The economy further tanked in March, PMIs in China have fallen into the contraction zone, as the country experienced a surge in the omicron wave. The government have decided to stick to the ‘dynamic zero’ policy, where social activities were severely limited to clamp down on infections. Henceforth, economic activities and demand have taken a hit, which inevitably impacts the economy itself. With the pandemic still ravaging different locations, it is expected that the economy will remain under pressure in the short term, which serves as headwinds for the market.

As a result, uncertainty in the Chinese equity outlook increases. Although there has been signals that the government would provide more support via monetary loosening and fiscal incentives, the overall business landscape remains rather tight in the short term, as the Chinese property sector suggests so. With no material changes, the Chinese economy will likely remain under pressure, short term equity market outlook is uncertain. However, in the long term perspective, we think that the current valuation levels are attractive, which might be an opportunity if one does not emphasis on the short term performance.

There is still no de-escalation in the situation in Ukraine, and little have been agreed on a ceasefire. However, given that the unlikelihood of a full blown war between the West and Russia, we expect no further deterioration in the situation and think that most of the downside arising from the conflict are already priced in. Economic fundamentals are strong, but the issue of high and persistent inflation remains in place, due to the fallout impacts of both the Russo-Ukrainian conflicts, as well as sanctions and self-sanctions, which significantly reduced the supply. 

With inflation remaining at highs of recent decades, monetary policy is poised to tighten notably, which will continue to be headwinds against the equity market. Considering the recent rebound, there could be downside risks arising from rebasing valuations. Another intriguing observation is the inversion of the yield curve, which was a historic predictor of future recession. While the current economic fundamentals of US are strong, with the high lingering inflation, economic momentum could further slowdown, potential stagflation scenarios could not be completely ruled out. Henceforth, we remain relatively conservative over the US equity outlook, and would suggest holding defensive sectors and only increase equity exposure if market further corrects.

  US

US inflation rose to a 40-year high, with US equities weakening on the back of volatility, the NASDAQ fell 1.77% and the S&P 500 lost over the past 5 days ending Wednesday. The US Consumer Price Index (CPI) rose by 8.5% YoY in March, the highest since 1981. In addition, the US PPI also hit a record high in both YoY and MoM measures, suggesting continued inflationary pressures on industrial raw materials. The United States NFIB Business Optimism Index also fell to a near two-year low in March, amid rising cost pressures. Against the backdrop of high inflation in the US, Fed Vice-Chairman nominee Lael Brainard said the authorities would move quickly to raise interest rates to a neutral level, and may decide whether to start tapering as early as May.
Earnings season has commenced in the US, with financials leading the charge. JPMorgan Chase (JPM) reported a 42% YoY drop in earnings for Q1 this year, spurring a 3.2% loss in a single day, while BlackRock (BLK), the world's largest asset manager, reported a 21.6% YoY increase in earnings. The market will pay close attention to the earnings performance, US will also release the manufacturing PMI data for April and the economic beige book next week.
 

Europe

The French presidential election piqued markets' attention, with European equities lacking clear direction after the sharp rebound in March. The first round of voting in the French presidential election has concluded and incumbent President Emmanuel Macron has received 27.6% of the votes, ahead of key rival Marine Le Pen's 23.4%. The next and final round of voting will be held on the 24th of this month. In addition, the market is eager to hear more from the ECB on its monetary policy at the next interest rate meeting on Thursday night, with Governing Council member Yannis Stournaras saying that inflation will be controlled at all costs. Next week, the Eurozone will release manufacturing PMI data for April.

China

Despite the news that the mainland might cut the reserve requirement ratio (RRR), the Hong Kong equity market remained soft, with the HSI down 1.62% for the shorter week due to the Easter holiday on Friday, the China A-share market was also weaker, down 0.93% from Monday to Thursday. Premier Li Keqiang said at a State Council meeting that monetary policy tools such as RRR cuts should be used in a timely manner, reinforcing market expectations that the next cut could come soon. On the data front, China's aggregate financing and new RMB loans in March were both higher than the previous month, as well as the March CPI YoY. Next week, China will release its 2022 Q3 GDP, as well as fixed investment, production and retail sales data for March.

