Apart from a few isolated infection groups in Beijing and Anxin County, China has left the epidemic cycle early, far leading other countries who are still struggling to kick start their economies. Leading indicators hinted at an improving economy, all PMIs are in the expansion zone for 2 months in a row, with the Caixin services PMI even rising to a 10-year-high.

However, even as various economic indicators like retail sales and export figures indicate visible bottoming out in the overall economy, these figures remained lower than pre-crisis levels. With the politburo stressing the importance of stability and livelihood guarantees, the overall economy is still expected to significantly slow down for the year. Therefore, choosing the right sector is more important, with the Chinese “new economy” sector expected to grow at a higher pace insulated from market conditions, we would hold the sector to higher regards in the mid to long-term.

The second wave outbreak in the US was geographically widespread, while previous epicentres like New York and New Jersey did not see the local cases skyrocket, states like California, Texas, and Florida saw infection figures jump, raising concerns over possible economy shutdown again in near future. However, recent statements from the White House indicated that the administration do not intent to adopt any plans that might damage the economy.

As the epidemic news are mostly digested and reflected in the market, subsequent negative news did not trigger significant correction in US equities. Instead, markets slowly rallied in anticipation of more fiscal stimulus, as it was widely reported that more are on the way awaiting bipartisan action. With economic indicators like PMIs and confidence board indexes showing visible improvement, we see limited downside in the overall economy. That said, with the valuation levels at such dizzying heights, selection is the key; we expect technology and healthcare sectors to extend their great performance with robust earnings and strong fundamentals.

USA

The United States reported more than 62,000 new Covid-19 cases on Wednesday, setting a new record high. Global covid-19 cases continue to rise, yet US president Donald Trump threatened to withhold federal funds unless schools reopen. As markets continued to be concerned over the second wave infections, the Dow and the S&P 500 fell 1.39% and 0.56% respectively on Thursday, while the NASDAQ gained 0.53%. Earlier, Federal Reserve Vice Chairman Richard Clarida said the fed is ready to adopt clearer forward guidance and increase asset purchases if the situation calls for it. The US will release the core CPI, initial jobless claims, and the Federal budget next week.

 Europe

European stocks retreated, the UK, French, and German equity indexes fell 0.94% - 3.06% over the past five days ending Thursday. Most European countries have restarted their economies, the UK also announced a new stimulus plan of 30 billion pounds. Against the background of the gradual recovery of economic activities, the market focus has shifted back to the Brexit trade talks. The EU Brexit negotiators said that there are still key differences between both sides, and they also pointed out that the whole Brexit fiasco will bring greater damage to companies than the covid epidemic; Still, the UK Prime Minister Boris Johnson claimed they are well prepared for a “No deal Brexit”. The European Central Bank will hold an interest rate meeting next week, President Lagarde hinted on Wednesday that the policy rates will remain unchanged.

China

Since the start of the third quarter, the Chinese and Hong Kong stock markets saw heated trading. The turnover of the Shanghai and Shenzhen stock markets broke through the one trillion yuan mark, and the total margin balance also exceeded 1.3 trillion, reaching a 5 year record high. The CSI 300 Index soared 14.15% since the start of July and gained over 7.55% this week. Although the Hang Seng Index did not perform as well as A-shares did, it has also accumulated a gain of 5.32% MTD and 1.40% over the week. China announced that its foreign exchange reserves increased to 3.112 trillion USD in June, aggregate financing figures also increased in June. As for Hong Kong stocks, on the one hand, the HKMA continues to inject capital into the banking system. On the other hand, it was reported that the HSI will launch the "Hong Kong version of the Nasdaq", driving market speculation on new economy stocks such as ATMX. Next week, China will announce its 2020 Q2 GDP growth, market expects the YoY figure recover to 2.5%.

US

The strong US employment data overshadowed market worries about the second wave of covid epidemic. Under the increased risk appetite, global stock markets went up. Over the past 5 days ending Thursday, the three major US stock indexes were up between 1.5% and 2.3%. The number of covid cases in the US increased by more than 56,000 on Thursday, which was the largest increase since 9^th May, worth noting that Chairman Powell of the Federal Reserve mentioned that curbing the epidemic is very important for economic recovery. The US employment data released on Thursday were encouraging, June nonfarm payrolls increased by 4.8 million, well above market expectations of 3.23 million, the unemployment rate also fell to 11.1%. It is reported that the Democratic Party in the United States is planning to enact a new round of stimulus, and Treasury Secretary Mnuchin and Republican senators hoped to complete the legal procedures before the end of July. The US will announce the June ISM non-manufacturing PMI next week, market expects that to rebound to the 50 level.

