of economic deceleration. The PMI for services which also hit a record high at 70.1 also points to a pick-up from reopening activities with US virus curves from infections, deaths and hospitalisations all down sharply.

The strong numbers if they keep up have however also fed into fears of inflation on worries that the Fed will tap on the brakes in its accommodative policies, and hence quell the liquidity drive behind market upward momentum – which are already showing some signs of fatigue as seen in the S&P 500 14-day RSI technical indicator which is neither overbought nor oversold.

In other words, it is a market in a holding pattern that is neither too hot nor too cold. That probably means that with the S&P 500 up by more than 80% since mid-March 2020, most of the positives may already be priced in with the next catalyst for a further rally getting harder to come by. That said though, cyclicals such as materials appear to have room to advance given their 7% discount in valuations versus the broad S&P index.

Minutes from the Fed’s April FOMC meeting released on Wednesday hinted that a number of participants were suggesting that it would be “appropriate” at some point in upcoming meetings to begin discussing plans to taper asset purchases “if the economy continues to make rapid progress.”

For some market watchers, it was a good sign that the Fed is not being complacent over inflationary concerns and hence in danger of behind the curve – and that stocks should be fine so long as it doesn’t signal a taper before the year end.

The April FOMC meeting had however taken place before the slew of stronger data released in the weeks since then – which should keep market watchers peeled on key data again this week: such as new US home sales and prices, durable goods and consumer confidence indicators with the most important being that of personal consumption expenditure (PCE) which is the Fed’s preferred yardstick for inflation. The earnings season is also winding down with the remaining reports coming from retailers such as Best Buy, Costco and Nordstrom and techs like NVIDIA and Dell.

Meanwhile, it looks like the toll of resurgent virus waves brought on by the more infectious Indian variant of the coronavirus will continue to cast a pall over markets in Southeast Asia with post-pandemic recovery likely to be delayed by at least a quarter in the wake of renewed lockdowns.