Economic indicators in the US continue to show conflicting signals. PMIs were slightly lower than market expectations, but the figures are still well in the expansion zone. However, consumer sentiment fared worse, hitting a near term low; inflation remained at the 10 year high, and employment data also showed dissatisfying figures, with non-farm payrolls seeing the lowest figure in 6 months. The resurgence in the pandemic have impacted business confidence and spilled over to the jobs market, suggesting that the economy might have slowed down.

Yet, the weaker than expected economy might not be entirely a bad thing for the financial markets. At the Jackson Hole Symposium, Fed Chairman Jerome Powell cited weaker employment conditions as the primary reason for holding off monetary tightening. The Fed was also surprisingly dovish over tapering, only suggesting the possibility before the end of the year, further supporting the market. However, we would highlight the risks, as the weakening economy, and the slow progress towards herd immunity also poses extra downside risk. Looking forward, while we stay positive on the US market, caution is advised, and we continue to prefer growth sectors in the portfolio for mid to long-term investments.

 US

The US economy showed signs of slowing down and investors were concerned about the Federal Reserve's plans on tapering its bond-buying programme, US stocks consolidated near all-time highs, with the three indices retreating between 0.40% and 1.23% over the past five days ending Thursday. The latest Federal Reserve Beige Book showed that the US economy grew at a slightly slower pace in July-August this year, and that companies are still worried about supply-side issues; employment data also fell short of expectations, as the 235,000 non-farm jobs added in August was well below market expectations of 728,000. In the face of negative factors such as the prevalence of the Delta variant, the slowing global recovery, and global central banks' gradual exit from accommodative policies, prominent Wall Street players such as Goldman Sachs, Morgan Stanley, and Citibank all warned that US stocks may be at risk of a correction.

Another worrying factor is the US debt ceiling issue. US Treasury Secretary Janet Yellen said that the temporary measures taken to prevent the debt ceiling from being exceeded may be fully exhausted by October this year. She added that if the debt ceiling is not raised in time, it could pose a risk to the financial system. Next week, the US will release CPI for August, retail sales for August, and the University of Michigan Market Sentiment Index for September

Europe

European stocks retreated on the eve of the European Central Bank (ECB) meeting, weighing on the market over the past five days ending Thursday. The UK, French, and German equities falling between 1.16% and 1.95% over the period. The ECB kept interest rates unchanged after Thursday's meeting, but said it would moderate the pace of purchases under its emergency pandemic purchase programme (PEPP), but reiterated that the €1.85 trillion programme would stay in place until at least March next year, and will be extended if necessary. The German Bundestag election is scheduled to take place on 26 September, Chancellor Angela Merkel made a high-profile statement, supporting of her party's candidate and CDU leader Armin Laschett and criticising the rivals from SPD. However, Forsa polls showed that CDU support had fallen to a record low of 19%, raising concerns in the market. Next week, the UK will release the unemployment rate for July and CPI figures for August.

China

It was reported that the head of state of China and the US spoke on Friday, easing market tensions. The CSI 300 Index rose 0.88% that day, extending the weekly gain to 3.52%; the HSI also rose on Friday, reversing its earlier loss and posting a 1.17% gain for the week. China's export data for August beat market expectations in both US dollar and Renminbi terms, while Chinese CPI growth moderated to 0.8% YoY in August, against an uptick in PPI to 9.5% over the same period. On the other hand, the negative news about Evergrande continued, with Moody's and Fitch downgrading the company's credit rating, putting pressure on both debt and equity prices. It was reported that the mainland regulators had agreed to renegotiate the debt repayment arrangements between Evergrande and financial institutions. Next week, China will release data on fixed investment, industrial production, and retail sales.

 US

With market sentiment positive, US markets continued to edge higher, the Dow and S&P 500 were 0.66% and 1.50% higher over the past 5 days ending Thursday, while the tech heavy NASDAQ performed even better at 2.58% higher. The annual Jackson Hole meeting was held over the weekend, Federal Reserve Chairman Jerome Powell’s speech was more dovish than market expected. Although Powell admitted that inflation has already met Fed’s target, he stayed ambiguous on the timing and scale of tapering plans, only suggesting that it could start before the end of the year. He also mentioned key points to look out for in the economy, citing a ‘substantial slack remaining in the labour market’ and COVID as a ‘near term risk’. As for fundamentals, ISM manufacturing PMI came in strong at 59.9, surpassing market expectations and the previous value. Consumer confidence however, were slightly disappointing, as the 113.8 figure missed market expectations and were the lowest since February this year, possibly reflecting concerns over the Delta variant. Next week, the US will release PPI figures and the Fed Beige Book.

