US

US bond yields have retreated, but the global epidemic is showing signs of resurgence. As the Fed Chairman has said that the Fed will gradually reduce bond purchases “when the economy is all but fully recovered”, global equities went lower, led by the technology sector. The Dow, S&P 500, and NASDAQ fell between 0.15% and 1.06% over the past five days ending Thursday. While vaccine distribution has made visible progress, the global epidemic has taken a turn for the worse, and investors are weighing the prospects of economic growth and inflation. U.S. Federal Reserve Chairman Jerome Powell said he would not stop the extraordinary monetary policy support until the economy is close to a full recovery, but also said he would gradually reduce bond purchases as concrete progress is made towards economic goals. The 10-year yield on Treasuries has now fallen back to around 1.62%. Next week, the US will release data on consumer confidence, the ISM manufacturing index and the unemployment rate, all of which are expected to improve significantly.

Europe

Equities in the UK, France, and Germany fell 1.04% to 1.82% over the past 5 days ending Thursday as signs of the worsening outbreak in Europe raised fears that the economic recovery may be affected. ECB President Christine Lagarde said uncertainty remained over the short-term economic outlook, due to the state of the epidemic and the pace of vaccinations, but added that the bank would utilise all instruments in due course to ensure inflation would stay on track. Earlier data showed that the local economy was improving, with the Eurozone's preliminary March manufacturing PMI coming in at 62.4, ahead of market expectations of 57.6. Next week, the Eurozone will release CPI figures for March, market expects the YoY growth to accelerate to 1.4%.

China

US-listed China stocks slumped, dragging the Hong Kong stock market down. The Hang Seng Index is down 2.26% for the week, while the CSI 300 Index rebounded from earlier losses to end the week in green. Driven by the weakness in China concepts and the strengthening Dollar, Hong Kong equities showed short-term weakness, falling for 5 days in a row and lost over 1,500 points. The market is concerned about the Mainland's monetary policy, as the PBOC reiterated the need to maintain a stable, flexible, precise, and reasonably appropriate monetary policy. Next week, China will release the official manufacturing and non-manufacturing PMIs, and the Caixin China Manufacturing PMI for March.    

Our positive view on the high yield bond market holds true up to date. Fundamentals, fiscal, and monetary factors all support high yields, and this should stay true for the years down the line as the global economy is now recovering. The yield curve in a recovering economy tends to be steepening, which negatively impacts investment grade bonds as they tend to have a longer tenor, while high yields usually thrives as they have shorter tenor on average and credit conditions improve in the economic recovery.

Moreover, markets expects major central banks to keep rates low in the short term. US Fed chair Jerome Powell reassured that the Fed does not see the need to raise rates for the coming few years, citing the accommodative monetary policies will stay in place as long as the economic situations have not fully recovered. This creates a healthy environment for the economy for recovery, together with the vast levels of stimulus and other governmental support, high yields and Asian fixed income in particular should continue to see better performance in the short to medium term.

As we reiterated multiple times recently, the current market is not entirely driven by the fundamentals, capital flows also play an important role in dictating market movements. With the current theme of economic recovery, we see the case for Japanese equities performing in the short to medium-term as capital flows still favour the market. However, weakness remains in the economy, as shown by the weaker than expected GDP growth and household spending figures, which makes the long term prospects of the market dull in comparison.

To add on that, the latest updates on the Olympics are also negative for the local economy outlook. Officials have finally made the decision to ban all foreign tourists from coming into the country for the delayed Olympics, which essentially removes almost all the potential gains from hosting Olympics, further impacting the already fragile recovery. Therefore, while the local market can still go further up with the market favouring cyclicals at the moment, the medium to long-term prospects of the market is still likely be limited without any material changes.

One of the hottest events in the market was the surge in US treasury yields, as 10Y treasury yields shot above the 1.50% level once again towards the end of the month. One of the causes of the resurgence in bond yields was the fear of higher inflation, due to the easy monetary policy and the Fed’s determination to keep the rates low, markets feared that the recovery in the economy could drive inflation up. The surge in treasury yields also indirectly sent the Dollar higher, negatively impacting EM equity returns.

The saving grace is the rise in commodity prices, which is positive for EM due to their general exposure to the commodity markets such as crude oil and other base metals. However, fundamentals in certain parts of the EM sphere remain weak, as the ongoing epidemic remains out of control, which in turn weakens their prospects in the short to medium term. Therefore, in the EM universe, we would prefer Asian markets for their more positive growth outlook and smaller downside.