  US

US equities were under pressure after the Fed minutes showed hawkish officials, combined with increased US sanctions against Russia, the S&P 500 and Dow were down 0.67% and 0.27% respectively and the NASDAQ lost 2.27% over the past 5 days ending Thursday. The Fed released the minutes of its March meeting, which showed that the authorities are considering tapering the balance sheet up to US$95 billion per month, and officials believe there will be at least one 50 bps rate hike in the future. The President of the Kansas City Fed said that a one-off 50 bps hike in May was one of the options that must be considered, and the President of the St. Louis Fed suggested that interest rates should be raised to 3% to 3.25% by the end of the year.
As for Western powers' response to Russia, the US announced a new round of sanctions against Russia, which will include the country's two largest banks and Putin's daughters. The US economy performed reasonably well amidst concerns over the inverted yield curve, with non-farm payrolls increasing by 431,000 in March and the unemployment rate falling to 3.6%. The ISM Services Index rose to 58.3 in March, accelerating for the first time in four months. Next week, CPI data and retail sales data for March, as well as University of Michigan market sentiment, will be released.
 

Europe

With inflation in the Eurozone hitting new highs, worries over accelerated tightening by the European Central Bank increased, as the French CAC and German DAX fell by 3.33% and 2.55% respectively in the five days to Thursday. Prices in Europe were fuelled by the Russo-Ukrainian war, with the Eurozone's consumer price index (CPI) surging by 7.5% YoY in March. ECB Governing Council member Klaas Knot said interest rates may start hiking as early as September. The Bank's chief economist, Philip Lane, said that if the economic outlook deteriorates, the Bank would reconsider the timing of the stimulus withdrawal. According to the ECB meeting minutes, officials said they felt the need to set a firm date for the end of the asset purchase programme.

China

Hong Kong's stock market started the week on a high note before sliding lower, the HSI was trading around the 22,000 level, with turnover dropping to just over $100 billion on Friday. The HSI was down 0.57% for the week, while the Hang Seng Tech Index was down 2.97%; the China A-share market remained range bound, with the CSI 300 index down 0.55% for the week. On the economic front, the Caixin China Services PMI fell to 42 in March, a more than 2 year low, while the Caixin China Manufacturing PMI was 48.1 in March, also falling into the contraction zone. The World Bank lowered its forecast for Chinese economic growth to 5% this year, down from 5.4% earlier. Next week, China's consumer price index (CPI) for March will be released.

  US

Positive news on Russo-Ukrainian talks boosted market sentiment early in the week, but hopes were dashed later on and US stocks turned lower on Thursday, with the Dow, S&P 500, and NASDAQ seeing limited movement over the past five days ending Thursday. Russia had said it would reduce its military operations near Kiev and Chernihiv, but the Kremlin later said there had been no breakthrough in the peace talks in Turkey, keeping the market under pressure.
On the other hand, the inversion of US treasury yield curve has raised investors' eyebrows as historical data shows that an inversion of the 2-10 year yield has occurred before each of the last four recessions in the US. Even though rate hikes may increase the pressure on the inverted curve, Fed officials are still very open to accelerating interest rate hikes in the face of the lingering high inflation. Next week, the ISM Services Index for March and the minutes of the 16th Mar interest rate meeting will be released.
 

Europe

Russian President Vladimir Putin claims that Russian forces will withdraw from Kyiv, while western governments remain dubious over the motives behind the action. Fortunately, the situation in Ukraine saw no further escalation, calming markets despite no further progress in the peace talks. Over the past 5 days ending Thursday, UK, French, and German equity indices edged 0.65 – 1.59% higher. ECB chief economist Philip Lane suggested that the Bank is not fixated on raising rate within the year, which contrasts to the markets’ expectations of 2 hikes by the fourth quarter this year. He further claims that current levels of inflation will not last, echoing ECB President Christine Lagarde’s view that stagflation is unlikely. As for economic data, Eurozone CPI was a whopping 7.5% YoY in March, setting a new record high. Next week, Sentix investor confidence and Eurozone services PMI, as well as retail sales figures will be in focus. 

