The situation in Ukraine remains troubling, but further escalation of the current situation seems to be an unlikely event. Henceforth, the direct risks arising from the Ukraine uncertainty should have been well priced into the current market. However, the lingering side effects due to the conflict, including the supply shortage on several key commodities, would likely fuel the high inflation for the time being, posing as a problem to the global economy. We do note that exporting countries could somewhat benefit from the higher commodities prices, but imported inflation remains a problem for many.

Global central banks have raised interest rates and tightened their monetary policy, EM central banks were no exception. While rate hikes could potentially help rein in inflation, they also deal damage to the physical economy, making it a two-edged sword. We still find emerging markets to be less attractive as an investment option, as negative factors such as the weaker economy, capital outflows back to DMs, and the stronger Dollar remain in place for the time being. Henceforth, we remain conservative on EM in the short term, while modestly optimistic on China and Southeast Asian markets over the longer investment horizon.

  US

The US stock market had initially rebounded strongly after the Easter holiday, but Fed Chairman Jerome Powell's hawkish comments triggered another sharp fall in technology stocks, with the tech-heavy NASDAQ tumbling 3.44% over the past 5 days ending Thursday, the S&P 500 fell 1.19%, while the Dow rose slightly by 0.66%. Powell mentioned that a 50 basis point hike would be discussed at the meeting, and also mentioned that he saw merits in a ‘front-loaded hike’, implying that he was in favour of a more aggressive approach to inflation. Bloomberg interest rate futures data suggests that the probability of a 50 basis point hike at the May 4th meeting has reached 100%.
As for corporate earnings, 91 S&P 500 constituents have reported their latest quarterly results, with 73 of them beating market expectations (80.22%). Two companies caught the market's attention: Netflix's share price plunged 35% in a single day after announcing that it lost 200,000 subscribers in the quarter; while Tesla's stock rose more than 10% intraday following its impressive earnings report, but later narrowed to about 3.23% at market close. In addition, the World Bank lowered its forecast for global economic growth to 3.2% in 2022, down from its original forecast of 4.1%. Next week, the US will release data on GDP for 2022 Q1 and consumer confidence for April.
 

Europe

European equities were relatively stable, with the UK, French and German equities markets gaining between 0.62% and 3.63% in the past 5 days ending Thursday. On the economic front, the data all point to an improving economy, with the preliminary Eurozone Manufacturing PMI at 55.3 in April, ahead of market expectations of 54.9, and the preliminary Eurozone Consumer Confidence Index of -16.9 in April was also better than the expected -20. ECB Deputy Governor Luis de Guindos said that the central bank should end its asset purchase programme in July and that a rate hike in July is possible. Next week, the Eurozone will release important data including 2022 Q1 GDP and April CPI.

China

Fears that the US Federal Reserve might speed up its tightening policies triggered worries over tighter market liquidity, pressuring the Hong Kong equity performance, with the Hang Seng Index falling by 4.09% over the week; China A-shares also failed to rebound, falling 4.19% over the same period. On the other hand, China's economic data was positive, with GDP rising by 4.8% YoY in 2022 Q1, up from 4.0% in the previous quarter. The recently announced 1 and 5 year LPR rates remained unchanged at 3.7% and 4.6%, no further cuts were made. The market will continue paying attention to the liquidity situation. Next week, China will announce industrial profits data for March.

Regarding the Ukrainian conflict, unless the highly unlikely event of a full blown war actually takes place, we do not expect further deterioration in the situation, and the majority of downside risks have likely been priced in. Instead, we see risks arising from the fallout of the conflict, namely sanctions and disruptions to the supply chain. Russian and Ukrainian exports have drastically reduced, European supply of key commodities reduced significantly, contributing to the surge in inflation, which will be the next focus of attention. The latest Eurozone CPI was 7.5% YoY, which was a new record. 

To reign in the problem, the ECB is poised to tighten its monetary policy, and market is already pricing in 5 rate hikes before the end of the year. With monetary policies shifting from a highly accommodative one to a tight one, equity valuations would likely remain under pressure. And with the economy is still affected by the weaker sentiment due to the ongoing conflict, as well as the sky high inflation, German think tank have warned that the region could enter technical recession. With a less optimistic outlook, we remain slightly negative on the European equities in the short to medium term.

The economy further tanked in March, PMIs in China have fallen into the contraction zone, as the country experienced a surge in the omicron wave. The government have decided to stick to the ‘dynamic zero’ policy, where social activities were severely limited to clamp down on infections. Henceforth, economic activities and demand have taken a hit, which inevitably impacts the economy itself. With the pandemic still ravaging different locations, it is expected that the economy will remain under pressure in the short term, which serves as headwinds for the market.

