US

China concept stocks saw a sharp sell-off, but softer economic data eased inflationary concerns, alongside a mild tone from the Fed on tapering, left US equities hovering at record highs, with all three major indices up between 0.64% and 1.18% over the past five days ending Thursday. The Fed kept its accommodative policy unchanged after the interest rate meeting, with Chairman Jerome Powell saying that the economy was making progress towards the central bank goals, but still needs to make 'substantial further progress' before the conditions for tapering are met. On the data front, the US GDP figures for 2021 Q2 came in at a lower than expected 6.5% QoQ growth, but the news eased concerns over the possibility of the Fed rushing to taper, which supported the stock market at record highs.

At the time of writing, more than half of the S&P 500 companies had announced their latest quarterly results, of which 87.6% posted better than expected earnings, among them the healthcare sector recorded a 96.9% earnings beat. Technology giants such as Microsoft, Apple, Amazon, and Alphabet, the parent company of Google, have also beaten expectations, although the post-release share prices have diverged. Next week, the US will release the ISM manufacturing and services indices for July, as well as the unemployment rate.

Europe

European stocks outperformed the global stock market, with the UK, French, and German markets gaining between 0.81% and 2.35% over the past five days ending Thursday. Economic confidence in the Eurozone rose to a record high in July, as COVID restrictions were lifted, along with improved economic fundamentals, which were bolstered by supportive policies from the European Central Bank and national governments. At the same time, inflation started to normalise in the region, with Germany's inflation rate reaching 3.1% YoY in July. Next week, the Bank of England will hold an interest rate meeting and the Eurozone will release retail sales data for June.

China

Recent volatility in the equity markets drew the attention to the Chinese and Hong Kong markets. The new regulatory guidelines on sectors including technology and education, led to a sharp sell-off in the related Chinese names; further rumours that the US might restrict funds from investing in the Chinese and Hong Kong markets further weighed on both markets, the Hang Seng Index fell 4.98% over the week, while the CSI 300 Index also lost 5.46% over the same period. After the Hang Seng Index plunged earlier this week, it was reported that the China Securities Regulatory Commission (CSRC) had called a meeting with major investment bank executives in an attempt to alleviate market concerns, and sources said China might continue to allow companies to list in the US, easing negative market sentiment, briefly sending the Hang Seng Index up by 841 points on Thursday. Next week, China will release the July Caixin China Manufacturing PMI.

Economic fundamentals in Japan were mixed. Japanese Household spending has grown YoY, mainly due to the low base effect in 2020, but industrial production stalled. Moreover, PMIs could likely have peaked, as there has been a slowdown in the figures. The services sector likely remains under pressure, as the reading has been in the contraction zone since February 2020. The overall economic outlook remains rather weak.

While daily cases are nowhere as high as the 2 previous peaks, the COVID epidemic situation in Japan is worsening. The government have officially announced spectator bans on most Olympic events, citing pandemic concerns as one of the main reasons for the ban, which further reduces Olympic related economic benefits. With the epidemic situation and economic conditions working against the market, we remain less confident in Japanese equities and would refrain from overweighting in the market.

During media interviews, US Fed chairman Jerome Powell have repeatedly emphasised that the current elevated inflation is transitory in nature. However, other Fed officials such has Christopher Waller have come out and voiced their support for a scale back in the massive QE programme. According to interest rate futures, the market is currently pricing in half a rate hike by the end of 2022, which means it will be reasonable to expect some announcement in the remaining half of the year regarding the scale of the QE.

Our fixed income outlook remains unchanged, with preference for high yields over investment grades among fixed income classes. The threat in the rise in real interest rates arising from the scale back in QE could have an impact on investment grade bond performance, as they tend to carry a larger duration exposure. High yields on the other hand are less affected by the low interest rate environment, and are usually shorter on duration, effectively avoiding the major source of downside risk, which offers a better risk adjusted return profile. 