 EUROPE

European equities also had a good performance. Over the past 5 days ending Thursday, the UK, French, and German indexes rose between 1.3% and 4.3%. With regards to the restarting economy after the epidemic, the UK will reopen pubs, restaurants and hotels on July 4th, market sees this as the right step towards an economic recovery. The Brexit trade talks ended early, both sides will continue to negotiate, the top EU negotiator said it is still possible to reach an agreement. In addition, the German parliament openly supported the European Central Bank’s bond purchase plan, breaking the earlier legal deadlock. The leaders of the 27 EU countries will meet at the summit held on 17^th – 18^th July, discussing the details of the 750 billion Euro economic recovery plan.

CHINA

This week, China and Hong Kong stock markets had a strong showing, A-shares’ performance in particular were outstanding. The CSI 300 index rose 6.78% over the week, while the Hong Kong HSI gained 2.39%. Chinese data released this week were mostly positive across the board, the May industrial profits YoY improved from negative 4.3% to positive 6.0%; the June official manufacturing and non-manufacturing PMIs, and the Caixin manufacturing and services PMI were all better than the previous value. Next week, China will release data such as foreign exchange reserves and CPI figures for June.

Weekly Insight June 26

United States

The number of new covid-19 cases in the United States hit a new single day record high, but President Trump said there is currently no plans for new lockdown measures. The market is still evaluating its impact on the restarting economy, limiting equity market performance. Over the past 5 days ending Thursday, the Dow and the S&P 500 fell 1.28% and 1.01% respectively, while the NASDAQ gained 0.74%. Total covid-19 cases exceeded 9.5 million globally, of which the US had a record single day increase of more than 37,000 cases on Thursday. However, White House economic adviser Larry Kudlow pointed out that even as the number of covid-19 cases surge, the economy will not be shut down again. He expects the US GDP to rebound by 20% in the second half of the year, and the unemployment rate will fall below 10% by the end of the year. In addition, Federal financial regulators have relaxed the "Volcker Rule", the market expects this to free up about 40 billion US dollars to the market. Next week, the US will release consumer confidence, ISM manufacturing data and employment figures.

 Europe

European stock markets saw a slight correction. Over the past 5 days ending Thursday, the French CAC and German DAX fell by around 0.8%, while the UK FTSE dropped around 1.2%. According to the minutes of the June European Central Bank (ECB) meeting, the Bank sees the purchase of bonds as the best tool for stimulating the economy. ECB stated that the asset purchase programs implemented in the past and at the present was intended to achieve price stability, and claimed that without the asset purchase programme, the Eurozone economy would have been worse off. Regarding digital taxes, after the United States threatened to retaliate through tariffs, countries such as the UK, France, Italy, and Spain made concessions and proposed to limit the scope of the global tax. The Eurozone will release data such as the consumer price index and unemployment rate next week

China

Earlier, White House trade adviser Peter Navarro clarified that the “Sino-US trade agreement is over” claim quoted by many others was taken out of context. This news favoured the performance of China and Hong Kong stock markets, the CSI 300 index rose nearly 1% over the week, while the HSI had a large drawdown on Friday, resulting in a flat week. As for Sino-Indian relations, the two sides agreed to ease tensions on the disputed border, but it was reported that the armed forces of both sides remained stationed in the region; India will also implement strict border inspection measures and levy tariffs on Chinese imports. Next week, China will release official and Caixin manufacturing PMI data.

United States

Recently, both incidents of the intensifying Sino-Indian border conflicts and the rising North-South Korea tensions have garnered much market attention. According to the latest info, after bilateral talks, China has released 10 Indian captives, seemingly implies that Sino-Indian tensions are cooling down. On the other hand, the epidemic situation once again drew market attention. We saw a rapid increase of new covid-19 cases in some US States, while the local Beijing government also identified a serious epidemic situation in the city, market fears grew over the possible second wave outbreak. Nevertheless, we have yet to see the epidemic situation and geopolitical developments bring great impact on the investment market. In the US, the Fed announced earlier that it began purchasing corporate bonds, other sources reported that the White House is drafting a trillion dollar financial stimulus. With the uplifting US retail figures, US stocks put an end to the recent correction, and the NASDAQ rebounded, challenging the 10,000-point level. Over the past 5 days ending Thursday, the Dow and S&P 500 rose about 3.7%, while the NSADAQ gained nearly 4.8%. The US will release data such as manufacturing PMI and core PCE next week.

