Recent economic data in the US were mixed. While PMIs were decent, and consumer confidence returned to the pre-pandemic level, employment figures were disappointing. Interestingly, the market did not see this necessarily as a bad thing, as an incomplete recovery in the economy could allow the dovish monetary policy to extend. According to the latest Fed interest rate meeting, Chairman Jerome Powell stood unchanged on the monetary policy as the economy is still ‘some distance away from a full recovery’, citing job market figures as his primary rationale. 

Another thing to consider is that COVID cases are once again on the rise. With the pace of vaccination rollout in the US slowing down, the rise in the Delta variant combined with the lack of herd immunity could still pose a threat to the economy with potential lockdowns and other restrictive policies. In short, expect more downside risks in the short term arising from epidemic resurgence and tapering talks, investors could consider a gradual shift back to more growth exposure when the market potentially corrects, which should offer a better return potential over the longer term.

 US

A slowdown in US inflation data eased concerns over an earlier tapering of asset purchases, and the Senate's approval of the US$ 550 billion infrastructure bill boosted market sentiment. The S&P and Dow hit new highs, up 0.72% and 1.24% respectively over the past five days ending Thursday. The US Consumer Price Index (CPI) rose by 0.5% MoM in July, easing from 0.9% in June. The core CPI, which excludes food and energy prices, also slowed to 0.3% MoM in July, down from 0.9% in the previous month, the softening data eased market fears of an earlier tightening of monetary policy. Earlier, following the release of strong US employment data, both the Kansas City and Richmond Fed Presidents suggested that the conditions for tapering would be met soon.

The US Senate passed the $3.5 trillion budget package and the $550 billion infrastructure bill, which may pave the way for President Joe Biden's future economic policies, whilst boosting the reflation trade, the 10-year US Treasury yield briefly hit the 1.377% level. The annual meeting of global central bankers at Jackson Hole will be held between 26-28 August this year, and the market will be watching for any major monetary policy announcements at the event. Next week, the US will release retail sales data for July and the minutes of Fed’s July interest rate meeting.

Europe

European stocks performed well, with the UK, French, and German equities gaining between 0.96% and 1.12% over the past five days ending Thursday. The UK announced its preliminary GDP growth of 22.2% YoY for 2021 Q2, which was a reversal of the 6.1% contraction seen in Q1. The Eurozone CPI rose by 2.2% YoY in July, surpassing market expectations of 2.0%. Bundesbank President and ECB Governing Council member Jens Weidmann said he would keep a close eye on the threat of elevated inflation. Next week, the Eurozone will announce the revised GDP for the 2021 Q2 and the market expects the YoY figure to remain unchanged at 13.7%.

China

Although the market is still digesting the latest regulatory signals from Chinese authorities, the Hong Kong and Chinese stock markets have rebounded this week after the recent sharp correction, Hang Seng Index rebounded 0.81% over the week and CSI 300 Index was 0.50% higher.  China's total social financing and new RMB loans in July both fell short of market expectations and were lower than the previous value, suggesting that the domestic economy could be slowing down. In addition, the China Banking Regulatory Commission announced that it would step up oversight of insurance technology platforms, triggering a sharp fall in related equities. The State Council announced the implementation framework for the next five years, stating that it will step up monitoring of key areas such as food, pharmaceuticals, as well as education and training. The market will be watching the impact of the national policy on different sectors. Next week, China will release key economic data on industrial production, retail sales, and fixed investment.

 US

The Delta variant continues to rage across the globe, threatening the recovery outlook, but strong US earnings have negated worries over the outbreak, with the S&P 500 and Nasdaq up 0.23% and 0.79% respectively over the past five days ending Thursday, both reaching new record highs, while the Dow was down a modest 0.06%. Thus far, about 85.6% of the 439 reporting S&P 500 companies have reported market beats, reflecting a strong overall business conditions.  Economic data has been slightly disappointing, the ISM Manufacturing Index slowed in July, mainly due to supply bottlenecks which limited output.

While the spread of the Delta variant posed a potential concern over slowing economic growth, global central bank monetary policies are leaning towards the hawkish side. US Federal Reserve Governor Christopher Waller said he was optimistic about the economic outlook and expects the Fed to scale back its monetary easing earlier. Vice-Chairman Richard Clarida also suggested that a tapering of bond purchases would be announced at a later date, followed by an interest rate hike for the first time in 2023. Incidentally, Brazil's central bank has already announced the largest rates hike since 2003. Next week, the US will release data on July CPI and University of Michigan market sentiment for August.

Europe

A strong recovery in the Eurozone boosted European markets, with UK, French, and German indices rising between 1.25% and 2.55% over the past five days ending Thursday. 2021 Q2 Eurozone GDP rose by 2.0% QoQ, well above market projections of 1.5%, while the final Eurozone manufacturing PMI for July was 62.8, also above expectations of 62.6. While the Bank of England kept interest rates and policy unchanged after the interest rate meeting, the Bank stated that it would start tapering when the bank rate reaches 0.5%. Next week, the Eurozone will release its ZEW survey expectations and Sentix investor confidence data for August.

China

A strong recovery in the Eurozone boosted European markets, with UK, French, and German indices rising between 1.25% and 2.55% over the past five days ending Thursday. 2021 Q2 Eurozone GDP rose by 2.0% QoQ, well above market projections of 1.5%, while the final Eurozone manufacturing PMI for July was 62.8, also above expectations of 62.6. While the Bank of England kept interest rates and policy unchanged after the interest rate meeting, the Bank stated that it would start tapering when the bank rate reaches 0.5%. Next week, the Eurozone will release its ZEW survey expectations and Sentix investor confidence data for August.

 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.