Epidemic wise, the situation in Europe continues to improve as daily new cases fell, vaccinations are also picking up in Europe despite significantly lagging behind progress in the UK or the US, which continue contributing to the positive market sentiment. Expectations of the upcoming economic recovery provided ample support to cyclicals, financials in particular gained a lot on the backdrop of a steepening yield curve.

Looking forward, while valuation levels in Europe are relatively fair when compared to historical averages, the region is still suffering from a rather weak economy. Economic fundamentals continue to hint at a subpar outlook, services PMI, consumer confidence and economic sentiment indicators are still depressed compared to long term averages. As recent markets movements tend to be dominated by capital flows, European equities may still see more upside in the short term under the expectations of a cyclical recovery, but the market will likely remain lacklustre in the medium to long-term considering its limited growth potential.

 US

US treasury yields spiked again on Thursday, 10Y Treasury yield rose above 1.7% spooking markets. Growth names, primarily led by big tech, saw some of the larger corrections in the market. Over the past 5 days ending Thursday, the S&P 500 fell 0.61%, the Dow gained 1.16%, while the NASDAQ lost 2.11%. Fed had their interest rate meeting this week, Fed chairman Jerome Powell stated that the Fed is optimistic on the US economic outlook, but also highlighted the risk of the economic boom being short-lived, signalling that rates will likely stay low at least until 2024 to better support the economy. Current fund flows prefer recovery plays, somewhat explaining the Dow’s recent outperformance compared to the NASDAQ. Economy wise, recent data has been rather disappointing, retail sales, industrial production, and initial jobless claims data have all missed market expectations. Investors could focus on next week’s data, where we will see the latest figures on durable goods, services and manufacturing PMIs, Michigan consumer sentiment, and PCE price index.

Europe

European equities have been performing relatively well recently, with the UK, French, and German equity indexes gaining between 0.27% and 1.88% over the past 5 days ending Thursday. On the epidemic front, European countries including Germany and France will resume the deployment of AstraZeneca's Coronavirus vaccine, as the European Medicines Agency concluded that ‘benefits of the Vaccine still outweigh its risks’. However, it was reported the third wave COVID outbreak in France has commenced, with the local government announcing a month-long closure of many areas including Paris. Markets are watching the outbreak with concern. Next week, the Eurozone will release its manufacturing PMI, while Germany will release its IFO economic outlook.

China

Although markets remained choppy, both Hong Kong and Chinese equities somewhat stabilised compared to the beginning of the month. Over the week, the CSI 300 Index was down 2.71% and the Hang Seng Index lost 0.87%. The market is watching the first face-to-face meeting between the US and Chinese Senior Officials since Biden took office, as there were reports that both sides have lashed out at each other on a range of issues. On the economic front, China's industrial production and retail sales both rose at a higher than expected YoY rate in February, while fixed investment growth fell short of expectations. As the Chinese economy recovers, the market is concerned whether the "deleveraging" will persist, as well as the regulatory actions on the so called 'platform economy'. Next week, China will release the 1-year and 5-year LPR data.

The tightening up in market liquidity was one of the reasons for the correction. PBoC officials have mentioned earlier that there are potential bubbles in the property and stock market, subsequent actions such as open market operations and adjustments to the medium-term lending facility (MLF) reduced liquidity in the open market, affecting market sentiment at the same time. However, outlook for the year is still likely positive. Although some of the figures are trending down, fundamentals remain on the positive side, economic growth outlook is still poised to be among the best in 2021 globally, which makes Chinese equities an attractive investment option.

As for policy direction, the ‘Two Sessions’ were held in early March, where we saw a summary of the Chinese policy and development direction in the short to medium term. Economic target for the year was set at a modest level of 6%, similar to our expectations at the start of the year. Another highlight in the ‘two sessions’ was the future carbon roadmap in the country, where the focus was on sectors such as electric vehicles and clean energy network, which is key to achieving the targets of carbon neutrality by 2060. These will likely be some of the sectors in focus with the greatest growth potential in the medium to long term.

Market sentiment improved as vaccine optimism continues to build up, it is estimated that most major western economies would be able to vaccinate most of their population by the end of 2021, which points to a swift return to normal. However, bond yields surged later on in the month, triggering market correction due to the speed of the surge. In our opinion, long end bond yields going higher while the short end stays unchanged is simply a steepening of the yield curve, which is traditionally considered to be an indicator of a positive economic outlook.

Henceforth, the latest market movement is likely a healthy correction, as the market has gained a lot since November 2020. Such a correction reduces the valuation multiple, bringing it more in line with the historic average. Considering the current recovery in the economy, proven by the leading economic indicators, the steady progress of the vaccination rollout, and the passing of the huge stimulus bill, the outlook of the US equity remains positive for the year.