Europe

European equities remained steady over the week as markets await updates from the ECB, the UK, French, and German equity indices were up by 0.19% - 1.46% over the past 5 days ending Thursday. Economic indicators were mixed, while unemployment figures continue to improve, retail sales and consumer confidence slipped. The latest Eurozone CPI figure caught markets’ attention, the August figure came in at 3.0% YoY, surpassing market expectations and was 1% higher than the ECB target level, markets will likely keep an eye on the figure to see if it will be persistent. Next week, the ECB will hold its interest rate meeting, and Europe will release the Sentix Investor Confidence and ZEW economic sentiment.

China

Although the latest COVID outbreak in China has seemingly been contained, latest economic data from China have been rather surprising. Caixin services PMI came in at 46.7, which was far lower than the market expectation of 52 and the previous value of 54.9, marking the lowest level and the first contraction in 15 months. This raises concerns on the economy and triggered a fall of both the Chinese and Hong Kong equity indices on Friday. Internet giant Alibaba announced that it will invest 100 billion CNY to support ‘common prosperity’, followed Tecent in the path of supporting President Xi’s latest initiative. With no new regulatory actions announced, markets are still pricing in the regulatory impacts, the CSI 300 Index ended the week with a 0.33% gain, while the Hang Seng Index was also 1.94% higher. Next week, China will release its foreign reserves, CPI, and PPI figures.

 US

The US Food and Drug Administration (FDA) granted full authorization to Pfizer's COVID vaccine, easing concerns about further spread of the virus, sending US equities higher, with the three major indices gaining between 0.91% and 2.78% over the past five days ending Thursday. The US House of Representatives passed President Joe Biden's US$3.5 trillion budget proposal, House Speaker Nancy Pelosi said they are also pushing for another US$550 billion bipartisan infrastructure bill. 

Recent economic data in the US has slowed down, with the August Markit manufacturing and services indices slowing to an eight-month low, whereas the Richmond Fed Manufacturing Index also fell sharply to 9 in August, well below market expectations. Nonetheless, the main focus is now on the annual Jackson Hole central bank conference, where Fed Chairman Jerome Powell is expected to share his thoughts on tapering bond purchases. Next week, the US will release key data including the ISM manufacturing and services indices, and non-farm payrolls for August.

Europe

European shares have enjoyed relative stability recently, with UK, French, and German indices up between 0.18% and 0.94% over the past five days ending Thursday. The minutes of the ECB's July interest rate meeting showed that there was extensive discussion on the new interest rate guidance, with most members indicating support for the proposed revised forward guidance. ECB chief economist Philip Lane said in an interview that the ECB was prepared to deal with the market impact of the Fed's tapering announcement. Next week, Europe will announce the unemployment rate for July and CPI data for August.

China

The Hang Seng Index briefly rebounded close to the 26,000 level this week, but the rally met resistance and closed at 25,407 on Friday, posting a 2.25% weekly gain; the CSI 300 Index also rose 1.21% for the week. On Friday, it was reported that China plans to ban technology companies possessing large amounts of data from seeking IPOs in the US, which triggered the Hang Seng Technology Index to reverse its gains on the day. In terms of policy news, it was reported that regulators had given guidance to six large state-owned banks and their wealth management arm, while the National People's Congress passed a decision to amend the Population and Family Planning Law, making the three-child birth policy official. Next week, China will release official manufacturing and non-manufacturing PMIs.

Economic indicators in Japan continued the previous mixed trend, positive indicators such as the better than expected industrial production figures and modest PMIs were overshadowed by relatively weak household spending. And while the Q2 GDP is set to rebound from the miserable Q1 contraction, the expansion is likely limited, and unlikely to bring the economy back to the pre-pandemic level. The ongoing epidemic also poses as a headwind against the economic recovery, as the virus’ resurgence in the country prompted another round of state of emergency declaration.

The latest emergency declaration once again limited business activities in the country, which is another hit to the business sentiment after the attempt at stimulating the economy via the Olympic Games. With the lack of economic impetus, fundamentals should stay relatively weaker, we would not overweight in the market. 

While the US CPI and PCE figures continue to stay elevated, the GDP growth figure falling short of market expectations, and the resurgence in COVID cases due to the delta variant, led to market speculation that the current inflation is actually transitory, as a slowdown in the economy would likely alleviate inflationary pressure from the wage and demand side. This echoes with the Fed claims that the inflation will not be sustained, and sent bond yields lower and bond prices higher.

Despite the recent positive sentiment, our view have not changed on the mid-term, as market is still expecting rate hikes in the coming few years down the road. As the latest Fed Dot Plot showed that sentiment among Fed members is shifting towards the hawkish side, the 2022 Dec Fed fund futures shows a 36% chance of a rate hike, we expect announcements on the Fed tapering timeline before the end of the year. Henceforth, duration exposure, as repeated many times in the past, should be minimised to reduce the impact on the portfolio. Thus, we remain more positive on high yields over investment grades with their shorter duration and better carry.