China

Both Hong Kong and Chinese equity markets recouped more ground over the week with limited negative news. External market sentiment were also mildly positive with no worsening in the Ukrainian situation. Over the week, the Hang Seng Index gained 2.97%, while the CSI 300 was also 2.43% higher. Recent economic data releases have been underwhelming, with the Caixin manufacturing PMI at 48.1 for March, and both official manufacturing and non-manufacturing PMIs in the contractionary zone. The COVID situation in China is another point of concern, as cases remain on the rise. In Hong Kong, trading in more than 30 listed companies in Hong Kong are temporarily suspended after the companies missed their deadlines on submitting annual results, raising concerns over the financial health of Chinese developers. Next week, China will release Caixin Services PMI for March, as well as the latest foreign reserves. 

  US

Despite the lack of visible progress in the Russia-Ukraine situation, US stocks rebounded over the past few days, as the Federal Reserve's increased clarity over the pace of rate hikes eased market uncertainty over the monetary policy outlook. Over the past 5 days ending Thursday, the NASDAQ gained more, up 4.24%, the S&P 500 rose 2.46% and the Dow edged 0.66% higher. US Federal Reserve officials were aggressive on interest rate policy, with Chairman Jerome Powell stating that a 50 basis point hike could be needed at the May meeting if the situation calls for it, and St. Louis Fed President Bullard suggesting an earlier hike would be preferable, and interest rates should rise above 3% this year. As a result of the hawkish comments, US Treasury yields rose across the board, with the 10-year yield briefly breaching the 2.4% level, the wide US bond market was under pressure.
In light of the Russo-Ukrainian War, and considering the impact of Russian sanctions on resource prices and the global economy, a number of international institutions have announced or indicated that they will lower their growth forecasts. Fitch has announced that they have lowered their global growth forecast for 2022 to 3.5%, while the IMF President has also indicated that they will lower theirs next month. Next week, US will be releasing unemployment and non-farm payrolls data, alongside with the ISM manufacturing index and consumer confidence data for March.
 

Europe

European stocks were relatively soft, with the French CAC and German DAX down 0.86% and 0.79% respectively over the past 5 days ending Thursday, while the UK FTSE 100 was up 1.11%. Inflation in the UK rose by 6.2% YoY in February to a 30-year high, reflecting unresolved inflationary pressures in the region. In the face of inflation in Europe, ECB Governing Council member Joachim Nagel said that interest rate hikes may start this year and should not be delayed. The ECB later said in a statement that it would phase out its temporary pandemic collateral easing measures from July onwards. Next week, the Eurozone will release data on March CPI and February unemployment.

China

The market volatility increased during the earnings season in Hong Kong, with the Hang Seng Index falling on Friday, wiping out all gains for the week; as for China A-shares, the CSI 300 Index was weak on Friday, dragging the index down 2.14% for the week. Many tech companies in Hong Kong announced their results, including Tencent, which posted the lowest growth in operating revenue in 2021 Q4, this was the lowest since its IPO in 2004, and also the first single-digit growth. In addition, Chinese property companies such as Sunac and Evergrande announced delays in the publication of their audited annual reports, raising concerns about their business. Next week, China will release official and Caixin manufacturing PMI data for March.

