The Japanese economy remains mixed, though the latest GDP growth reading for Q3 shrunk more than market expected, but PMIs have improved, which could support the idea of the Japanese economy catching up with other DM economies. Another data point with could support the Japan market is the local inflationary environment, the latest figures continue to show limited inflation in Japan, a stark contrast when compared to the rest of the world. This could allow the Bank of Japan to keep the current accommodative monetary policy in place for a longer period, supporting equity valuations.
However, the Japan market was shaken by the unexpected resurgence of COVID. With border closures ordered, original recovery drivers from travel and services will likely be delayed once again. Even though the LDP led government have rolled out some fiscal stimulus earlier, there are no solid signs of more stimuli down the line. Henceforth, our Japanese market outlook stay conservative, short term headwinds remain before we have a better understanding of the new COVID variant. We will stay neutral on the Japan market as we expect pandemic fears to be offset by the loose monetary policy.
 

The short term outlook remains depressed, the headwinds which were in place over the year have not dissipated, with certain aspects even worsening. The pandemic became the foremost issue in the market, large number of mutations found in the new strain resulted in more uncertainty surrounding its infectiousness and severity, with more concerned over its ability to evade the vaccine. Given EM’s overall lower vaccination and weaker infrastructure, the virus could cause more extensive damage in EM economies, have the possible subsequent outbreak not been contained.

The resurgence of the pandemic also increased the risk of sustained high inflation. With the more stringent measures in place to control the spread of the disease, supply chain disruptions could linger, which in turn bumps up the currently high inflation. At the same time, tightening monetary policy in the US materialised, the Dollar is expected to strengthen, and EM economies could see pressure ahead in form of hiking rates and capital outflows. We continue to hold a conservative outlook for EM equities in the short term before the dust over the Omicron variant settles, by then one could consider geographies with better pandemic control, as those markets could possibly see recovery further ahead in the New Year.
 

Economic fundamentals remain positive, yet inflation stays strong with the latest YoY figure of 4.9%, which was the highest reading in recent years. Contrary to other global central banks, the ECB has remained unwavering on their ‘transitionary inflation’ claim, pledging to keep the Eurozone monetary policy accommodative as the economy recovers, which should provide further support to the market. However, this also poses a risk if the supply chain troubles and the energy crisis remain in place, as an extended period of high inflation could be harmful to the economy.
As for the pandemic, several European countries have reinitiated lockdown measures just as infection numbers climb higher and a new virus strain emerges, this could hit consumer sentiment which impacts the local economic growth. The resurgence in the global epidemic could extend the current higher inflation, by disrupting more supply chains, potentially forcing the ECB to tighten monetary policy at an undesirable time, further hitting the equity market. In the short term, more headwinds are present, and we suggest investors to exercise caution as the potential impacts of the Omicron variant is being investigated by the scientific community.

The Chinese economy has remained weaker, with the Caixin manufacturing PMI missing expectations and falling into the contraction zone. More importantly, policy uncertainty is still a wildcard for investors. The real estate market had borne the brunt of the regulatory action, with a continued stream of defaults in the market. Referencing the latest statements from relevant authorities, we expect incremental loosening in the credit market for the real estate sector, which could hopefully signal recovery for one of the most important pillars of economy in China.
On the other hand, tech giants in China continued to see regulatory upheaval surrounding the sector and the stock price suffered. Considering that previous regulatory cycles tend to be over in a year, markets are likely watching closely if this would be the case, as the cheaper valuation in the sector could be a market entry opportunity. Overall, the China market is blessed with its insulation from the global pandemic, with the normalisation of the monetary and fiscal landscape, we expect an orderly recovery in the Chinese economy, which should be positive for the equity market outlook in the New Year.

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While the current pandemic is still currently dominated by the Delta strain at the time of writing, the Omicron has caused fear in the market due to the uncertainty it brings. Early studies have showed that the new variant have a large number of mutations, and that the virus could be more infectious than previous strains. Market fears that there could be more disruption to the global supply chains, and the global service sector could suffer, short term equity market sentiment would likely remain at the lower level before we get more clarity.

Putting that aside, the economy is decent, but inflation remains as the important unresolved issue, with the figures hitting new record highs in recent decades. To tackle the issue, US Fed President Jerome Powell mentioned that a faster tapering could be appropriate considering the inflation and economic environment, raising the odds of more rate hikes in 2022. While this could limit the equity upside in form of valuation expansion, this marks the end of early recovery in the economic cycle. Henceforth, if the pandemic risk does not fully materialise, we see growth stocks as one of our main picks in the US market for 2022.

