Our views on the fixed income market remains unchanged, we continue to value high yield bonds over investment grades as 1) Economic recovery should continue, and 2) High yields have more upside potential. Vaccinations programmes across the globe continue, which forms the basis for global economic activity to return to normal. In a cyclical recovery environment, high yields usually outperform investment grades, as market anticipate improvements in the business environment alongside credit and liquidity conditions.

As global central banks have repeatedly confirmed that the current interest rate doctrine will be kept constant as long as the overall economy is still below its original level, regardless of the inflation situation. This should guarantee the current low interest rate environment as the norm, credit spreads would form the main source of return, which is offered by high yield bonds. We will stay bullish on high yields and Asian credit for the year ahead, for they should offer the best risk adjusted return in the market with their higher upside potential under the backdrop of overall improving economy across the globe.

Epidemic continued to take the headlines in the country, cases remain higher and the government will likely extend the current state of emergency announcement in the short term, undermining the potential recovery in the local economy. The lack of tourism continues to take its toll on the service industry, stimulus checks expiring also lowers expectations on the economic outlook. As a result, business and consumer confidence remains on the weaker end, fundamentals should remain under pressure in the short to mid-term.

More importantly, Olympics news remains concerning. While Japanese officials intend to go ahead with the delayed Olympics, there has been more dissenting voices from both the international and local communities, it was reported that an Olympics without spectators is being considered right now. If these news are remotely true, it would be the final nail in the coffin for any wild imagination regarding Tokyo Olympics as the key to restarting the Japanese economy. In short, economy remains sluggish and we see limited upside for the market given the current outlook. 

 US

While new COVID cases globally continue to decline and market expects Biden's relief plan to help the economy recover, the US Treasury yield edging higher suggests higher inflationary expectations, and the influx of profit taking in tech stocks after the recent surge weighed on the performance of the NASDAQ, which shed 0.77% over the past 5 days ending Thursday, while the Dow and S&P 500 edged up 0.18% and 0.10% respectively. Worldwide daily infection figures fell back to around 400,000 per day, the lowest since October 2020, while on the other hand, market expects vaccine supply in the US to multiply in the coming months following the emergency authorisation of several new COVID vaccines by the FDA (US Food and Drug Administration). On the economic front, the US released strong retail sales figures for January, up 5.3% MoM, much higher than the 1.1% expected growth. US Treasury Secretary Janet Yellen commented that even with the recent positive retail sales data and US equities hitting record highs, the country still needs the US$1.9 trillion in relief measures. Next week, the US will release the revised GDP for 2020 Q4 and the consumer confidence index for February.

 Europe

Equities in the UK and France rose by more than 1% over the past five days ending Thursday as the number of COVID infections continue to fall and vaccination programmes carried on across Europe, raising hopes that the current lockdowns will be eased to boost the economic recovery. New COVID cases in the UK fell to a record low since October 2020 and Prime Minister Boris Johnson said he would announce plans to lift lockdown measures within a week. In addition, President of the Eurogroup Paschal Donohoe said the Eurozone will probably decide when member states could start withdrawing economic support measures by March to May, when vaccines should have been widely administered. Next week, the Eurozone will publish the final figures for the Consumer Price Index in January.

 China

On Tuesday, Hong Kong stocks had a good start in the first trading day of the Year of the Ox, closing over 500 points higher than the previous session. Meanwhile, the market was concerned about the liquidity situation in the market, China's A-shares had a mixed showing on Thursday, with the SSE index closing higher while the SZSE index fell. The People's Bank of China (PBoC) introduced a RMB 200 billion medium-term loan facility (MLF) and made a RMB 20 billion reverse repurchase on Thursday, but the market still saw a net withdrawal of RMB 260 billion. In addition, the RMB weakened on Thursday, with the onshore rate falling 326 pips to a low of 6.4894. Some analysts reckon that was probably due to reduced demand for foreign exchange after the holidays. The market will likely be focused on details of the ‘Two Sessions’ which will be held in early March.

Fundamentals has stayed strong ever since China has gotten itself out of the COVID crisis, the world’s second largest economy is now poised for over 8% of growth in 2021, which is among the fastest in the major economies. The government’s strong control over the epidemic situation and the relative pricey valuations of the US markets atttracted more fund flows into emerging markets, which Chinese markets indirectly benefitted from it with its nearly 40% weighing in the indexes, and was one of the reasons why there was a surge in emerging North Asian markets early on.

As valuations are still lower, and the economic growth is expected to stay strong, outlook for the year remains positive. We do expect a moderate to tighter monetary and fiscal doctrine in 2021, but Chinese markets should still return positive as the growth drivers are here to stay throughout the year.