Inflation was originally expected to ease throughout the year, but the surprise turn of events in Ukraine will likely further fuel the sky high inflation via supply disruptions in Russia. While enacted sanctions have largely excluded the energy sector, there are still more concerns about the supply as OPEC refused to raise production quotas, and the strategic oil reserves coming down further fuelled speculation that energy prices are here to stay. Higher inflation has always been unfriendly to fixed income markets, as central banks have to respond with certain levels of monetary tightening.
That said, central banks are forced to choose between stemming runaway inflation, or to ensure sufficient liquidity in the market. The ECB could slow down on their tightening pace, but the Fed is expected to continue with the plans for tapering and rate hikes. This backdrop remains negative for the fixed income market, even though the bond market could see some short lived rebound as capital flock to fixed income for hedging against geopolitical risk, over the course of the year, we remain negative on this market segment, and consider only the high yield bonds to be an acceptable investment choice.
 

  US

Global markets rebounded, hopes for Russia and Ukraine to reach a peace agreement grew, and crude prices briefly retreated, easing inflationary pressures. Over the past 5 days ending Thursday, the 3 major equity indices gained 3.57-3.94%. After the Thursday meeting, the US Federal Reserve announced the first rate hike since 2018, and indicates that there will be 6 more hikes in the year. Fed President Jerome Powell stated that the economy is strong and see no signs of recession within the next year, and indicates that the balance sheet reduction could start as early as May. While the FOMC projects a 4.3% inflation for the year, Powell reemphasised that Fed is focused on achieving price stability, no surprises from the Fed helped lift market sentiment.
Earlier, it was reported that neutrality plans in Ukraine were being considered, but peace talks have seemingly stalled later in the week. The House voted in a decisive manner to pass the motion to end Russia’s favoured trade status, which is sent to the Senate for the final vote. Interestingly, it was reported that Russia managed to pay the interests on its sovereign bonds, avoiding a sovereign default. However, credit rating agencies remain concerned over the prospects of a default some time down the road, with the S&P further downgrading Russia’s rating to CC. Markets will keep an eye on the conflict development, and several key economic data will be released next week, including the latest Initial jobless claims, Markit manufacturing PMI for March, and durable goods orders for February.
 

Europe

European equities rebounded on the back of optimism over the Ukrainian situation, as Ukrainian President Volodymyr Zelenskyy noted that the country will not join NATO, fuelling expectations of more progress on the peace talks. The UK, French, and German equities gained 4.03-7.04% over the past 5 days ending Thursday. As for the economic data, ZEW economic sentiment recorded the largest drop ever, with the indicator dropping 93.6 points to -39.3, the revised Eurozone CPI for February also set a new record high. With inflation remaining elevated, ECB governing council member Klass Knot suggested that 2 rate hikes for the year is still possible, although ECB President Christine Lagarde said the Bank is in no rush to raise rates. With peace talks stalling late in the week and attacks from Russian forces continued, markets will be keeping an eye out on the Russo-Ukrainian conflict. Next week, Eurozone will release the consumer confidence indicator and Markit Manufacturing PMIs for March, while Germany is also poised to release the IFO Business Climate for March alongside UK’s latest CPI.

China

Both China and Hong Kong markets experienced huge swings this week, with the Hang Seng Index plunging 4.97% and 5.72% on Monday and Tuesday, before rebounding by 9.08% and 7.04% on Wednesday and Thursday. This was mainly driven by the shift in market confidence. At the beginning of the week, the combination of (i) the absence of a clear statement from China on the Russo-Ukrainian conflict, (ii) the heightened risk of delisting of Chinese stocks, (iii) foreign capital potentially abandoning the Chinese market, (iv) the new wave of COVID in China potentially impacting the Chinese economy, as well as (v) the suspension of the Russian stock market, which could lead to funds selling other emerging market positions in exchange for liquidity. The combination of these factors led to a free-fall in the Hong Kong market. However, on Wednesday, with the news that (i) US and Chinese regulators were working to reach an agreement on delisting arrangements, (ii) Vice Premier Liu He had sent clear signals to support the Chinese economy and the healthy development of its markets, and (iii) anticipating further negotiations regarding the Russo-Ukrainian conflict, market confidence recovered and soared on Wednesday and Thursday. Next week, China will announce both the 1Y and 5Y loan prime rates (LPR).