 US

While the Delta variant continued to threaten global markets, steady economic figures in the US and the positive Q2 corporate earnings bolstered US equity performance, with the Dow, S&P 500 and NASDAQ gaining between 0.17% and 0.97% over the past five days ending Thursday. According to the World Health Organization, the Delta variant is spreading rapidly across the globe, with records showing that the strain is now present in more than 104 countries. At the moment, there are approximately 580,000 daily COVID cases worldwide, up from a low of around 300,000 in June. 
Nevertheless, the market is also watching Q2 US corporate earnings closely. Of the 111 S&P 500 constituents reporting, about 87% beat market expectations, reflecting the continued strong earnings momentum of US companies. In particular, Goldman Sachs, Citi, and Wells Fargo all beat market expectations by at least 40% in their quarterly net profits. Tech giants such as Amazon, Apple, Facebook, and Microsoft will also announce their Q2 results by the late July. Next week, the Federal Reserve will hold its interest rate meeting, and the US will release its preliminary GDP for the 2021 Q2

Europe

Recent performance of European equities pales in comparison to that of the US, with the STOXX 600 index only up 0.39% over the past five days ending Thursday. The ECB kept interest rates and the size of its bond purchases unchanged after the interest rate meeting, but revised its forward guidance on inflation, noting that the ECB want to see inflation at 2%. President Christine Lagarde said the current pick-up in inflation is expected to be transitory, and expects it to rise further in the coming months before subsiding early next year. Lagarde said that there will be no premature tightening of monetary policy. On the economic front, the Eurozone manufacturing PMI for July was 62.6, slightly above market expectations of 62.5. Next week, the Eurozone will release the preliminary GDP for Q2 2021, the unemployment rate for June and the CPI data for July.

China

Recent performance of European equities pales in comparison to that of the US, with the STOXX 600 index only up 0.39% over the past five days ending Thursday. The ECB kept interest rates and the size of its bond purchases unchanged after the interest rate meeting, but revised its forward guidance on inflation, noting that the ECB want to see inflation at 2%. President Christine Lagarde said the current pick-up in inflation is expected to be transitory, and expects it to rise further in the coming months before subsiding early next year. Lagarde said that there will be no premature tightening of monetary policy. On the economic front, the Eurozone manufacturing PMI for July was 62.6, slightly above market expectations of 62.5. Next week, the Eurozone will release the preliminary GDP for Q2 2021, the unemployment rate for June and the CPI data for July.

Heading into the second half of the year, our view on the market outlook remains unchanged, maintaining the suggestion of DM over EM. The main reasons for us to hold reservations over the EM outlook remains in play: epidemic is still largely out of control, vaccinations are lagging behind, and further fiscal and monetary stimulus are likely limited. These altogether would likely lead to a weaker and slower economic recovery, which in turn doesn’t bode well for equity markets.

To add on, with the headline inflation figures in the US going higher than the long term average, there have been more calls from Fed members for monetary tightening. Anticipating tighter liquidity conditions, the Dollar has reversed its previous downtrend and rebounded sharply, which will likely put a greater pressure on EM equities, as it did in the past. The further increase in real interest rates in the US will also pressure EM central banks to raise their interest rates to prevent excess capital outflow, which could possibly cause a dent in their economic recovery. In short, we remain more positive on DM equities in the short term, and would not suggest investors to overweigh in EM in the short to mid-term.

On the fundamentals front, the European economy remains very strong. Both manufacturing PMI and services PMI reached record high levels, other important sentiment indices are also encouraging, with the economic sentiment index setting a new record high, and consumer confidence reached the highest level since 2018. With the economic fundamentals back to pre-pandemic levels and the COVID epidemic under control for most European countries, the European equity market is well set for good performance.

