Pandemic remains a hot topic, as the Omicron variant swept through the region, bringing cases far above previous waves. However, we expect a limited impact to the economy compared to previous outbreaks, as government restrictions and lockdowns are less stringent. That said, even though the economic growth is expected to stay decently in line with early projections, the fast-spreading virus still reduced the workforce available, adding further pressure to the strained supply chain. This is also one of the contributing reasons why the inflation level is high.

The latest CPI print in Europe was a whopping 5.1%, representing a problem for the central bank. ECB President Christine Largarde was surprisingly hawkish, announcing tapering of asset purchases, and even refused to rule out a rate hike before the end of the year. Markets have started pricing in faster tightening, with the ECB widely expected to increase rates by 50bps within the year. The sharp turn from the ECB could bring forth more downside pressure in the equity market even as corporate earnings and economic conditions improve. With the high levels of volatility in the market due to uncertainties, before market conditions stabilise, we would opt for a wait-and-see approach in the meantime before actually entering the market. 

  US

With prospects of a faster rate hike from the Fed, and the situation in Ukraine heating up, equities fell sharply, with the S&P 500 back below its 200-day average, and the three major US indices down between 2.64% and 3.31% over the past five days ending Thursday. Initially, Russia had signalled a partial withdrawal of its troops, which at one point spurred a rally in global equities. Later, the US and NATO said that Russian presence on the Ukrainian border was increasing instead, and US President Joe Biden warned that there was a ‘very high probability’ that the Russians would launch an attack on Ukraine within a few days, which led to a shift in market sentiment again, sending safe-haven assets such as gold above US$1,900 per ounce at one point.

On the interest rate front, the US Federal Reserve released the minutes of its January interest rate meeting, with officials agreeing that interest rates should be raised as soon as possible, and the Fed should remain vigilant about high inflation, some members further agreed that the current situation warrants the start of tapering later in the year. Current interest rate futures data suggest a 50 basis point hike in March and a total of 100 basis points before we move into the second half of the year. On the economic front, the US Producer Price Index (PPI) in January were higher than expected, following the earlier surprise in Consumer Price Index (CPI), reflecting that inflation in upstream raw materials remained worse than expected. Next week, the US will release important data including the Markit Manufacturing PMI and the Consumer Confidence Index for February.
 

Europe

European stocks followed external markets as the geopolitical tensions in Ukraine intensified, with the UK, French, and German equities falling between 1.44% and 2.18% over the past 5 days ending Thursday. Markets were focused on the ECB's monetary policy position for the year, as ECB President Christine Lagarde expressed her concerns about inflation earlier, and then said she would act at ‘the right time’ and would not rush to exit the Eurozone’s current simulative measures. In addition, the International Monetary Fund (IMF) has said that the supply chain problems in the Eurozone may continue until 2023. Next week, the Eurozone will release data including the Markit Manufacturing PMI for February.

China

Hong Kong stocks were under pressure partly due to the situation in Ukraine, ending the week with a 2.32% drop, while China A-shares recovered modestly, with the CSI 300 Index rising 1.08% over the week. Against the backdrop of surging inflation in Europe and the US, China's January Consumer Price Index (CPI) slowed to 0.9% YoY, down from 1.5% YoY in December, while the PPI also moderated. On the other hand, there were further regulatory guidelines from Chinese authorities, with the National Development and Reform Commission urging takeaway platforms to lower their service charges, pressuring shares of a number of takeaway platform companies. Next week, China will announce the 1-year and 5-year LPR rates.

Ever since the strong initial rebound in 2020, the economy growth has been slipping, with various sectors hit by the ongoing regulatory upheaval as reflected by the corresponding indicators. As a result, equity performance has underperformed global equities. While this situation might not completely resolve by itself in the short term, considering the shifts in the message from the authorities in China, with the emphasis put on increasing the economic stability, we could be looking at a gradual loosening in terms of both fiscal and monetary policies.