As a result, uncertainty in the Chinese equity outlook increases. Although there has been signals that the government would provide more support via monetary loosening and fiscal incentives, the overall business landscape remains rather tight in the short term, as the Chinese property sector suggests so. With no material changes, the Chinese economy will likely remain under pressure, short term equity market outlook is uncertain. However, in the long term perspective, we think that the current valuation levels are attractive, which might be an opportunity if one does not emphasis on the short term performance.

There is still no de-escalation in the situation in Ukraine, and little have been agreed on a ceasefire. However, given that the unlikelihood of a full blown war between the West and Russia, we expect no further deterioration in the situation and think that most of the downside arising from the conflict are already priced in. Economic fundamentals are strong, but the issue of high and persistent inflation remains in place, due to the fallout impacts of both the Russo-Ukrainian conflicts, as well as sanctions and self-sanctions, which significantly reduced the supply. 

With inflation remaining at highs of recent decades, monetary policy is poised to tighten notably, which will continue to be headwinds against the equity market. Considering the recent rebound, there could be downside risks arising from rebasing valuations. Another intriguing observation is the inversion of the yield curve, which was a historic predictor of future recession. While the current economic fundamentals of US are strong, with the high lingering inflation, economic momentum could further slowdown, potential stagflation scenarios could not be completely ruled out. Henceforth, we remain relatively conservative over the US equity outlook, and would suggest holding defensive sectors and only increase equity exposure if market further corrects.

H​​​​arris Fraser Hong Kong office's working hour on 14 April 2022 will be from 9:00 am to 6:00 pm. And the office will be closed on Eater holiday (15 to 18 February 2022). Any request received during the holiday will be processed on the next working day (19 April 2022 ).

  US

US inflation rose to a 40-year high, with US equities weakening on the back of volatility, the NASDAQ fell 1.77% and the S&P 500 lost over the past 5 days ending Wednesday. The US Consumer Price Index (CPI) rose by 8.5% YoY in March, the highest since 1981. In addition, the US PPI also hit a record high in both YoY and MoM measures, suggesting continued inflationary pressures on industrial raw materials. The United States NFIB Business Optimism Index also fell to a near two-year low in March, amid rising cost pressures. Against the backdrop of high inflation in the US, Fed Vice-Chairman nominee Lael Brainard said the authorities would move quickly to raise interest rates to a neutral level, and may decide whether to start tapering as early as May.
Earnings season has commenced in the US, with financials leading the charge. JPMorgan Chase (JPM) reported a 42% YoY drop in earnings for Q1 this year, spurring a 3.2% loss in a single day, while BlackRock (BLK), the world's largest asset manager, reported a 21.6% YoY increase in earnings. The market will pay close attention to the earnings performance, US will also release the manufacturing PMI data for April and the economic beige book next week.
 

Europe

The French presidential election piqued markets' attention, with European equities lacking clear direction after the sharp rebound in March. The first round of voting in the French presidential election has concluded and incumbent President Emmanuel Macron has received 27.6% of the votes, ahead of key rival Marine Le Pen's 23.4%. The next and final round of voting will be held on the 24th of this month. In addition, the market is eager to hear more from the ECB on its monetary policy at the next interest rate meeting on Thursday night, with Governing Council member Yannis Stournaras saying that inflation will be controlled at all costs. Next week, the Eurozone will release manufacturing PMI data for April.

China

Despite the news that the mainland might cut the reserve requirement ratio (RRR), the Hong Kong equity market remained soft, with the HSI down 1.62% for the shorter week due to the Easter holiday on Friday, the China A-share market was also weaker, down 0.93% from Monday to Thursday. Premier Li Keqiang said at a State Council meeting that monetary policy tools such as RRR cuts should be used in a timely manner, reinforcing market expectations that the next cut could come soon. On the data front, China's aggregate financing and new RMB loans in March were both higher than the previous month, as well as the March CPI YoY. Next week, China will release its 2022 Q3 GDP, as well as fixed investment, production and retail sales data for March.

