Global inflation have seemingly gotten worse. CPI figures in the US edged ever so slightly lower, but the YoY figure remained above 5%, Eurozone figures even hit a 13-year high. To make matters worse, the ongoing energy crisis could stay until the end of the year, the elevated fuel prices are expected to support inflation at multi-year high levels, such that the current dovish policies could come under question.

The ECB stood firm on their current policy, stating that they still believe that the current elevated inflation as purely transitory, and suggested that the current accommodative monetary policies will stay in place until the economy fully recovers. The US Fed on the other hand though had a more hawkish stance. Fed chairman Jerome Powell warned that inflation pressures are higher and raises the prospect of an earlier and larger tightening. With the US taking the lead in tapering, interest rate continue to serve as the main source of downside risk in the fixed income universe. Henceforth, our view on the market has not changed, we would still take high yields over investment grades as they offer better risk adjusted return in the current environment. 

As usual, economic fundamentals in Japan lean towards the weaker end. While services PMI has significantly improved, it remains in the contraction zone; retail sales are weak, household spending is also down, all pointing to a weaker economic outlook in Japan. However, we should look beyond economic indicators, and pay attention to the market itself. Corporate earnings continue to improve, forward EPS have been on the rise since late 2020, which outpaced the equity market movement. The stronger earnings growth momentum makes for a good investment case, more so considering that the valuation level is below the 5 year average.

The surging inflation globally has not affected Japan on the same magnitude, as local CPI is only barely positive. The lack of inflationary pressures allow the central bank to extend the current dovish monetary policy, indirectly supporting the equity markets. As Japanese equity markets have far lagged behind other DM markets, with the market sentiment improving with the new Prime Minister assuming the role, positive pandemic developments, and the economy set for a full reopen, we are more positive on the Japanese equity market in the short to mid-term.

With surging inflation numbers across the globe, monetary tightening as a countermeasure is inevitable. According to the Fed, tapering of bond purchases could begin this year, driving bond yields higher. This puts EM economies in a dilemma, whether to 1) Respond to the rise in Dollar yields with a rate hike of their own, and risk damaging the economy by reducing liquidity and raising borrowing costs; or 2) Keep rates unchanged, and risk inflation further spiking and capital outflow. Furthermore, we expect the Dollar to further appreciate, and this could pressure EM equity performance.

Our base case on the EM outlook has not changed much, risk factors including epidemic control, vaccinations, inflation, and limited room for fiscal stimulus all contribute to the weaker fundamentals compared to DM economies. The pressing issue of rising inflation raised the need of rate hikes in the EM economies, several of them have already taken action, which is expected to cause a dent in their local economy. Although valuation levels of EM equities are on the lower end, the headwinds to equity performance are still present, such that we will still prefer DM equities over EM in the medium term.

 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

European equities are in a weaker form compared to the US, with the UK, French, and German indices posting losses between 0.60% and 0.74% over the past five days ending Thursday. Europe's latest quarterly earnings were not as stellar as those of the US, with only 57% of the 97 reporting STOXX 600 constituents beating market estimates, which is far below the US figure of over 80%. In addition, the European Central Bank (ECB) policy is troubled by rising inflation, ECB Governing Council member and Bank of Slovenia Governor Bostjan Vasle said that inflation in the Eurozone may exceed expectations, and the Bank should end the PEPP after March 2022. Next week, The Eurozone will announce its preliminary GDP for the third quarter, and the ECB will also hold an interest rate meeting.

China

China A-shares were stable, with the CSI 300 Index rising 0.56% this week. In Hong Kong, the HSI rose above its 50-day moving average, and was up 3.14% over the week, as sentiment improved in recent weeks, with technology equities leading the market rebound. The market is still focused on the Chinese debt crisis. While it was reported that the asset disposal agreement between Evergrande and Hopson Development fell through, it was later revealed that Evergrande had remitted the interest on the USD bonds before the deadline, narrowly avoiding a default. In the commodity futures market, China's Development and Reform Commission said it was studying specific measures to intervene in coal prices, sending domestic coal futures plunging, and dragged down coal-related names. Next week, China will release figures on the September industrial profits.

As the situation in UK have showed us, a comprehensive vaccination doctrine could be ones of the ways out of the current pandemic. Although local daily cases are higher, it still put limited strain on the healthcare system. Vaccinations in most major European economies has hit the suggested herd immunity level, expect economic activities to return to normal. PMIs have edged slightly lower, while sentiment indicators stay close to the recent highs, which suggest that economic fundamentals remain positive. Although the EU revised its Q4 GDP forecast higher, as the recent fall in German factory activity showed, economy growth could be past its peak.

Inflation is the more concerning data point here, given that the latest CPI figure was 3.4% YoY, a level not seen in the past 13 years. To make matters worse, Europe was also facing an energy crisis, surging gas prices had a spill over effect, which is expected to further drive inflation higher. Markets are worried if the ECB will tighten the monetary policy in response, while the ECB reiterated that the Bank would refrain from premature tightening that could damage the economy. Overall, we would like to stay positive on the market outlook as valuations and fundamentals continue to support the market.

