US

The recovery in global demand led to a strong rise in commodity prices, which in turn boosted the Dow to a new record high, but Yellen's comments on the possible need to raise interest rates in the future triggered a sharp drop in US technology stocks. Over the past five days ending Thursday, the Dow rose 1.43%, while the S&P 500 and the technology-heavy NASDAQ fell 0.23% and 3.19% respectively. Recent data from the US showed further improvement in the economy and job market, with the service PMI posting its second highest increase on record in April, and the number of people claiming initial unemployment benefits falling to a record low since the epidemic.

Base metal prices, including copper, steel, and iron ore, hit record highs, buoyed by infrastructure and consumer demand. Whereas food prices, such as corn and soybeans, also rose to new highs in eight years. As the market anticipates a strong inflationary cycle, US Treasurer Yellen expressed the possibility of higher interest rates in the future, sparking concerns about the relatively expensive technology sector and resulting in a sell-off. Meanwhile, the market is expecting the US Consumer Price Index to rise by 3.6% YoY in April, well above the Fed's target of 2%. Next week, the NFIB Small Business Optimism for April and the University of Michigan Market Sentiment Index for May are also due for release, market expects them to further improve.

Europe

With technology stocks being a relatively small part of the European stock market, European stocks were relatively stable, with the FTSE 100 up 1.62% and the French CAC up 0.87% over the past 5 days ending Thursday. The Bank of England kept its policy rate and bond buying target unchanged, but slowed the pace of purchases as the Bank expects the domestic economy to return to pre-epidemic levels within the year. European economic data continued to improve, with Eurozone retail sales rising 2.7% MoM in March, surpassing the expected 1.5%, and the final services PMI rose to 50.5 in April from 49.6 in March. Next week, Germany will release its ZEW economic forecast for May, and the UK will release its GDP growth figures for the first quarter of the year.

China

Strong economic data from China failed to deter the market from falling. It was rumoured that Biden might keep the China investment ban in place, weighing on the performance of Chinese ADRs and the sentiment spread over throughout the Hong Kong and Chinese markets, the Hang Seng Index and CSI 300 index were down by 0.40% and 1.86% respectively for the week. On the data front, the Caixin China Services PMI rose to 56.3 in April, hitting a 4-month high. Exports in US dollars grew by 32.3% YoY in April, beating market expectations of 24.1%. Hong Kong's economy also performed well, GDP grew by 7.8% YoY in 2021 Q1, well ahead of market expectations of a 3.7% growth, and reversing the trend of six consecutive quarters of recession. Next week, China will announce the CPI and PPI figures for April, both which are expected to be higher than in March.

 US

US stocks continued to reach new highs on the back of strong economic data and corporate earnings. The US GDP rose sharply by 6.4% QoQ in the 2021 Q1, while the April Consumer Confidence Index rose to a pre-epidemic levels of 121.7. US corporates also reported strong quarterly results, with more than 87% of the 284 reporting companies beating market expectations, with an average earnings growth of more than 53% YoY.

On the monetary policy front, the US Federal Reserve kept interest rates and the scale of asset purchases unchanged. Fed Chairman Jerome Powell said there was a one-off upward pressure on inflation, but saw it only as a short term phenomenon that will likely not last, and further reiterated that the current interest rate policy is appropriate before employment and inflation targets were met. On the eve of US President Joe Biden’s 100th day in office, he mentioned that it was time to make US corporations and the richest 1% of Americans pay their fair share of taxes. He also mentioned the $1.8 trillion American Family Plan for the next 10 years, which will be partly funded by the increased tax on the wealthy. Next week, the US will release a series of economic data, including the ISM manufacturing and services indexes for April, alongside non-farm payroll data.

Europe

European equities had mixed performances, the UK and French markets were up 0.33% and 0.56% respectively over the past 5 days ending Thursday, while German indexes were down 1.09%. Inflation accelerated in Germany, with the German CPI for April rising above 2% YoY for the first time since 2019. European Commission President Ursula von der Leyen said the €750 billion EU Recovery Fund will be out soon. On the other hand, ECB President Christine Lagarde said it was still too early to tell whether the impact of the epidemic on the economy was over. However, she expects that 70% of the Eurozone population will have received their first dose of the vaccine by the end of June, so the odds of a strong rebound in the second half of the year are good. Next week, Eurozone retail sales figures for March will be released.