 US

Fed meeting minutes last month showed that most officials agreed that tapering of bond purchases could begin within the year, sparking concerns over an earlier tapering, sending global equities lower, with the three major US stock indices falling between 1.23% and 1.85% over the past five days ending Thursday. Minutes showed that most officials believe that US inflation has made progress, although the labour market still has room for improvement. St. Louis Fed President James Bullard was vocal that he would like to see bond purchase tapering done by the first quarter next year, and rate hikes starting in the fourth quarter. Earlier, US Fed Chairman Jerome Powell warned that a resurgence in the epidemic would bring uncertainty to the economic recovery and stressed the limitations of the Fed's tools.

In fact, cases in the US jumped again, with daily deaths in the country reaching a record high since February this year. Just as the epidemic rebounded, the US economy showed signs of slowing down, with July retail sales down by 1.1% MoM, more than the expected 0.3% drop; the August homebuilder confidence index also fell to a 13-month low. With inflation making progress on one hand, and a revival of the epidemic on the other, the market is watching for more insight from Powell at the Jackson Hole meeting on 26-28 August regarding the pace of tapering. Next week, the US will release economic data such as the Markit Manufacturing and Services PMI.

Europe

As global investor sentiment turned cautious, European stocks followed the external markets, with the UK, French, and German indices falling between 1.32% and 4.21% over the past five days ending Thursday. Recent economic data from the Eurozone was lukewarm, with the Harmonised Index of Consumer Prices (HICP) up 2.2% YoY in July, in line with expectations, the final GDP growth of 2% QoQ in 2021 Q2 also met market expectations. Next week, the Eurozone will release more data including the August Markit Manufacturing PMI.

China

Reports on the Chinese authorities expanding regulations across more sectors increased the selling pressure on Hong Kong and Chinese markets. The Hang Seng Index fell below the 25,000 level again on Friday and hit a new low since early November last year, adding up to a 5.84% drop over the week, while the CSI 300 Index also fell 3.57% over the same period. The Central Government's latest draft regulations targeting ‘unfair competition’ in the cyberspace and revisiting information infrastructure security put pressure on internet-related sectors, quality stocks such as Tencent were also hit by the news. In addition, well performing sectors, such as electric vehicles and healthcare, were also targeted by new regulations, bringing the overall market down. The market will continue to monitor the latest regulatory developments and their implications.

While the macro environment has slightly shifted, we still think developed markets should outperform emerging markets in the near term, as several factors contribute to the divergence in performance. The resurgence of the Delta variant could potentially derail the economic recovery, as countries have started to re-impose epidemic restrictions in order to control the situation. 

Vaccinations in emerging economies continue to lag behind developed countries due to logistic and supply constraints, which could further amplify the lockdown impact as economic activities gets more limited.

Likewise, inflation also poses as a threat to the emerging market equity performance. The relatively elevated figure across EM countries could force local central banks to tighten up their monetary policy. As a matter of fact, numerous emerging market central banks including Russia and Brazil have already hiked their rates recently, the tightening in liquidity puts a cap on the valuation level. Given no material changes to the macro environment, we will still prefer DM equities in the shorter term, and would avoid taking in more EM exposure.

Economic fundamentals in Europe continue to stay strong. Various PMIs stay close to the all-time high, reflecting the positive business environment at the moment, sentiment indicators such as economic sentiment and consumer confidence indicators are also positive, staying above the long term average. With the continued vaccination efforts, epidemic restrictions in the region should likely follow the UK path and be uplifted. Overall, we expect the outlook of the European economy to stay on the positive note as risks such as COVID fade out.

Apart from a good control over the COVID epidemic and a solid economy, the European market also has a particular advantage in terms of monetary support. With the inflation level lower than most major economies, the ECB have announced no change to rates and the PEPP after the latest interest rate meeting, and further changed the inflation targeting to ‘symmetric 2% inflation target’. These would further cement our idea that there will be no tapering before Q2 2022, and no rate hikes in the short to mid-term. Henceforth, the monetary policy should remain more supportive compared to most other major economies, we continue to hold a positive outlook on the European market in the coming few months.

The fundamentals of the economy remains stable, but most of the indicators have slowed down in line with the previous trend. Base effect wears off, and the moderately tight fiscal and monetary policies was negative for the market. Although the PBoC announced a surprise RRR cut of 50 bps during the month, freeing up 1 trillion CNY in liquidity, which did offer a brief support to market sentiment. However, subsequent policy announcements that impacted several sectors raised uncertainties in the market.

Following the scrutiny over several sectors such as internet platform businesses earlier, the target has since then moved on to other industries. Policies such as limiting overseas listing, a non-profit order for the education sector, and criticising the gaming industry, had material impact on the business themselves, and affected the investment sentiment, which was the main reason behind the market crash in July. Overall, the market remain exposed to the downside in the short to mid-term due to policy uncertainty, such that we would refrain from holding excess positions in the market in the near term.