Corporate earnings season started and the market was particularly concerned about the impact of the epidemic in late December, where there has been a reintroduction of the lockdown measures. Up to date, the results were not as bad as markets feared, as more than 80% of the reporting S&P 500 companies still managed to beat market expectations. Economic fundamentals also stayed positive, as various leading indicators such as consumer confidence and PMIs hint at positive outlooks.

Epidemic wise, the country seems to be heading for improvement. Daily new cases and deaths seems to be coming down from the earlier peak, and the vaccination programmes are indeed making slow but visible progress, which puts the US far ahead most other countries. However, it is still too early to make the call that the epidemic will be over within 2021 1H, the currently expensive valuations also show larger potential drawdowns compared to the upside, which suggests exercising caution in the short to mid-term.

 US

US inflation were moderate, suggesting that the accommodative monetary policy will continue, together with favourable quarterly results, pushed US stocks to new highs, with all three major equity indexes rising by more than 2% over the past five days ending Wednesday. The core consumer price index (CPI) fell further to 1.4% YoY in January, the lowest since June 2020. As inflation remains subdued, Fed Chairman Jerome Powell noted that quantitative easing would continue until the US economy made real progress. Quarterly corporate earnings in the US were impressive, with around 80% of reporting S&P 500 companies beating earnings expectations, where there was a 7.3% YoY growth in overall earnings. With the extensive vaccination programme underway, the number of new COVID cases continued to fall globally, the US in particular fell below the 100,000 daily cases mark for the third consecutive day. In other news, it is worth sharing that the price of Bitcoin has risen again to a record high, following Tesla's announcement of a US$1.5 billion investment in the cryptocurrency, prices reached US$48,215 per coin at one point, and the rally of the volatile instrument continued to drive up market sentiment. Next week, the US will release retail sales and manufacturing PMI data, as well as the Fed meeting minutes.

 Europe

European Commission economics chief Valdis Dombrovskis is optimistic about the COVID outbreak and the economy, but Germany's extension of the lockdown produced mixed results in the European equity market. The UK and French equities are up 0.25% and 1.94% respectively over the past 5 days ending Wednesday, while German stocks have stayed flat. According to Valdis Dombrovskis, the region's economy is expected to improve sharply in the second quarter as vaccination programmes in many European countries should accelerate and gradually relax their lockdown restrictions. In Germany, however, Chancellor Angela Merkel plans to only partially relax restrictions, but the overall lockdown restrictions will stay until 7th March. The dispute between the EU and the UK over the COVID vaccines remains unresolved, with Minister for the Cabinet Office Michael Gove saying that the terms of the Northern Ireland Trade Agreement will need amendments. Next week, the Eurozone is due to release its fourth quarter GDP and February manufacturing PMI figures.

 China

As the Lunar New Year approaches, China and Hong Kong stock market turnover dropped significantly, but the performance this week remained strong, with the SSE Composite Index rising 4.54% in just three trading days, recording a total gain of 22.8% for the year of Rat; while the Hong Kong stock market only had a half-day market on Thursday, the HSI was still in full swing, rising for five days in a row and hitting a new closing high since June 2018, tallying a gain of 2,223 points or 7.9% for the year of Rat. As for data, China recorded a record high of RMB 3.58 trillion in new RMB loans in January, while the increase in aggregate financing in the same month was RMB 5.17 trillion, which was also higher than market expectations of RMB 4.6 trillion. The market will watch the National People's Congress (NPC) meeting commencing on 5 March closely.

U.S.

The US stock market continued to improve on the back of positive economic data and corporate earnings, the three major equity indexes rose 1.48% - 3.30% over the past five days ending Thursday. The January Markit Manufacturing PMI was 59.2, which was the highest on record, while the ISM Services Index also rose to 58.7 in January, which itself was a two-year high. The latest corporate earnings reports were also encouraging, with over 80% of the 283 reporting companies beating market expectations, including Amazon's fourth quarter results, which saw revenues top US$100 billion, after which Bezos announced his resignation as Group Chief Executive. The silver and GameStop stocks, which had been the focus of retail investors, fell across the board, with interest shifting to other stocks such as small cap pharmaceuticals. Next week, the US will release the NFIB Small Business Confidence Index for January and the preliminary University of Michigan Market Sentiment for February.