The battered real estate sector should see pressures alleviating with the loosening policies, this could also help support sectors that we are bullish on, including the technology sectors with compressed valuations, and the carbon neutral sectors. However, as China continues to adopt a zero-tolerance policy against COVID, we would avoid the relevant sectors that are more affected by the curbs on travel and services. Overall, we are positive on China for the year, as the country is likely going for a contrarian fiscal and monetary policy.
 

Omicron continue to dominate the epidemic landscape, but the high infection figures are not deemed to be a problem, as government lockdowns and restrictions were not in place, which should help support the economy. Fundamentally, US equities are still relatively strong, although economic sentiment indicators have slightly receded, corporate earnings are still strong, with a majority of reporting S&P 500 constituents reported earnings beats; the forward EPS of US equities are still being revised up. Henceforth, the key of the equity market outlook lies in non-fundamental factors.

The biggest headwind came in form of the elevated inflation. The US CPI hit a 40 year high, raising concerns over faster monetary tightening. According to the US Fed, tapering of its balance sheet would happen this year, and rate hikes would start after asset purchases reach zero. This is a significant shift, which could mean a change in the post-pandemic ‘new normal’. If the current expectations were to materialise, the US equity market could see further downside via valuation compression. Although we expect the full year performance could be in the low single digits, we would opt to stay on the side-lines in the short-term given the uncertainties present.

  US

US inflation hit a 40-year high, leading to worries that the Fed will raise interest rates at a faster pace, nearly wiping out all equity gains over the week. The Dow and S&P the 500 narrowed their gains to 0.37% and 0.59% over the past 5 days ending Thursday. The US Consumer Price Index (CPI) rose 7.5% YoY in January, above the market estimate of 7.3%. The core CPI, which excludes energy and food prices, rose 6.0% YoY, which was also higher than the estimate of 5.9%, both hitting a 40-year high. Interest rate futures data show that the probability of a 50-bps rate hike in March rose to nearly 100%, and the full-year rate hikes may total over 150 basis points.

As for corporate earnings, among the 356 reporting S&P 500 constituents, almost 77% of them reported market beats, of which 87.5% of the tech sector beat estimates, including heavyweights such as Apple and Amazon. In addition, to avoid a government shutdown after 18th February, the House of Representatives has passed a three-week stopgap spending bill, which has been submitted to the Senate for a vote. Next week, the US will release the minutes of the January interest rate meeting on 17th February, and the market will be watching out for more details on tapering. In addition, US retail sales data for January will also be released.

Europe

High inflation and interest rate hikes were also on the agenda in Europe, but over the past 5 days ending Thursday, European equities were still able to record gains, with UK, French, and German equities rising between 0.79% and 1.91% over the period; Eurozone CPI rose 5.1% YoY in January and core CPI rose 2.3%, both higher than market expectations. Later, ECB President Christine Lagarde admitted that inflation was a problem after the interest rate meeting and did not rule out rate hikes this year, leading to market speculation that the ECB might raise interest rates later on. Interest rate futures market indicates that the ECB may raise interest rates by 0.1% in June, and would raise interest rates by a total of 0.5% for the year. Next week, the Eurozone will announce the revised GDP for 2021 Q4.

China

The negative news of certain drug companies being included in the US commerce department’s ‘unverified’ list for exporters pressured the Hong Kong biotechnology index, but the news of the government related funds’ market activity boosted both China and Hong Kong stock markets, with the CSI 300 and the Hang Seng index posting gains for the week. China's total foreign exchange reserves fell slightly to 3.221 trillion yuan in January, but with further relaxation of the capital market, aggregate financing and new RMB loans both rose sharply in January, to 6.17 trillion yuan and 3.98 trillion yuan respectively; money supply M2 also rose to 9.8% YoY in the same period, compared to previous 9.0% YoY figure.

  US

In the first meeting of the year, the Federal Reserve further reinforced the idea of faster interest rate hikes and tapering, suggesting that an interest rate hike at the March meeting is almost certainly going to happen. Together with the rising tensions between Russia and Ukraine, global stock markets including the US further slipped, with the Dow, S&P 500 and NASDAQ down by 5.99%, 9.22%, and 14.65% respectively over the 18 trading days since the beginning of the year. Despite the volatility in the US market, the Federal Reserve delivered a hawkish statement instead, saying that interest rates would hike soon, and tapering would follow. Chairman Jerome Powell also said that the US is now facing a different economic expansion compared to the last tightening, sparking speculation that the pace of tightening would be more aggressive this time around.