With the pandemic under control in China, economic activities had gradually resumed, which was reflected by the improving economic data, such as the PMIs’ recovery to or close to the expansion level. With the vaccination rates reaching herd immunity levels, and the government adopting effective countermeasures, it was expected that the country can recover and return to pre-pandemic levels. However, unexpected disruptions to the economic activities due to the abrupt power curbs raised concerns over the economy outlook in China. 

More so, market uncertainties arising from the ongoing debt crisis continue to impact market sentiment. More Mainland developers defaulted on their debt obligations over the month, the debt-ridden Evergrande group is also on the verge of doing so. With liquidity conditions in China being on tight end, if confidence in the property market further weakens, this could lead to a snowballing problem. Henceforth, as uncertainties in the Chinese market outlook remain, this could hurt market sentiment. We would stay neutral on the market in the short term, only staying selectively positive on segments that are structurally integral to the country.

On the economic front, US data is still decent. Key PMI data have all stayed at higher levels, employment data was encouraging, possibly suggesting that the economy has recovered from the COVID pandemic. With the economy back to pre-pandemic levels, the current inflation problem should be the next issue pending resolution. Fed Chairman Jerome Powell’s view on the currently elevated inflation has shifted from ‘transitory’ to ‘could last longer than expected’. This suggests that monetary tightening could be more imminent, so as to counter the higher inflationary pressures as the Q4 energy crisis hits. 

According to the latest Fed Dot Plot, committee members have turned slightly more hawkish, interest rate futures market have also reacted accordingly, currently pricing in one rate hike by the end of 2022. All these point to a tapering announcement as early as November. The expected reduction in market liquidity could put further pressure on the market valuation levels and could result in limited upside for the US equity market in the short term. While we do expect the US market to perform in line with global equities, we would stay on the cautious side for the last quarter of the year as the downside risks do remain. 

 US

High energy prices continued to raise concerns about rising inflation, but the US financial sector Q3 results were promising, easing fears of an economic slowdown, the three major US stock indices rose 1.56% to 1.73% on Thursday alone, reversing the weakness over the past five days. As the US entered the new earnings season, 77% of the latest 35 S&P companies reported market beats, of which 89% of the 9 financial institutions managed to beat the market.

The global energy crisis continued with a surge in energy prices, with WTI futures rising again to US$82.1 per barrel at the time of writing and New York natural gas prices rising again to US$5.77 per MMBtu. In addition to energy, some base metals prices also recovered, with the LME aluminium price rising to US$3,099 per tonne and hitting a 13-year high, the LME metals index also reached a new record high. The Organization of the Petroleum Exporting Countries (OPEC) remained cautious in its oil demand forecasts despite the surge in international oil prices. It has been reported that the US government will meet to discuss how to deal with rising gasoline and natural gas prices.

Against the backdrop of surging energy prices, the US Consumer Price Index rose by 5.4% YoY in September, the highest level since 2008. Amid high inflation, the minutes of the US Federal Reserve's September interest rate meeting indicated that taper of bond purchases was expected to be start in mid-November or mid-December, in line with market expectations. The market will continue to monitor the US financial results, with the latest Fed economic beige book and manufacturing PMI data to be released next week.

Europe

European stock markets rebounded across the board, with the UK, French, and German indices rising between 1.58% and 1.91% over the past 5 days ending Thursday. The PEPP is scheduled to expire in March 2022, but there are divergent views among ECB officials regarding this issue; Francois Villeroy de Galhau, member of the ECB Governing Council and Governor of the Bank of France, said that the central bank should retain the purchasing flexibility of the PEPP instead of increasing the amount of bonds on a fixed basis. Klaas Knot, another member and President of De Nederlandsche Bank, said that inflation in the Eurozone might be higher than expected in the short to medium term, suggested that the ECB should end the PEPP programme in March next year. Next week, the UK will release the consumer price index, and Eurozone will release the Markit PMIs.

China

A-shares were stable while Hong Kong stocks had a strong rebound. The CSI 300 Index was roughly flat for the week. After a two-day trading hiatus due to typhoons and holidays, the Hang Seng Index rebounded 1.48% in a single day and hit a one-month closing high after the market resumed on Friday. Panic in the offshore bond market spreads further as yields on the Bloomberg China Dollar Bond Index rose to 20%, the market is closely watching the latest development. Next week, China will release its Q3 GDP and important data on fixed investment, production and retail sales for September.

 US

The US Senate reached a bipartisan agreement to extend the debt ceiling and the market expects the House to approve the bill. The news was positive and US stocks reversed their short term weakness, in the past 5 days ending Thursday, the Dow, S&P and NASDAQ rose by 2.69%, 2.14% and 1.42% respectively. On the US debt ceiling issue, Senate Republican Leader Mitch McConnell originally declared that he would not work with the Democrats. However, McConnell later proposed the short-term extension of the debt ceiling, which was passed by the Senate. According to the agreement, the US debt ceiling will be raised by US$480 billion, which should be sufficient to meet all payments until 3 December this year, lifting the US debt ceiling crisis for the time being.