In Q3 2021, we favour European equities over other developed markets. Apart from the solid fundamentals to support the local economy and corporate earnings, monetary policy is expected to stay more supportive than the US, as inflation in Europe remains rather mild, ECB’s new strategy on inflation further ensures that there will be no tightening in the short term. President Christine Lagarde claimed that the European economy remains fragile and the supportive monetary policy would likely stay in place at least until the end of March 2022. With the relatively robust economy and an abundance of liquidity, European equities will likely be the market in focus for Q3 this year.

On the fundamental side, although the economy is still in the expansion zone, the momentum of the Chinese economy does seem to be slowing down. As the low base effect fades out, economic indicators continue to fall. This could have implications for the market, as it could imply that the economic recovery from the epidemic exit is fading, such that we are entering late cycle economic expansion. To top it off, liquidity shortage has been one of the main limitations on the market performance, despite the strong economy and corporate earnings.

For the remaining half of the year, we still expect monetary policy in China to remain modest, where further gain in the equity market would depend more on corporate earnings growth. As we enter the late cycle, the new economy sector will return as one of the segments in focus, as valuations of quality growth companies are attractive, partly due to a surprise ban on DiDi, which impacted market sentiments. Henceforth, for the remaining half of the year, we would prefer to pick individual quality companies in the Chinese equity market, as the overall market should remain under pressure.

The economy in the US is still going strong, PMIs remain in the expansion zone, while new job creations were also supportive to the economy. However, we also do note that the figures were less positive than markets expectations, which could suggest that peak recovery is possibly over. Another thing to consider is the jobs market, even though initial jobless claims fell below the 400,000 mark once again, the employment level is still far below pre-pandemic levels, which is a point of concern.

More importantly, inflation levels in the US remain elevated, which poses a threat to the current loose monetary policy. Although Fed chairman Jerome Powell have repeatedly said that the current inflation is transitory in nature, other Fed members have voiced out their support for an earlier scale back in QE size. With the market currently pricing in half a rate hike by the end of 2022, market expects less monetary support to the equity markets. While we are still positive on the US market, we’ll opt for a balanced approach on both growth and value, and expect less upside due to the anticipated tightening liquidity.

 US

Despite the inflation in the US reaching a post-2008 record high, the Fed Chairman maintained his dovish stance, which was positive for market sentiment, as the U.S. stock market hovered around its all-time high. Over the past 5 days ending Thursday, the Dow gained 1.64%, the S&P 500 rose 0.91%, while the NASDAQ was weighed down by technology stocks, down 0.11%. The US Consumer Price Index (CPI) rose by 5.4% YoY in June, the largest jump since 2008, although US Federal Reserve officials said inflation was only transitory, different governors expressed divergent views on the monetary policy. Chairman Powell stressed that it was not the time to taper bond purchases, while the St. Louis Fed President urged a tapering of bond purchases, saying that both employment and inflation targets had been met; the Chicago Fed President said policy should be adjusted by the end of the year, and interest rate hikes would have to wait until 2024. US Treasury Secretary Yellen said she would discuss with President Joe Biden whether to nominate Powell for a second term, and the market is assessing the impact of different candidates on the administration's monetary policy. As for crude oil prices, upward pressure was eased in the short term as the deadlock in the UAE-Saudi Arabia talks showed signs of easing, with OPEC+ expected to reach consensus on increasing production. The Organization of the Petroleum Exporting Countries (OPEC) is forecasting a gradual recovery in oil demand for this year and the next. Next week, the US Manufacturing and Services PMIs will be released.

Europe

European equities as a whole followed the US market and consolidated at all-time highs, the French and German markets gained 1.51% and 1.36% over the past 5 days ending Thursday, while the UK index fell 0.27%. European Central Bank (ECB) Board member Isabel Schnabel said the ECB would need to see a rise in core inflation before considering adjusting its outlook and tightening its policy. President Christine Lagarde said in an interview that the ECB would not tighten policy prematurely as it did in the past to avoid repeating the same mistakes. On the other hand, the EU finance ministers approved an investment plan for 12 member states which, according to the EU executive committee, is estimated to be worth €800 billion and could boost public investment to 3.5% of the region's GDP next year, in a bid to boost the recovery after the epidemic. Next week, the ECB will hold an interest rate meeting on 22 July, and the Eurozone will also release manufacturing PMI data for July.