  US

US equities were under pressure after the Fed minutes showed hawkish officials, combined with increased US sanctions against Russia, the S&P 500 and Dow were down 0.67% and 0.27% respectively and the NASDAQ lost 2.27% over the past 5 days ending Thursday. The Fed released the minutes of its March meeting, which showed that the authorities are considering tapering the balance sheet up to US$95 billion per month, and officials believe there will be at least one 50 bps rate hike in the future. The President of the Kansas City Fed said that a one-off 50 bps hike in May was one of the options that must be considered, and the President of the St. Louis Fed suggested that interest rates should be raised to 3% to 3.25% by the end of the year.
As for Western powers' response to Russia, the US announced a new round of sanctions against Russia, which will include the country's two largest banks and Putin's daughters. The US economy performed reasonably well amidst concerns over the inverted yield curve, with non-farm payrolls increasing by 431,000 in March and the unemployment rate falling to 3.6%. The ISM Services Index rose to 58.3 in March, accelerating for the first time in four months. Next week, CPI data and retail sales data for March, as well as University of Michigan market sentiment, will be released.
 

Europe

With inflation in the Eurozone hitting new highs, worries over accelerated tightening by the European Central Bank increased, as the French CAC and German DAX fell by 3.33% and 2.55% respectively in the five days to Thursday. Prices in Europe were fuelled by the Russo-Ukrainian war, with the Eurozone's consumer price index (CPI) surging by 7.5% YoY in March. ECB Governing Council member Klaas Knot said interest rates may start hiking as early as September. The Bank's chief economist, Philip Lane, said that if the economic outlook deteriorates, the Bank would reconsider the timing of the stimulus withdrawal. According to the ECB meeting minutes, officials said they felt the need to set a firm date for the end of the asset purchase programme.

China

Hong Kong's stock market started the week on a high note before sliding lower, the HSI was trading around the 22,000 level, with turnover dropping to just over $100 billion on Friday. The HSI was down 0.57% for the week, while the Hang Seng Tech Index was down 2.97%; the China A-share market remained range bound, with the CSI 300 index down 0.55% for the week. On the economic front, the Caixin China Services PMI fell to 42 in March, a more than 2 year low, while the Caixin China Manufacturing PMI was 48.1 in March, also falling into the contraction zone. The World Bank lowered its forecast for Chinese economic growth to 5% this year, down from 5.4% earlier. Next week, China's consumer price index (CPI) for March will be released.

  US

Positive news on Russo-Ukrainian talks boosted market sentiment early in the week, but hopes were dashed later on and US stocks turned lower on Thursday, with the Dow, S&P 500, and NASDAQ seeing limited movement over the past five days ending Thursday. Russia had said it would reduce its military operations near Kiev and Chernihiv, but the Kremlin later said there had been no breakthrough in the peace talks in Turkey, keeping the market under pressure.
On the other hand, the inversion of US treasury yield curve has raised investors' eyebrows as historical data shows that an inversion of the 2-10 year yield has occurred before each of the last four recessions in the US. Even though rate hikes may increase the pressure on the inverted curve, Fed officials are still very open to accelerating interest rate hikes in the face of the lingering high inflation. Next week, the ISM Services Index for March and the minutes of the 16th Mar interest rate meeting will be released.
 

Europe

Russian President Vladimir Putin claims that Russian forces will withdraw from Kyiv, while western governments remain dubious over the motives behind the action. Fortunately, the situation in Ukraine saw no further escalation, calming markets despite no further progress in the peace talks. Over the past 5 days ending Thursday, UK, French, and German equity indices edged 0.65 – 1.59% higher. ECB chief economist Philip Lane suggested that the Bank is not fixated on raising rate within the year, which contrasts to the markets’ expectations of 2 hikes by the fourth quarter this year. He further claims that current levels of inflation will not last, echoing ECB President Christine Lagarde’s view that stagflation is unlikely. As for economic data, Eurozone CPI was a whopping 7.5% YoY in March, setting a new record high. Next week, Sentix investor confidence and Eurozone services PMI, as well as retail sales figures will be in focus. 

China

Both Hong Kong and Chinese equity markets recouped more ground over the week with limited negative news. External market sentiment were also mildly positive with no worsening in the Ukrainian situation. Over the week, the Hang Seng Index gained 2.97%, while the CSI 300 was also 2.43% higher. Recent economic data releases have been underwhelming, with the Caixin manufacturing PMI at 48.1 for March, and both official manufacturing and non-manufacturing PMIs in the contractionary zone. The COVID situation in China is another point of concern, as cases remain on the rise. In Hong Kong, trading in more than 30 listed companies in Hong Kong are temporarily suspended after the companies missed their deadlines on submitting annual results, raising concerns over the financial health of Chinese developers. Next week, China will release Caixin Services PMI for March, as well as the latest foreign reserves.