Tensions over the Ukraine situation are also worrying markets. The Ukrainian government estimates that more than 100,000 Russian troops have been deployed. Whereas the White House said 8,500 US troops are ready to aid NATO, called for the evacuation of US Nationals from Ukraine, and suggested sanctions against Putin himself. Despite Russia's repeated denials of its plans to invade Ukraine, tensions have escalated.

As for the fundamentals, although the IMF has lowered its growth forecast for the US economy, the estimated 2.6% growth in 2023 is still higher than the long-term average of 1.9%. US GDP growth for 2021 of 6.9% QoQ was well ahead of the 5.5% market estimate. In addition, Q4 earnings were strong, with 78% of the 159 reporting companies posting earnings beats, key players such as Microsoft, Apple and Tesla also reported solid results. Next week, the ISM manufacturing and services indices will be released, along with key data including non-farm payrolls.
 

Europe

Affected by the neighbouring Ukraine situation, and the poor global market sentiment, European equities struggled to perform, with the STOXX 600 index down 2.69% over the past five days ending Thursday, while the German and French indices lost 2.44% and 2.37% respectively over the same period. The German government lowered its economic growth forecast to 3.6% this year in the face of a number of headwinds including the epidemic, inflation, and the geopolitical tensions. ECB's chief economist Philip Lane said in an interview that the ECB would tighten its monetary policy if inflation remained above target. Next week, the Eurozone will release its 2021 Q4 GDP and CPI data for January.

China

Hong Kong stocks almost wiped out all the YTD gains in just one week, as the HSI fell 5.67% for the week, trimming the YTD returns to just 0.65%; China A-shares remained soft, with the CSI 300 Index down 4.51% for the week, extending its YTD losses to 7.62%, almost reaching the bear market territory of over 20% down from its 2021 February high. China's 2021 GDP grew better than expected at 8.1%, but the economy remains under pressure as retail sales growth slowed markedly in December, and the problems of the real estate sector persist. China's Premier Li Keqiang said that macro policies need to be stepped up, and growth stabilisation will take a greater priority, but he insisted that there would be no excess stimulus. Earlier, the People's Bank of China lowered the one-year and five-year LPR rates to help the economy. The market will still be watching to see if China will further loosen its policies.

Inflation in major economies remain severe, both the US and Europe figures are close to record highs. The US Fed sped up its tapering schedule in response, where the tapering of bond purchases will now be complete by March, the end of bond purchases opens up the opportunity for rate hikes. At the time of writing, rate futures markets expect 3 rate hikes from the Fed in 2022; meanwhile, treasury yields are also climbing higher, these would be problematic for the fixed income market if they do materialise.

Henceforth, ‘HY over IG’ will remain our core view on the fixed income market into 2022. We still expect the longer duration IG bonds to suffer more as global interest rates move higher over the year. In contrast, we still see opportunities in the high yield space. Global high yields should see further improvement with the continued pandemic exit, while remaining relatively unaffected by the rising rates due to their lower duration. Asian high yields in particular could offer a rare opportunity, as the anticipated loosening monetary environment in the Chinese market could potentially start the recovery in this badly hit market in 2022.
 

While COVID cases were still far below their previous peaks, the trend has been upwards, prompting the government to tighten restrictions over borders and local economic activities. If the latest wave of Omicron does manage to gain a foothold in the country, it could spell more restrictions for longer, inevitably impacting the economy. The travel ban in particular is hard on relevant sectors such as travel, retail, and hospitality related, dampening the Japanese economic outlook in the short term. 