China

Weak economic data weighed on the mainland stock market ahead of the Labour Day holidays, with the CSI 300 index falling 0.23% over the week. The Hong Kong markets also faltered, the HSI was down 1.22% for the week as tech heavyweights fell on Friday on news that they had been summoned by state authorities. For economic data, China’s official manufacturing and non-manufacturing PMIs slowed down to 51.1 and 54.9 respectively, while the China Caixin manufacturing PMI further improved to 51.9. On the other hand, regulatory actions were taken against Chinese online platforms, with 13 companies, including Tencent and ByteDance, being summoned by regulators and asked to rectify irregularities in their businesses, it was reported that the authorities are ready to issue a fine of at least RMB 10 billion to Tencent. Next week, China will release data on exports and foreign exchange reserves.

As we have reiterated multiple times in the past, we favour Asian high yields in the credit space, as a strong economic recovery is expected, and they offer a better risk adjusted return when compared to their European and US counterparts. In addition, although major central banks have made commitments on keeping the rates low, mounting risks arising from the inflationary pressure could still result in rate hikes, investors should limit the duration in the portfolio. That said, while we continue to hold the view of high yields over investment grades, it is always important to consider the credit quality of issuers beforehand, avoid issuers which overly rely on governmental aid for survival.

At the moment, our outlook of the fixed income market remains unchanged. The backdrop of the economic recovery should continue at least for another year, improving economic conditions would likely lead to narrowing of credit spreads, while increasing inflation pressure stemming from the booming economy on the other hand could push long end interest rates higher. We continue to suggest investors to stay short on duration, while long on credit spreads, given an adequate credit quality.

At the start of the year, we were positive on EM equities as we expected the Dollar to go weaker, given that there were 1) low interest rates; 2) continued quantitative easing; and 3) a widening fiscal deficit. However, the Dollar had a recent bull run, mainly on the back of rising rates fuelled by inflation fears. In the mid to long-term, fundamental factors for a weak Dollar never left, commodities prices are also on the rise, both which should provide further support to the EM. However, we have to acknowledge that the constant dread of the Dollar strengthening poses as a material risk to EM equities.

We also note 3 other factors in play which could potentially act as headwinds against EM equities in the mid to long-term: 1) vaccination progress; 2) inflation risk; and 3) potential fiscal cliff. Vaccinations in the EM space is currently lagging, threat of inflation could mark an end to the easy monetary policy, and mounting external debt could result in fiscal cliffs in the near future. These together create a lot of uncertainties for the EM, which would dissuade us from overweighting the market in the short term. Henceforth, we would prefer overweighting DM instead of EM in this time frame.
 

 US

The US stock market came under pressure at its all-time high as the epidemic worsened around the world, coupled with news of a proposed hike in capital gains tax, the three major equity indices fell between 0.65% and 1.57% over the past five days ending Thursday. The World Health Organisation (WHO) said the number of daily new cases is on the rise in all regions except Europe, and India in particular has set a new global record of more than 310,000 new cases per day, while places such as Tokyo may also enter a state of emergency. The US stock market reacted negatively to reports that Biden would raise capital gains tax to a maximum of 43.4% on the wealthy, sparking fears that participants might sell assets in advance. Meanwhile, in response to Biden's $2.3 trillion infrastructure plan, Senate Republicans proposed a $568 billion alternative on Thursday that focused on more traditional infrastructure projects and omitted the Democratic proposal for a hike in corporate profits tax.

Recent economic figures and corporate earnings were positive, initial jobless claims in the US fell to a record low since the start of the epidemic. As of Thursday, over 75% of reporting S&P 500 index constituents beat market expectations. It is also worth noting that the Bitcoin has plunged recently, falling below the US$48,000 level at the time of writing. Next week, the US Fed will hold the interest rate meeting, and the preliminary GDP for 2021 Q1 will be released. The market is expecting an annualised growth of 6.5% QoQ.