  US

Short term volatility increased in the US equity market, as the Fed announced a ramp up in the pace of tapering. The S&P 500 and Dow saw little movement over the past 5 days ending Thursday, while the NASDAQ was down 2.17%. The US Federal Reserve announced a doubling of the tapering of bond purchases to US$30 billion per month after its interest rate meeting, and markets expect the programme to end in March next year. According to the Fed dot plot, officials are anticipating three interest rate hikes next year and three in the year after. Chairman Powell said he would not rule out raising interest rates before full employment is achieved.

The US Senate's latest bill to raise the debt ceiling by US$2.5 trillion has now been sent to the House of Representatives for voting. The Bill is expected to extend the US government's ability to raise debt until early 2023. The Omicron variant has emerged in 33 US states, with hospitalisations in New York State rising by 70% since Thanksgiving, raising concerns about the spread of the new variant. Next week, the US will release the Conference Board Consumer Confidence index and the University of Michigan Consumer Sentiment for December.

Europe

The European stock market saw little movement over the past five days ending Thursday, but the UK market was affected by the Bank of England's unexpected interest rate hike, sending the FTSE 100 index 0.43% lower over the same period. The Bank of England unexpectedly raised interest rates by 15 basis points to 0.25% after the interest rate meeting. The Bank stated that with inflation rising and likely to peak at around 6% by April next year, the Bank might need 'modest tightening’ down the road. The ECB kept its policy rate unchanged, and announced that it would temporarily increase the size of its regular bond-buying operations from the second quarter next year onwards, in order to hedge against the impact of the end of the Pandemic Emergency Purchase Programme (PEPP). ECB President Christine Lagarde said that the central bank will unlikely raise interest rates next year. Next week, Germany will release the GfK consumer confidence index for January.

China

Fears over the faster pace of global monetary policy tightening continued, with the Hang Seng Index under pressure, down 3.35% over the week, while the CSI 300 index was also 1.99% lower. The latest YTD growth rates for fixed investment, retail sales, and industrial production in China for November were 5.2%, 13.7% and 10.1% respectively, all lower than the previous month. The market will be on the lookout for more accommodative measures from the Chinese government to support the economy. On the other hand, the market is still watching the development of the property market, as both hare and bond prices of Chinese real estate companies have fallen amidst the resurgence of risks in the sector. Next week, China will announce the one year LPR rate.

  US

US stocks rebounded sharply as market sentiment was boosted by easing concerns over the Omicron variant, with the Dow, S&P 500 and NASDAQ rising between 0.88% and 3.22% over the past five days ending Thursday. Data showed that US online retail prices rose by 3.5% YoY in November, the highest since 2014. As for employment data, the initial jobless claims figure also fell to a 52-year low. US Commerce Secretary Gina Raimondo said that inflation would ease when the supply chain and labour market disruptions caused by the epidemic dissipate. That said, there are still concerns that the pandemic countermeasures could negatively impact the economic outlook, neutralising the positive impacts of the vaccine. Next week, US will release retail sales for November and the Markit US Manufacturing PMI for December, while the US Federal Reserve will hold its last interest rate meeting of the year, markets are focused on whether the Fed will accelerate the tapering of bond purchases.

Europe

As fears of the epidemic subside, European stocks rebounded in line with global markets, with the UK, French, and German indices gaining between 2.79% and 3.59% over the past five days ending Thursday. There are reports that the European Central Bank (ECB) is studying the possibility of changing its PEPP reinvestment to help its member states cope with the future circumstances. On the monetary policy front, ECB Executive Board member Isabel Schnabel said the bank should not change the sequence of monetary policy tightening, and must only raise interest rates after the end of bond purchase programmes. As for economic data, German exports improved, with a higher-than-expected 0.9% rise in seasonally adjusted exports, to 4.1% MoM in October, suggesting that Germany's recovery may be improving. Next week, the Bank of England and the ECB will hold their December interest rate meetings, while the UK will also release CPI data for November.

China

The market sentiment was boosted by the news of the RRR cut, with Hong Kong and China stocks rising in tandem, the HSI was up 0.96% and the CSI 300 was 3.14% higher for the week. The People's Bank of China (PBoC) announced a 0.5% RRR cut early in the week, which is expected to release about RMB1.2 trillion in long-term funds. Subsequently, PBoC also lowered the refinancing rate for agricultural and small loans by 0.25%. On the economic front, China's CPI rose by 2.3% YoY in November, a 15-month high, while foreign exchange reserves stood at US$3.2224 trillion at the end of November, up from US$3.2176 trillion in the previous month. Next week, China will release key data on fixed investment, retail sales and production in November.

