Into the last quarter of the year, the ongoing energy crisis is shaping up to be a significant issue for the global economy. While earlier supply chain issues remain unresolved, global fuel shortage further exacerbated the price pressures in the market, sending inflation higher. The US figure in particular stayed steady above 5% YoY, while the Eurozone figure hit a new high since 2008, all of which suggesting that the current dovish monetary policy are not here to stay.
Among major economies, the ECB is the minority in deciding to keep monetary policies on the dovish side. Global central banks from the rest of the world have started monetary tightening, encompassing banks from both DM and EM economies. The most influential central bank US Fed has also announced the start of tapering, scaling back quantitative easing and bond sending bond yields higher. The fixed income market outlook remains uncertain, as downside risks stay with the rising interest rate risks. We continue to see high yield bonds as the better option over investment grades as they have a shorter duration on average and the higher carry should offer better risk adjusted return.
 

 US

Anticipating a swift approval of the latest spending bill, together with encouraging quarterly earnings from tech leaders, the S&P500 and the NASDAQ continued to set record highs, over the past 5 days ending Thursday, the tech heavy NASDAQ gained 1.84%, the S&P 500 was up 1.19%, and the Dow was down 0.14%. The US House of Representatives is currently planning to vote on a near US$2 trillion spending plan which, if passed by the House, will then go to the Senate. In addition, President Joe Biden will announce Fed nomination soon, which could impact market expectations of the pace of policy tightening. As for the renewed debate on the US debt ceiling, US Treasury Secretary Yellen said that the Treasury's cash could run out after 3rd December. The market is concerned about the potential impact of these uncertainties on the market.
On the economic front, US retail sales rose to a seven-month high in October, raising the odds of an earlier Fed tightening. According to five indicators used by Fed to assess the inflation outlook, there is now increasing pressure to accelerate monetary policy tightening than three months ago, St. Louis Fed President Bullard also said the Fed should step up on reducing stimulus in response to high inflation. With the release of the core PCE index for October and the minutes of the November Fed meeting next week, markets will be watching the data and news closely to gauge the pace of monetary policy tightening.
 

Europe

The Governor of the Bank of England said he was very worried about inflation, while the ECB President said rate hikes next year are unlikely, suggesting a potential divide in monetary policy. With the exchange rate moving in different directions, stock market performance also diverged, with French and German equities up 1.17% and 0.86% respectively over the past 5 days ending Thursday, while UK equities were down 1.74%; the Pound rose 1.25% against the Euro over the same period. The UK CPI rose 4.2% YoY in October, surpassing both the previous reading and market expectations of 3.1% and 3.96%. Bank of England Governor Andrew Bailey said he felt ‘very uneasy’ about the sharp rise in inflation and noted that he would study the data before deciding whether to raise interest rates or not. In contrast, ECB President Christine Lagarde stressed that the Bank was unlikely to raise interest rates next year and that she expects inflation to fall below the Bank's target of 2% in the medium term. Next week, both the UK and Eurozone will release the Markit Manufacturing PMI for November, while Germany will release the latest IFO Business Sentiment Index.

China

The video conference between the US and China leaders showed the way forward for Sino-US relations. However, major banks lowered their price targets for certain Chinese technology giants, sending their Hong Kong listed shares down by almost 11% on Friday, weighing on the overall Hong Kong stock sentiment, with the Hang Seng Index down 1.1% for the week; China A-Shares however stayed flat. Alibaba shares fell sharply after Thursday's US market close, as the company announced much weaker-than-expected net profit for the last quarter, share price plummeted and weighed on the performance of Hong Kong markets. On the other hand, China's economic data showed some stabilisation, with industrial production rising by 3.5% YoY in October, retail sales accelerating to 4.9% YoY and fixed investment growing at a faster than expected YTD.

The LDP election ended with Fumio Kishida as the new prime minister of Japan, there were concerns over whether the LDP can keep the majority in the House of Representatives after the election. Uncertainties further increased with Kishida’s brief mention of capital gains tax changes after becoming the PM, which was unpopular and he did subsequently backtrack, but such comments still raised concerns over the new government’s policy directions. Concerns dissipated as the ruling LDP has once again secured a majority in the latest general election, this should stabilise the political landscape.
This is supportive to the equity market, as the majority in the House allows the economic stimulus plans to be enacted smoothly. Economic fundamentals of Japan have shown improvement recently, we also noticed that Japan have not felt the heat from the rising inflation across the globe, allowing the supportive monetary policy to stay unchanged for the time being. With the local sentiment favourable, we are still confident that the Japanese equity market can perform in the short to mid-term as long as monetary conditions permit.
 

