Inflation was originally expected to ease throughout the year, but the surprise turn of events in Ukraine will likely further fuel the sky high inflation via supply disruptions in Russia. While enacted sanctions have largely excluded the energy sector, there are still more concerns about the supply as OPEC refused to raise production quotas, and the strategic oil reserves coming down further fuelled speculation that energy prices are here to stay. Higher inflation has always been unfriendly to fixed income markets, as central banks have to respond with certain levels of monetary tightening.
That said, central banks are forced to choose between stemming runaway inflation, or to ensure sufficient liquidity in the market. The ECB could slow down on their tightening pace, but the Fed is expected to continue with the plans for tapering and rate hikes. This backdrop remains negative for the fixed income market, even though the bond market could see some short lived rebound as capital flock to fixed income for hedging against geopolitical risk, over the course of the year, we remain negative on this market segment, and consider only the high yield bonds to be an acceptable investment choice.
 

  US

Global markets rebounded, hopes for Russia and Ukraine to reach a peace agreement grew, and crude prices briefly retreated, easing inflationary pressures. Over the past 5 days ending Thursday, the 3 major equity indices gained 3.57-3.94%. After the Thursday meeting, the US Federal Reserve announced the first rate hike since 2018, and indicates that there will be 6 more hikes in the year. Fed President Jerome Powell stated that the economy is strong and see no signs of recession within the next year, and indicates that the balance sheet reduction could start as early as May. While the FOMC projects a 4.3% inflation for the year, Powell reemphasised that Fed is focused on achieving price stability, no surprises from the Fed helped lift market sentiment.

Earlier, it was reported that neutrality plans in Ukraine were being considered, but peace talks have seemingly stalled later in the week. The House voted in a decisive manner to pass the motion to end Russia’s favoured trade status, which is sent to the Senate for the final vote. Interestingly, it was reported that Russia managed to pay the interests on its sovereign bonds, avoiding a sovereign default. However, credit rating agencies remain concerned over the prospects of a default some time down the road, with the S&P further downgrading Russia’s rating to CC. Markets will keep an eye on the conflict development, and several key economic data will be released next week, including the latest Initial jobless claims, Markit manufacturing PMI for March, and durable goods orders for February.
 

Europe

European equities rebounded on the back of optimism over the Ukrainian situation, as Ukrainian President Volodymyr Zelenskyy noted that the country will not join NATO, fuelling expectations of more progress on the peace talks. The UK, French, and German equities gained 4.03-7.04% over the past 5 days ending Thursday. As for the economic data, ZEW economic sentiment recorded the largest drop ever, with the indicator dropping 93.6 points to -39.3, the revised Eurozone CPI for February also set a new record high. With inflation remaining elevated, ECB governing council member Klass Knot suggested that 2 rate hikes for the year is still possible, although ECB President Christine Lagarde said the Bank is in no rush to raise rates. With peace talks stalling late in the week and attacks from Russian forces continued, markets will be keeping an eye out on the Russo-Ukrainian conflict. Next week, Eurozone will release the consumer confidence indicator and Markit Manufacturing PMIs for March, while Germany is also poised to release the IFO Business Climate for March alongside UK’s latest CPI.

China

Both China and Hong Kong markets experienced huge swings this week, with the Hang Seng Index plunging 4.97% and 5.72% on Monday and Tuesday, before rebounding by 9.08% and 7.04% on Wednesday and Thursday. This was mainly driven by the shift in market confidence. At the beginning of the week, the combination of (i) the absence of a clear statement from China on the Russo-Ukrainian conflict, (ii) the heightened risk of delisting of Chinese stocks, (iii) foreign capital potentially abandoning the Chinese market, (iv) the new wave of COVID in China potentially impacting the Chinese economy, as well as (v) the suspension of the Russian stock market, which could lead to funds selling other emerging market positions in exchange for liquidity. The combination of these factors led to a free-fall in the Hong Kong market. However, on Wednesday, with the news that (i) US and Chinese regulators were working to reach an agreement on delisting arrangements, (ii) Vice Premier Liu He had sent clear signals to support the Chinese economy and the healthy development of its markets, and (iii) anticipating further negotiations regarding the Russo-Ukrainian conflict, market confidence recovered and soared on Wednesday and Thursday. Next week, China will announce both the 1Y and 5Y loan prime rates (LPR).

Overall, the Japanese economy is still relatively fragile, fundamentals are mixed, and there is limited positive news on the market. Unless there is a significant shift in policy, we expect this to remain the norm in the short term. The biggest support could come from the government, as the government is starting its slow but gradual shift towards living with COVID. Although tourists are still excluded from the reopening at the moment, allowing foreigners through the borders is a good sign that tourism will eventually recover, which would support the battered service sectors in the country. 
Inflation also continues to be the bright spot, the much lower figure than the global average, which is even lower than that of the Bank of Japan’s long term target, allows the current loose monetary policy to be maintained. This is a gives the Japan market an advantage over other major equity markets as valuations are expected to stay at the current elevated levels, but this advantage is somewhat nullified by the weaker base line. Unless there is any material change to the economy itself, we shall remain neutral on the Japan market for the year.
 