Global energy shortages sent energy prices to multi-year highs, with natural gas futures surging by 60% over a two-day period. At the end, Russian President Vladimir Putin, a major natural gas supplier to Europe, said he could help stabilise the global energy market, prompting a fall in natural gas prices. While countries are working to address their energy crisis, OPEC+ announced that it will maintain a 400,000 barrel per day increase in crude oil production in November, which falls short of market expectations; together with the US Department of Energy statement that there are no plans to release strategic oil reserves, sent WTI crude futures to a seven-year high of almost US$80 per barrel.

With energy prices high, the market is wary of inflation risks in the US, plus the faster-than-expected expansion of the service sector in September, indicating strong demand, there is high conviction that the Fed will announce a taper in bond purchases in November. The 10-year yield on US Treasuries rose to nearly 1.6%, the highest since mid-June, reflecting rising inflation expectations and the Fed's expected tapering, as funds flowed out of US Treasuries. Next week, the US will release the minutes of its September interest rate meeting and important data such as the September CPI.

Europe

European equities mirrored the global market recovery, with UK, French and German equities rising between 0.73% and 1.27% over the past five days ending Thursday. According to the minutes of the European Central Bank (ECB) meeting in September, members discussed a larger reduction in the scale of asset purchases, and there were suggestions that the market may be preparing for the end of the pandemic support programme. It was also reported that the ECB was looking at introducing a new bond-buying programme to replace the PEPP, which expires in March next year, to avoid market turbulence that could affect the economic recovery. Next week, the ZEW Economic Sentiment Index for October will be released.

China

Asian stock market sentiment improved, with the Shanghai and Shenzhen stock markets ending in the green after the National Day holiday, the CSI 300 Index rose 1.31% in a single day, and the combined turnover of the two stock exchanges exceeded one trillion RMB again. While Hong Kong equities narrowed their gains on Friday, the market rose for two days in a row, reversing the recent weakness, the HSI rose 1.07% for the week and the Hang Seng Tech Index also rose 1.72% over the same period. During the National Day holidays, the market was concerned about the liquidity of mainland property companies. Following Evergrande's missed bond interest payment, another property company, Fantasia, also failed to pay the principal on its maturing notes, which weighed on the Chinese offshore bond market, driving the Bloomberg Barclays China Dollar Bond Index yield up to 16.9%. Next week, China will release CPI and PPI data for September.

 US

The US equity markets logged in one of the larger single-day declines on Tuesday, as sentiment was hit amid market uncertainties. Over the past 5 days ending Wednesday, the NASDAQ took the largest hit, losing 2.58%, the S&P 500 lost 0.82%, while the Dow managed to hold a 0.39% gain. On the economic front, core durable goods orders missed market estimates, coming in 0.2% versus the 0.5% consensus. Conference Board Consumer Confidence Index also fared worse, as the reading of 109.3 for September is both lower than the estimate and the August figure. Fed Chairman Jerome Powell still insisted the view that inflation should ease eventually, but admits that the current pressures could stay well into 2022.

Treasury Secretary Janet Yellen told the Congress that the Treasury will run out of cash by 18th October if the debt ceiling is not addressed, potentially risking the first US default and causing systematic risk to the global financial system. The House have passed a bill to suspend the US debt ceiling, but it is expected to fail in the Senate. It remains to be seen how the Democrats will try to avoid the possibility of default. Next week, the US will release important data including the ISM non-manufacturing and Markit Services PMIs, non-farm payrolls, and unemployment rate.

Europe

European equities had mixed performance, UK equities edged 0.35% higher over the past 5 days ending Wednesday, while French and German indices lost 0.91-1.15% over the same period. On the economic front, Eurozone unemployment rate in August was 7.5%, meeting market expectations. European Central Bank (ECB) President Christine Lagarde admitted that there are factors that could potentially lead to higher inflation, but the risks remain limited at the moment. ECB Governing Council Member Mário Centeno reiterated the ECB view that the current inflation level is only temporary, emphasising the need to keep favourable financial conditions until the economy is clearly out of the crisis. Next week, Europe will release the Services PMI and retail sales figures for Eurozone, Germany will also release Industrial Production Data for August.

China

With the national day week holidays ahead, the Chinese and Hong Kong stock markets lacked clear direction. The CSI 300 Index was 0.35% higher over the short week, while the Hang Seng Index also managed a 1.59% gain. An abrupt announcement of electricity curbs came out of China during the week, citing electricity shortage in several provinces, hitting industrial hubs in Guangdong and other north eastern provinces, concerns over the potentially lower Chinese industrial production led to a fall in shipping and materials sectors. The Evergrande incident continues to drag on, as the company missed the second offshore bond interest payment. The Group has arranged an around 10 billion CNY stake in Shengjing Bank, but more work is still needed before the Group can meet all outstanding liabilities. Next week, China will release Caixin Services PMI.