Our view on EM equities remains unchanged, expect them to underperform in the shorter term. Sources of downside risks have not dissipated, concerns over vaccinations, external debt, weak currency, and political uncertainties all contribute to the weaker outlook of EM equities. Many DM countries have achieved herd immunity, economic activities have mostly returned to normal with COVID treated as an endemic; the opposite is happening in EM economies, and without a robust and effective vaccination programme, EM economies will likely remain lagging behind their DM counterparts in the scope of economic recovery. 

To add on, inflation continued to stay as the forefront issue, global central banks have moved forward with monetary tightening as a countermeasure. The most influential US Fed has already announced the start of tapering in asset purchases, the policy turnaround is more pronounced in EM countries with multiple rounds of rate hikes, and this rapidly tightening monetary landscape likely puts more pressure on EM equities. Moreover, limited fiscal ammunition available to EM due to higher external debts also limits further acceleration in the economy, hitting recovery from both fiscal and monetary sides. Henceforth, we still hold reservations over EM equities in the shorter term, and would suggest a more conservative approach if one allocates to EM equities. 

With vaccination rates in Europe hitting target levels, policy making have started to treat covid as a non-factor, with economic activities back to near pre-pandemic levels. Economic fundamentals are steady, but the ongoing energy crisis is expected to last until the end of the year, inflation remain as one of the larger threats to the market. The latest CPI reading in the Eurozone hit a new record high since 2008, markets are concerned if the mounting inflation could force the ECB to tighten their monetary policy earlier than planned. According to Bloomberg interest rate futures, the market is now expecting the ECB to start hiking rates as early as 2022, which could limit the equity upside if it were to materialise.

The ECB kept interest rates unchanged after the interest rate meeting, President Christine Lagarde explicitly mentioned that interest rate futures implied data are not in line with ECB targets. The Bank expects European inflation to fall below 2.0% in 2022 as energy shortage and supply chain issues could resolve by the 1st quarter next year. With the confidence of the ECB, expect monetary policy to stay more accommodative, which should further support equity performance. We remain more positive on European equities in the short to mid-term as valuations and monetary policy stay supportive.

Key leading indicators including PMIs and others reflected the continued economy slowdown, which was a result of a combination of numerous factors. The global energy crisis was deeply felt in the country, as power curbs still remain in place due to the elevated fuel costs, which in turn disrupts the production in the whole supply chain. To make matters worse, the rout in the real estate market continued, the sector stayed under pressure as policy remain tight on the market. Overall, the Chinese economy remained under stress.

Over the month, more developers defaulted on their debt obligations hitting market sentiment, as suggested by the surge in yield of the China high yield bond index. Due to the lack of clarity in the market outlook, buyer interest has also dwindled, YoY sales figures saw large drops. On the latest politburo meeting, officials have released signals that liquidity conditions could improve. While this doesn’t rule out future defaults, it could possibly prevent the market from collapsing. Although policy direction is seemingly loosening, we still see uncertainties in the Chinese market, hence our neutral stance on the market in the short term.

Fundamentals remained solid, most leading indicators including PMIs and employment figures came out positive. This is further supported by the strong corporate earnings, with a majority of reporting companies managed to beat market expectations. Overall, market outlook remains positive, while the biggest source of risk originates from extended periods of inflation. The global energy crisis continued throughout the month, pushing inflation higher, as reflected by the elevated US CPI, which has remained above 5% YoY for 4 consecutive months. 
Partly as a response to the higher and more persistent inflation, US Fed President Jerome Powell announced the decision to taper bond purchases, by US$15 billion per month, marking a formal end to the COVID related monetary stimuli by mid-2022, and opening the path for future rate hikes. While there are no surprises in the policy, downside risks remain in form of supply chain disruptions, lingering inflation, and the impending debt ceiling. The reduction on liquidity could reduce the equity upside, but fundamentals remains solid, slowing monetary stimulus should be offset by materialising fiscal expenditure and strong consumption, we still see the US market to perform in line with the global market for the remaining portion of the year, with the room to edge higher.