Fears of supply shocks in various commodities drove prices higher, commodities exporters other than Russia were able to post gains amidst the volatility. With sanctions imposed on several key entities, energy supply is facing potential jeopardy. With short term shortfall in supply expected, energy prices could remain at elevated levels in the short to medium term, inflation would linger. This could act as headwinds for the market, as it pushes for a tighter monetary policy from central banks, which in turn likely hurts the economy. 

At the moment, we are still cautious on EM equities, as the risk factors remain in place. A less than ideal vaccination level leading to more COVID disruption to the economy; softer economic fundamentals as reflected by the leading indicators; strong US Dollar and inflation leading to capital outflows. These together bundled with the uncertainties surrounding the military conflict paints a rather bleak picture for emerging markets, as capital generally prefer DM equities and fixed income during periods of risk aversion. As of now, we are only selectively positive on China and Southeast Asia markets, mainly due to their relatively healthier economic fundamentals.

The Russo-Ukrainian conflict continued, peace talks have not resulted in any meaningful progress. In response, western nations have imposed a fresh round of sanctions against Russian entities, targets included a number of banks and other key institutions, which is expected to cause great damage to the Russian economy. Due to the ongoing conflict and sanctions, expect crude oil supply to tighten, which could further push up energy prices, especially in Europe where there is more reliance on the Russian supply, inflation could remain elevated in Europe.

As a result, this could possibly impact the ECB monetary policy. Originally, given the relatively persistent high inflation, the ECB is expected to tighten its monetary policy over the year, cutting down on the scale of quantitative easing, alongside a number of rate hikes. While the higher level of inflation is almost a given fact at this moment, uncertainty surrounding the situation in Ukraine could delay the expected tightening in a bid to relieve short term liquidity squeezes in the market. However, fundamentals are expected to stay weaker do to the external circumstances, and we remain less positive on the European equity outlook before the 2 main risk factors fade out.

Over the month of February, CSI 300 Index edged 0.39% higher (1.22% in US$ terms), whereas the Hang Seng Index fell in line with external markets, losing 4.58% (4.78% in US$ terms).

Chinese economy is still on the soft side, as leading indicators have showed. While signals from the politburo have indicated that there should be more support coming from both fiscal and monetary sides, concerns over the real estate market remains. That said, we are still optimistic on the policy outlook, even though the overall economic growth might slow down, as we believe that the authorities’ repeated emphasis on ‘stability’ should still be the overarching policy doctrine for the year, which should reduce chances of any disastrous market crash.

For the outlook of the year, our views on the sectors has not really changed materially, as we are still positive on the selected few sectors, namely new energy and technology related sectors. The renewables related sector should see continued policy support as China continue to move towards its carbon neutral target. Whereas the technology sectors are expected to see valuation recovery as they have good fundamentals and have relatively cheap valuations at the moment. Overall, we are still leaning towards a positive outlook on the Chinese market for the year, as loosening policy stranglehold in the market should help with equity valuation recovery.

Pandemic concerns are almost completely out of the picture in the US market, the economic activity is moving back to the pre-COVID levels. However, the situation in Ukraine threw the markets off guard, with concerns over energy security and the conflict itself hitting sentiment, the freshly imposed round of sanctions would likely further worsen the supply chains woes. With limited ways out of the situation in the short term, expect elevated near term market volatility, uncertainties remain for the outlook of the market.

The monetary policy outlook also provides no help to the market. Although the situation in Ukraine could result in a slower tightening pace for global central banks, with the US is still facing one of the highest levels of inflation in recent decades, we do not expect any material change to Fed’s monetary policy direction, tightening is still the name of the game, we still expect more pressure onto equity valuations. In the short term, with the 2 major risk factors in play, we have reservations on the US market, and would advise against increasing exposure before the dust settles.

  US

The rebound in the global stock market was initially strong when Ukrainian President Volodymyr Zelenskyy said he would not insist on joining NATO, but then the lack of significant progress in the Russo-Ukrainian talks, coupled with the continued high energy prices and the heightened fears of an impending recession in the US, weighed on the US stock market, with the Dow, S&P, and Nasdaq falling between 1.84% and 3.01% over the past 5 days ending Thursday. As for the ongoing conflict, the Russian army is still stepping up its attacks on the Ukrainian capital Kiev, no substantive consensus has been reached in the foreign ministerial talks between the two, and the sanctions imposed by the West on the Russian side are still in place.