Europe

European markets fell in line with global equity markets, the UK, German, and French indexes were down between 0.31% and 1.16% over the past 5 days ending Thursday. The ECB kept interest rates unchanged and pledged to maintain its 1.85 trillion euro PEPP unchanged at least until March 2022. ECB President Christine Lagarde said that the bank would not keep pace with the Fed, and the central bank is not considering phasing out the PEPP at this time. Eurozone economic data improved, with the Eurozone consumer confidence indicator rising to -8.1 in April, beating market expectations. Next week, Europe will release the preliminary 2021 Q1 GDP and the April inflation data.

China

Chinese equities performed relatively well this week, with the CSI 300 Index rising 3.41% for the week. Hong Kong markets also rebounded on Friday, the Hang Seng Index ended the week in green, logging a gain of 0.38%. It was reported that the People's Bank of China (PBoC) was considering a third-party buyout of Huarong's $100 billion assets, bringing clarity to the "Huarong debacle" that had plagued the Chinese offshore bond markets, meanwhile Huarong International also announced a turnaround in its first quarter results. Separately, Anta Sports and Meituan, two companies that announced share placements earlier, also rebounded for the second consecutive day, easing market concerns. Next week, China will release official manufacturing and non-manufacturing PMI data for April.

Economic data in the country do remain on the weaker end, as we noted that the household spending figures remain in a contraction YoY, which was expected with the hike in GST and the expiry of government handouts. Retail sales and industry production also stayed negative, in line with the continuously contracting services PMI, although manufacturing PMI still climbed higher, reassuring cyclical bettors. Driven by market capital flows, cyclicals such as consumption, auto, and finance helped support the market.

However, the epidemic situation is seemingly on a resurgence in the country since the beginning of March. The increasing threat of the virus concerns local governments, Osaka have decided to take the Olympic Torch Run off public roads. Overall, the virus still has a stranglehold on the country after more than a year of outbreak, haunting the local economy with the near complete halt in tourism dollars. While the current outlook on cyclicals remains positive, the mid to long term growth prospects of the Japanese market remains lacklustre, and we would be more hesitant to overweigh them in the portfolio.
 

Anticipation of rising inflation and economic growth drove capital to cyclical sectors, which benefitted Europe markets due to their heavier cyclical weightings. Local economic indicators headed higher, the Eurozone manufacturing PMI even hit a record high, reflecting business confidence in the upcoming economic recovery. The ECB has also openly addressed the risk of rising yields, stating that the bank will utilise all available tools to fend off any speculators on rising rates, guaranteeing a low interest rate environment in the future, further supporting equity market performances.

As for the ever important epidemic front, the AstraZeneca vaccine’s earlier suspension was subsequently resolved. Despite the bumps, Europe is still among the vaccination leaders, the European Commission expects the region to achieve initial herd immunity by the end of the quarter, marking a likely end to the endless lockdown restrictions. While the longer term growth prospects in the market remain relatively limited, the cyclical favouring trades could still further boost returns in the short term, valuations are in line with historical levels, which suggests further upside potential as long as the recovery trades are in place in the short to mid-term.

Chinese economic data remained strong as we expected, PMIs stayed in expansion zone across the board, while industrial profits posted record YoY gains due to the low base effect. Outlook on the Chinese economy remains strong, numerous forecasts put China as one of the top performers in 2021 growth, even the conservative outlook on the ‘Two sessions’ set the figure at higher than 6%, which should be positive for the Chinese corporate earnings.

However, the continued clampdown on the liquidity and speculation in the market had negative impacts on the market as valuation multiples were compressed. Moreover, regulatory authorities are considering having more oversight over some of the largest tech companies in China, which led to fears in the market regarding their growth outlook, sending the indexes down despite the positive economic outlook. That said, the main driver for the market slide was due to valuation contraction, which should likely have a temporary effect on the equity performance only. In short, the growth potential in the economy should still favour equities in the mid to long-term, we remain positive on the Chinese market for the year.