Europe

Rumours that former ECB chief Mario Draghi may become Italy's new prime minister have fuelled speculation that a new Italian government will be set up soon, clearing up political uncertainties and boosting European equities. Italian, German, and French equity indexes were up 4.49%, 2.89% and 1.78% respectively over the past 5 days ending Thursday, whereas UK equities edged down 0.34%. The Bank of England kept monetary policy unchanged, and expressed optimism over the economic outlook, noting that the vaccine programme should drive a rapid rebound in the economy, the Bank  further added that it would be prepared for negative interest rates, but the radical policy would not be implemented in the next six months. Next week, the Eurozone will release the Sentix Investor Confidence Index for February.

China

Hong Kong stocks were volatile this week, but still posted a decent gain. Recent IPOs such as Kuaishou sparked a frenzy in the market, but the slowing down of Southbound capital pressured parts of the stock market. Pressure on capital markets eased in the China A-share market, with the overnight SHIBOR falling from over 3%, and the market expects liquidity to remain accommodative before and after the Chinese New Year, the CSI 300 Index rose 2.46% for the week. Kuaishou was listed on Friday and opened at HK$338, representing a 194% gain. However, it should be noted that from February 9 onwards, southbound trading via Hong Kong Stock Connect will be suspended, meaning there will be no Southbound capital. As for corporate earnings, Alibaba shares rebounded after Alibaba's Q3 revenue beat expectations and its 33%-owned Ant Group reached an agreement with regulators, suggesting a green light for its future IPO.  Next week, China will release CPI and PPI data for January.

U.S.

The IMF raised its outlook for global economic growth this year, but the slowdown in US GDP growth in the fourth quarter, coupled with concerns that the GameStop long/short battle could trigger massive sell-off by funds, caused the US stock market to slip, with the three major equity indexes down between 1.43% and 1.84% over the past five days ending Thursday. The market's focus centered around the GameStop long-short debacle, as the news of retail investors' successful defense against short-selling hedge funds shocked the world, and the frenzied rally in the stocks in concern continued unabated even though several brokerages, including Robinhood, restricted subscribers from opening positions for the stocks in concern, the whole incident have raised concern from the US government and the SEC.

The International Monetary Fund (IMF) raised its global growth outlook, but its economists said they were concerned that the slow pace of vaccinations would weigh on the global economic recovery. In terms of data, the US GDP growth slowed to 4% YoY in Q4, which was a surprise to the market. However, more than 80% of the 171 reporting S&P 500 constituent companies up to date have outperformed market expectations, indicating that the overall corporate landscape remains healthy.

On the policy front, US President Joe Biden remains open to making adjustments to the US$1.9 trillion stimulus package, market expects the relief package to be approved within one to two months. The US Federal Reserve also kept its easing policy unchanged after the interest rate meeting, with Chairman Jerome Powell saying that given the signs of a slowdown in economic recovery, the Administration would commit to the current level of asset purchases for a ‘period of time’. Job market data for January and the ISM manufacturing and services indexes will be released next week.

Europe

European stocks were soft due to global market volatility, with UK, French, and German equity indexes were down 1.44% - 2.82% over the past 5 days ending Thursday. Eurozone inflation data for December were in line with market expectations, but the YoY change remains in negative territory. ECB Governing Council member Olli Rehn said the central bank would utilise necessary means to boost the inflation rate, and the Bank remains concerned about the appreciation of the Euro. Next week, the Eurozone will release data on 2020 Q4 GDP, December unemployment, and January CPI figures.

China

As China’s aggregate financing hits 1.7 trillion, overnight SHIBOR rate rose to over 3%. The upcoming IPO of Kuaishou also froze over 1 trillion in the market, sending the HIBOR up. As market liquidity runs low, investment sentiment deteriorated. Hong Kong and Chinese stock markets lost momentum, with the Hang Seng Index (HSI) reversing its trend after hitting the 30,000 mark, falling below its 20-day average after 4 consecutive days of losses. For Chinese economic data, all eyes are on the January Caixin China Manufacturing Index releasing next week.

Our biggest takeaway from the recent events didn’t come from central banks, but from the one-off event of Georgia runoff elections which took place in very early January. The elections ended with a complete Democrat victory, translating to a full ‘Blue Wave’. This has implications on the fixed income market, as the ever-increasing fiscal deficit will further weight on the Dollar and the long end of the yield curve, long rates could go higher, possibly hampering the performance of investment grades in turn.

Henceforth, we remain selectively positive on fixed income, prioritising quality high yield names which can benefit from the economic recovery and are lighter on duration. We are also bullish on Asian fixed income, largely based on the positive economic outlook and higher upside potential. Asian countries have a better control of the epidemic, and most forecasts have Asian economies at a better spot. Moreover, the current credit spread for Asian credit are also higher than their US or European counterparts, which should be the focus for fixed income this year.