While the situation in Ukraine and Russia is still ongoing, worries about the US economic outlook are mounting as the US Federal Reserve's rate hike expectations for March have markedly cooled. According to Bloomberg interest rate futures data, the expected rate hike in March has been reduced to 25 basis points from 50 basis points, possibly suggesting that the escalation in the Russo-Ukraine situation is considered a constraint on the Fed's policy tightening. As a reference, the 10/2 year US Treasury spread, which has been an accurate predictor of US recessions in the past, has now fallen to a lower level of around 28 basis points, which may mean that the US could soon be at risk of another recession. The US Federal Reserve will meet on 16th March and the market is already expecting one rate hike. The focus will be on the post-meeting statement and Chairman Jerome Powell's comments on inflation and tapering. The retail sales data for February will also be released next week.
 

Europe

Although European stocks briefly rebounded as the situation in Russia and Ukraine eased, the region still posted losses over the past five days ending Thursday, with the UK, French, and German equities posting cumulative losses ranging from 1.87% to 2.68%. The European Central Bank kept interest rates unchanged after its interest rate meeting, but unexpectedly announced an accelerated exit from their accommodative policy. President Christine Lagarde said that with inflation expected to rise further and the economic environment highly uncertain, asset purchases would cease by the third quarter of the year unless the medium-term outlook has changed. Markets will continue to monitor the central bank policy and the European economy, while Germany will release data including the ZEW economic sentiment index next week.

China

In addition to the continued escalation of the Russo-Ukraine situation, China stocks listed in Hong Kong and the US were further weighed down by US regulatory news, which saw the Hang Seng Index testing the 20,000 level again, while the China A-share market remained weak over the past week. The SEC released a list of five Chinese companies during US market hours on Thursday, stating that these companies would be required to provide evidence to refute the decision to delist, triggering a sharp drop of the China concept stocks in the US market, which later extended to the same segment in the Hong Kong stock market. As for the two sessions, Premier Li Keqiang said in response to a reporter's question that China's economy had grown to more than RMB110 trillion last year, and that the current growth was on top of a high base, and that it would be a big challenge for such a huge economy to maintain a medium-to-high speed of growth. Next week, China will be releasing key figures on fixed investment, industrial production, and retail sales in February.

  US

The war between Russia and Ukraine continued into the second week, the Russian offensive showed no sign of slowing down, and there was no visible progress in the ceasefire negotiations. However, market expects rate hikes from the US Federal Reserve to be milder, fuelling a rally in the US stock market, as the three major indices rose by between 0.48% and 1.74% over the past five days ending Thursday.  Despite greater gains in the south, Russian forces are making slow progress in northern Ukraine. The two sides have now reached an agreement in the second round of talks on the evacuation of civilians and other issues, and will continue to negotiate.

During this period, many Western countries have stepped up their sanctions against Russia, with the White House announcing a ban on US individuals and companies from doing business with the Russian central bank, the Russian National Wealth Fund, and its Ministry of Finance. The EU has reportedly agreed to ban seven Russian banks from using SWIFT, but the number one bank Sberbank and Gazprombank are off the hook for the time being.

US Federal Reserve Chairman Jerome Powell expressed support for a 25 basis point rate hike in March and remained open to a 50 basis point hike in the future, noting that the US economy was strong enough to withstand a faster pace in rate hikes. However, he reiterated that the Russian invasion of Ukraine has created both inflationary and economic risks, suggesting that the Fed would take a "cautious" approach when raising interest rates. Next week, US will release CPI data and the University of Michigan market sentiment.
 

Europe

The Russo-Ukrainian conflict continues, rising oil prices, and increased Western economic sanctions against Russia are three factors weighing on the European economic outlook, with European equities underperforming the rest of the world. Over the past five days ending Thursday, the UK, France, and German indices fell between 3.35% and 5.96%. The ECB's chief economist said the central bank is closely monitoring the economic impact of the Russo-Ukrainian war and will use all necessary measures to support the economy when the situation becomes clearer. According to the latest ECB meeting minutes, officials believe that the geopolitical situation increases inflationary pressure, and that if the surge in energy prices continues, inflation will surpass expectations in the coming months. The ECB will hold an interest rate meeting on 10th March.

China

On Friday, reports of explosions near Europe's largest nuclear power station raised fears of an escalating war, Asian stocks were down for the day, the Hang Seng Index fell 2.5% on Friday, extending its weekly loss to 3.79%; the Hang Seng Technology Index fell 7.33% over the week, while the CSI 300 Index also shed 1.68% over the week. China's official manufacturing and non-manufacturing indices both improved in February compared to the previous month. Sectors such as oil and resource companies gained on the back of higher energy and raw material prices. Next week, China will release CPI and PPI figures for February.