  US

Increased uncertainty affected market sentiment, dragging US equities lower over the week. Over the past 5 days ending Thursday, the 3 major US equity indices lost 2.65-3.25%. US Fed President Jerome Powell mentioned that faster tapering would be discussed in the December Fed meeting, stating that it is appropriate considering the current inflationary and economic circumstances, other Fed members have also echoed Powell’s sentiment. Markets are pricing in the possibilities of a faster taper and earlier rate hikes, at the time of writing, Bloomberg interest rate futures is showing a 99.5% chance of the first rate hike in June 2022.

The resurgence of the COVID pandemic is the other major source of uncertainty. While there is insufficient data on the Omicron variant, global governments have taken a conservative approach, with border closures and lockdown measure re-enacted in several countries. In the US, the government shutdown was avoided as the Senate passed the stopgap bill on Thursday, which should keep the US government running until February next year. In other news, OPEC+ surprisingly announced no changes to their planned output increase. Next week, the US will be releasing important data including initial jobless claims, CPI figures, and University of Michigan sentiment index.

Europe

Similar to the rest of the world, the European market sentiment was hit by the rise of the new Omicron variant, countries in Europe exercised extra caution in response, as the pandemic in Europe was already worsening over the past weeks. Over the past 5 days ending Thursday, equity indices in the UK, France, and Germany lost 2.48-4.11%. The resurgence of COVID in Europe began earlier, and the latest discovery of the Omicron variant resulted in increased uncertainty in the outlook, several countries have tightened restrictions in response. As for the latest economic data, inflation remains as one of the forefront issues. The latest Eurozone CPI have exceeded expectations and hit 4.9% YoY, which is the highest reading since 1991. Markets are looking at the ECB if they would change their inflationary outlook, which could provide clues to the future tightening timeline. Next week, Germany will release their industrial production figures and the ZEW economic sentiment index.

China

Local markets have largely priced in the fear of the new COVID variant, the China A-share markets defied global trends, with the CSI 300 index gaining 0.84% over the week; the Hang Seng index on the other hand was dragged down by the Chinese tech heavyweights, falling 1.30% over the same period. The Chinese tech sector which came under fresh pressure as the US SEC announced new rules regarding audit requirements for foreign stocks, DiDi is reportedly preparing for its delisting from the US stock exchange and move to Hong Kong. The debt crisis in the Chinese real estate market continues, Kaisa Group’s proposal to extend the bond maturity failed, risking potential default. On the economic data front, PMIs were a mixed bag, as both Caixin PMIs missed market expectations, while the official manufacturing PMI managed to return above the 50 level. Next week, China will release both the CPI and PPI figures for November.

  US

The US stock market was closed on 25 November for Thanksgiving. Over the past 5 days ending 24th, the Dow and NASDAQ were down 0.35% and 0.48% respectively, while the S&P was up 0.27%. On the economic front, US Q3 GDP was revised upwards to 2.1% QoQ, but the figure was still slightly below market expectations of 2.2%. US President Joe Biden formally announced the nomination of incumbent Federal Reserve Chairman John Powell for a second term, and also nominated Lael Brainard as Vice Chairman. Following the announcement, short-term interest rate suggests more hawkish expectations for the Fed, with the market anticipating a rate hike as soon as July next year.

As for the shortage of crude oil, the US government announced the release of 50 million barrels of strategic reserves, and oil prices briefly spiked as the market felt that the release was insufficient. However, OPEC later said that the release of the US strategic reserves was expected to increase supply by 1.1 million barrels per day, which would result in an oversupply in crude oil early next year. At the time of writing, WTI crude futures prices had plunged to US$73.4 per barrel. Next week, the US will release several important data including November employment figures and the ISM manufacturing index.

Europe

The UK and German and French stock markets moved in opposite directions, German and French indices were down 1.50% and 0.51% respectively over the past 5 days ending Thursday, while UK equities were up 1.20% over the same period due to the weakening of the Euro against the Pound. The epidemic in Europe is seemingly worsening with the French Prime Minister tested positive, the WHO now expects the death toll in Europe to reach 2.2 million by March 2022. The minutes of the October meeting of the European Central Bank (ECB) showed that the members believe the Bank needs to set aside sufficient policy options beyond its meeting in December this year. Across the Channel, Bank of England Governor Andrew Bailey stated that if wages rise as a result of inflation, the Bank will have to take action. Next week, Eurozone will release the preliminary CPI for November and the market is expecting a fall of 0.2% MoM. 

China

A new COVID variant found in South Africa caused panic in the market, and reports that the Mainland would ban some online payment methods weighed on Hong Kong's tech heavyweights and dragged down the market, the Hang Seng Index fell 2.67% on and extended its weekly loss to 3.87%.  China's A-shares though were relatively stable, only slightly falling 0.61% for the week. According to reports, China will ban the personal money reception codes on WeChat and Alipay from 1st March next year. Next week, the official manufacturing and non-manufacturing indices will be released, as well as the Caixin China Manufacturing and Services Indices.