Overall, outlook of the Japan equity market is affected by 2 aspects. On one hand, the economic fundamentals remain weaker, as suggested by the leading indicators. The headwinds from the renewed COVID crisis also do no favours to the 2022 economic outlook. However, this is still somewhat balanced out by the loose monetary policy, guaranteed by the low inflation which has diverged from the global trend. The dovish monetary policy could also potentially support equity valuation, while the weak local currency due to the widening yield cap could potentially supporting corporate earnings. Considering factors from both sides, we stay neutral on the Japan market for 2022. 
 

  US

The market is worried that the Fed will take a more aggressive path in hiking interest rates, leading to worsening sentiment and a sharp fall in the US stock market. The Dow was down 4.34%, the S&P 500 5.15% lower and the NASDAQ fell 6.81% over the past five days ending Thursday. The NASDAQ in particular is down by almost 10% this year. Earlier, William Ackman, a famous US hedge fund founder, said that the Fed should raise interest rates by 50 basis points at the March meeting, market is worried about a faster rate hike, which also increased selling pressure in the market. According to Bloomberg interest rate futures, the odds of the Fed raising rates by 25 basis points in March this year have risen to 100%. Although the market is not expecting a 50 basis points hike, but it is still pushing its rate hike expectations gradually higher.

Another event in the spotlight is the US earnings season. Goldman Sachs reported a 13% drop in earnings last quarter, which was weaker than expected and weighed on the banking sector. Of the 61 reporting companies, 77% reported earnings beats. 73% of the 26 financials that reported earnings were better than expected, while all six reporting technology companies managed to beat earnings forecasts, though the most important technology giants such as FAAMG have yet to report their results. It is worth mentioning that crude oil prices surged to a seven-year high, with WTI futures reaching a high of US$87.91 per barrel, before retreating to around US$83. The Organization of the Petroleum Exporting Countries (OPEC) said it expects the global crude oil market to be supported by strong demand this year. Next week, the US will release its interest rate meeting statement in the early hours of 27 January, and markets will be focusing on tapering details. The US will also release its GDP for 2021 Q4 in the evening of the same day.

Europe

While US stocks fell sharply, European stocks were not significantly dragged down, perhaps reflecting the market's confidence in the ECB to maintain its accommodative policy. Over the past five days ending Thursday, UK equities rose by 0.56%, French by 0.72% and German by 0.18%. The ECB released the minutes of its December meeting, which showed that policymakers suggest that inflation in the Eurozone may easily remain above the bank's target, so the central bank should keep its options open. Central Bank President Christine Lagarde said that inflation was expected to fall this year and that there were reasons not to follow the Fed's swift and vigorous response. Next week, the Eurozone will release its manufacturing PMI for January.

China

Hong Kong stocks reversed last year's weakness as the Hang Seng Index continued to rebound this year, gaining 2.39% this week and up 6.7% YTD, which is among the best globally. China A-shares also performed well, with the CSI 300 Index gaining 1.11% over the week. In the face of economic pressure, the People's Bank of China (PBoC) lowered its LPR rate by 5 basis points for 5 years or above and by 10 basis points for the 1 year rates, which is the first in more than a year and half. The PBoC said that the economy is now under three-pronged pressure, and more policies supporting stable growth will be introduced before the downward pressure eases. Next week, China will announce industrial profits for December last year.

Heading into the New Year, our EM outlook has remained largely unchanged, as the external environment is still challenging. The overarching pandemic situation could affect EM economies, as the discrepancy in vaccinations likely leads to divergent economic recovery. With lower vaccinations and less control over the pandemic, expect more and longer restrictions in the respective economies, outlook would likely be less positive than their DM counterparts. Weaker fundamentals as reflected by the EM economic indicators further support our bearish view.

Inflation is another drag factor. Global monetary policies are starting to tighten in response, with a stronger Dollar due to rising yields. This do not bode well for EM equities, as a strong Dollar tends to impact EM equity performance. Moreover, EM central banks have already hiked rates over the year to deal with their own inflation, but these could damage the local economy, as tightening monetary conditions tends to hinder economic recovery. With these macro backdrop factors not dissipating anytime soon, we maintain our conservative view on EM equities in 2022, only staying selectively opportunistic on China which is covered in the other section, and certain Southeast Asia markets which have better pandemic control and are facing less inflationary pressure.