 US

Inflation was more serious than expected, market sentiment was hit. Over the past 5 days ending Thursday, the Dow, S&P 500, and NASDAQ fell 0.56%, 0.66%, and 1.48% respectively. Inflation stayed as a forefront issue, as the latest CPI figure for October hit 6.2% YoY, which topped forecasts, and was the highest reading since November 1990. With inflation remaining at elevated levels, markets are pricing in the potential impacts. Treasury notes saw a larger selloff with shorter term treasury yields rising more, the 2Y treasury yield jumped from 0.42% to 0.51% on Wednesday, which was the largest single day gain since early 2020, narrowing the yields spread between the 2 and 10 year treasuries. Investors are also rebasing their inflation expectations, as the 5 year breakeven inflation rate hit 3.1%. Although Fed members have tried to delink tapering and rate hikes, citing that labour market conditions have not fully recovered as suggested by the miss in initial jobless claims, Bloomberg interest rate futures showed that markets are moving their rate hike expectations forward. At the time of writing, markets are currently pricing in an 82% chance of the first rate hike happening in June 2022. On other news, crude oil prices briefly rebounded, hitting the US$84 level during the week but retreated afterwards. Next week, the US will release several key data including retail sales and industrial production.

Europe

COVID have seemingly started its resurgence in Europe, investors are watching how the latest wave will unfold. Over the past 5 days ending Thursday, the UK, French, and German equity indices gained between 0.33% - 1.43%. ECB board member Frank Elderson reassured that the ECB have recognised the high level of near term inflation, and suggested that inflation expectations on the medium term have come closer to the Bank’s target of 2%, but refused to speculate on the fate of the PEPP once it expires in March 2022. COVID have returned in certain parts of Europe, Germany in particular hit a record number of daily cases this week, other less vaccinated European countries are also experiencing the same resurgence. Markets will be on the lookout for any policy tightening in response. For economic data, the German ZEW economic sentiment index surpassed market estimates by a fair margin, while the UK Q3 GDP of 1.3% QoQ was disappointing as it fell short of the market expectation of 1.5%. Next week, Europe will release its finalised CPI for October, while UK will release its CPI and retail sales figures.

China

Global inflationary pressures intensified as China's October PPI YoY rose at the fastest rate in 26 years, while CPI YoY also rose at the fastest rate since September 2020. A wave of selloff in China's real estate sector took place, even higher rated USD bonds such as Country Garden were hit. Foreign investors are worried about the risks, the US Federal Reserve issued warning about China's real estate sector, the Hong Kong Monetary Authority reportedly asked banks to report details on their exposures to the sectir, and Credit Suisse and UBS rumoured to have stopped accepting Chinese developers’ issued USD bonds as collateral for loans. However, later in the week, reports of a gradual loosening of the financing conditions for the real estate sector boosted sentiment, the debt-ridden Evergrande also managed to avoid default again and paid its outstanding interest before the end of the grace period, the market believes that the Chinese government would take concrete steps to help resolve the economic crisis caused by the rout in the property sector, lifting equity indices. The CSI 300 Index rose 0.95% over the week, while the Hang Seng Index also closed 1.84% higher. Next week, China will release data on retail sales, industrial production and fixed asset investment.

 US

The US Fed announced tapering of its bond purchases, in line with market expectations. This allayed market concerns over uncertainties, coupled with the recent positive economic data, boosted market sentiment, with the Dow, S&P, and Nasdaq gaining between 1.10%, 1.82%, and 3.19% respectively over the past five days ending Thursday. The Fed announced a reduction in bond purchases of $10 billion in Treasuries and $5 billion in mortgage-backed securities per month starting in November, but Chairman Powell noted that the Fed would remain patient on rate hikes. The market was concerned about high energy costs, but oil prices fluctuated after the Saudi-led Organization of Petroleum Exporting Countries and Allies (OPEC+) announced that it stick to its original plan on increasing production by 400,000 barrels per day in December, rejecting Biden's call for more production. Crude oil prices retreated later in the day, and briefly fell below the $80 per barrel level.
For economic data, the Markit Manufacturing PMI slowed slightly to 58.4 in October, but the Markit Services PMI rose to 58.7 in the same period, the ISM Services Index even unexpectedly rose to a record high of 66.7 in October, significantly higher than market expectations of 62.0. As for employment data, the ADP nonfarm payrolls added 571,000 jobs in October, beating the expected 400,000 figure and was the highest in four months. Next week, the US will release October PPI and CPI data, as well as University of Michigan market sentiment data.