China

European equities as a whole followed the US market and consolidated at all-time highs, the French and German markets gained 1.51% and 1.36% over the past 5 days ending Thursday, while the UK index fell 0.27%. European Central Bank (ECB) Board member Isabel Schnabel said the ECB would need to see a rise in core inflation before considering adjusting its outlook and tightening its policy. President Christine Lagarde said in an interview that the ECB would not tighten policy prematurely as it did in the past to avoid repeating the same mistakes. On the other hand, the EU finance ministers approved an investment plan for 12 member states which, according to the EU executive committee, is estimated to be worth €800 billion and could boost public investment to 3.5% of the region's GDP next year, in a bid to boost the recovery after the epidemic. Next week, the ECB will hold an interest rate meeting on 22 July, and the Eurozone will also release manufacturing PMI data for July.

 US

US stocks erased much of their previous gains on Thursday alone, amid concerns that the US economic impetus may be slowing down. In spite of the Thursday drawdown, US stocks still outperformed the other major equity markets over the past five days ending Thursday, with the S&P 500 and NASDAQ up 0.54% and 0.38% respectively. On the US data front, the labour market continued to improve, with a record number of 9.2 million job openings in May, reflecting further strengthening of the job market. However, the pace of expansion in the US service sector, reflecting service sector activity, was weaker than expected in June, raising concerns that the US economic growth momentum may have peaked, triggering a market correction. Longer-term inflation pressures have eased as the 30-year US Treasury yield, typically reflecting longer-term inflation expectations, fell to 1.85%, down 66 basis points from its high of 2.51% in March. The minutes of the June meeting of the US Federal Reserve showed that officials expect the timing of the tapering could be earlier, but remain divided on how to scale back purchases of mortgage-backed securities (MBS).

Global oil prices continue to rise, mainly due to concerns over the supply outlook as Saudi Arabia and the UAE failed to reach an agreement on increasing production. No announcement has been made regarding the next OPEC+ meeting, which may mean that production will probably stay unchanged in August, possibly resulting in a 'historic supply gap', and this has spurred a further rise in oil prices to near US$77 per barrel. The market is still closely monitoring oil price action. Next week, the US will release important data such as CPI and retail sales for June, and the Fed will also publish its latest economic beige book.

Europe

European stock markets have been weak recently, with the UK, French, and German equity indices down 1.33%, 2.40% and 1.17% respectively over the past 5 days ending Thursday. The ECB announced the results of its first strategy review since 2003, stating that a medium-term "symmetric" inflation target of 2% will be implemented from 22 July onwards, while allowing inflation to "moderately" exceed this level temporarily. ECB president Christine Lagarde said that the new inflation target does not preclude any potential policy tightening, which was unanimously agreed by central bank policymakers. On the other hand, the European Commission raised its economic growth forecast for the Eurozone from 4.3% to 4.8% this year, saying that the economy is "recovering strongly". Next week, the UK will release CPI data for June.

China

The investigation of DiDi has renewed regulatory concerns in China, and the sharp fall in China concept stocks weighed on the performance of the Hong Kong stock market. The Hang Seng Index was down 3.41% for the week, while the mainland stock market fared better, the CSI 300 Index was slightly lower by 0.23% for the week.  The freshly US-listed vehicles for hire leader DiDi is under investigation, with its share price falling by nearly 20% in a single day after its IPO, and its shares have been in a downward spiral since then, to the extent that US investors have taken it to court. It is reported that the Chinese government may tighten up the supervision of companies listing abroad. On the other hand, China's bond market was supported by the State Council's reintroduction of "timely RRR cuts", which saw the 10-year bond yield briefly falling below 3%. Next week, China will announce its GDP for the second quarter and important data on fixed investment, production and retail sales in June.