 Europe

European stock markets followed global markets and rebounded. Over the past 5 days ending Thursday, the UK, French, and German stock indexes rose between 2.4% and 3.0%. After the interest rate meeting, the Bank of England (BoE) kept the interest rate unchanged at the record low of 0.1%, announced a £100 billion increase in the scale of asset purchases, but will slow down the rate of purchase. In the BoE statement, it was reported that the recent data implied that the UK economy had started its recovery since May, so the Q2 GDP contraction may be less severe than the earlier forecast. Leaders of EU member states held a video conference on Friday to discuss the 750 billion euro economic recovery plan, EU budget commissioner expects the plan to receive support from all member states in July. Eurozone will release data such as manufacturing PMI and consumer confidence index next week.

China

Despite the risk of a second wave outbreak in Beijing, Chinese and Hong Kong stock markets still saw gains, the CSI 300 index rose 2.4% over the week, while Hong Kong stocks also rose around 1.4%. As the number of second wave infections in Beijing reached 180, the local government implemented preventive measures, such as school closures and restoring local community control measures, most flights in and out of the city are also cancelled. As for the Sino-US trade relations, after both sides met in Hawaii, American officials said China reiterated its commitment to fulfil the first-stage trade agreement. Next week, China will announce the latest LPR interest rate, market expects a slight drop of 2 basis points to 3.83%.

In order to restart the economy, the European Commission announced a “recovery fund” of 750 billion euros, while the European Central Bank increased the bond purchase plan by 600 billion euros. Individual countries also adopted different economic stimuluses, varying from the radical permanent basic income policies in Spain, to multibillion Euro fiscal stimulus in Germany and Italy alike. However, due to their export dependence, it is expected that the continued epidemic on the global scale will put pressure on Europe’s recovery.

From the economic indicators’ point of view, we can claim that while the European economy has bottomed out, but it is still far from full recovery. Despite rebounding from the previous low, PMIs, various sentiment and confidence indicators are still in the negative territory, which reflects a contracting economy. Given the limited manoeuvrability of the European Central Bank, overhanging Brexit concerns, and continued weakness in business confidence, we would hold back from investing in the region in the short term.

As the pandemic ended its ravage in the country, the “Two Sessions” were finally held in Beijing. During the meetings, key points to note for the year include no GDP growth target, a much higher M2 money supply target, and setting a higher budget deficit target. These are expected to outline the Chinese government’s developmental directions for the year: a further consolidation of the economy with no growth targets, more focus on the physical economy with increased budget deficit, plus a looser monetary policy with the increased money supply, we could potentially see RRR cuts or even falling interest rates in the year.

Economic indicators seemed to agree that the Chinese economy is essentially back to normal, PMIs have recovered, all returning into the expansion territory, potentially marking an end to the pandemic induced recession. That said, external risks remain with Sino-US tensions running back to trade war levels, which does dampen the optimism after the recovery. Although external risks remain, which could pressure the equity markets in the short to mid-term, we still expect the Chinese economy to further stabilize as economic activities pick up.

We continue to expect fixed income to yield positive returns over the year, under the effects of uncapped quantitative easing, bond prices should continue to appreciate amidst the uncertainty in global economy. Since the restart of the QE programme in March, the Fed balance sheet has ballooned from around 4 trillion to over 7 trillion US dollars. This means around 3 trillion US dollars were injected into the market via asset purchases of open market bonds, providing solid support to the general fixed income market.
In light of the economic uncertainty and increasing tensions across the globe, we see two main reasons for investing in the fixed income market, allocating a portion of the investment portfolio in bonds can help improve risk diversification and reduce overall adjusted risk profile, while still providing yield enhancement over holding cash. With the uncertainty in the economy, the low yields in treasuries, and possible inflation pressure in emerging markets, we would opt for quality in general, and short on duration if we seek additional yield. Hence, we like investment grades for risk diversification, and Asian short duration names for yield enhancement.