Europe

The Bank of England unexpectedly kept interest rates unchanged after the interest rate meeting, missing market expectations of becoming the world's first major central bank to raise interest rates, sending the pound down 1.37% against the US dollar on the same day; the yield on the 10-year UK government bonds fell below 1% again; however, the FTSE 100 index rose 0.37% in a single day, buoyed by the depreciation in the currency. Over the past 5 days ending Thursday, UK, French, and German equities rose by 0.42%, 2.70%, and 2.12% respectively. On the other hand, although the market expects the European Central Bank to raise interest rates in October 2022, President Christine Lagarde is still stressing that a rate hike next year is very unlikely. Next week, the Eurozone will release the ZEW Economic Sentiment Index for November.

China

Hong Kong equities remained under pressure as the market is concerned over the state of the Chinese real estate market, the Hang Seng Index fell below the 25,000 level, down 2.0% over the week; China A-share market was more stable, but the CSI 300 index still fell over 1.35% over the same period. Negative news on Chinese real estate companies continued to emerge, overdue payments on financial management products guaranteed by Kaiser Group, and the subsequent suspension of trading of Kaiser Group and its subsidiaries in Hong Kong, weighed on the Chinese real estate sector. On the economic front, the Caixin China Manufacturing and Services PMI both improved in October. Premier Li Keqiang said China's economy is facing new downward pressure and effective policy adjustment is needed. Next week, China will release CPI and PPI data for October.

 US

Strong Q3 earnings in the US boosted market confidence, as the S&P 500 hit a new all-time high. The three major US stock indices continued their strong form over the past five days ending Thursday, posting gains of 1.98% - 2.65%.  Of the 109 reporting S&P 500 companies, more than 80% reported earnings beats; In particular, among the 31 reporting financial institutions, 87% beat earnings estimates, driving the S&P 500 Banks index up 6.7% MTD.

Global energy supply shortages persist, it was reported that OPEC+ missed output targets again last month, and Russia has not increased natural gas supply to Europe. Data showed that US Cushing crude inventory recorded the largest fall since February this year, while gasoline stockpiles also fell to a two-year low. The WTI crude futures price peaked at US$84.25 per barrel. The S&P 500 Energy index rose 10.0% month-to-date, driven by higher oil prices. In addition, copper prices surged as physical copper stocks on the LME fell to their lowest level in over 40 years.

High energy prices kept inflationary expectations elevated, increasing tapering pressure on the Fed.  According to Bloomberg interest rate futures, market expects the Fed to raise interest rates twice by the end of 2022. US Fed governor Christopher Waller pointed out that the Fed may need to accelerate its monetary tightening if inflation remains too high. The US 10-year Treasury yield, which is an indicator of interest rate policy expectations, hit 1.7%. Next week, the US will release important data including the preliminary Q3 GDP and the core PCE for September.

Europe

The ECB's interest rate meeting on Thursday had little impact on the broader market, with European equities following external markets, the UK, French and German indices rose 0.62% - 1.05% over the past five days ending Thursday. The ECB left policy rates and the size of its PEPP unchanged after the meeting. Against the backdrop of higher inflation, the market is expecting the ECB to raise interest rates in the coming year. According to Bloomberg interest rate futures, the probability of a rate hike at the September 2022 ECB meeting has reached 100%. However, ECB President Christine Lagarde dismissed the market's expectations at the press conference, stating that this is not in line with the policy guidelines. Next week, Europe will announce the Eurozone unemployment rate for September.

China

The US Federal Communications Commission announced the revocation of China Telecom's license in the US. The news weighed on the performance of many China shares listed in the US, the Chinese technology sector was also affected. The Hang Seng Index lost 2.87% over the week, while the CSI 300 Index was also 1.03% lower. It was reported that some holders of the Evergrande US dollar bonds due in 2024 have received their late coupon payments. On the energy front, it was reported that Chinese authorities are planning to limit coal prices to alleviate power shortages, sending mainland coal futures prices sharply lower in recent days. Next week, China will release several important economic data, inclusding the Caixin Manufacturing and Services Purchasing Managers' Index for October.