Inflation conditions remain elevated, CPI figures in the US stayed above 5%, which is significantly higher than Fed’s target level. The situation in Europe is similar, where inflation measurements reached a near 10 year high. Concerned over possibilities that the situation could impact the future monetary policy, market participants trimmed their positions to reduce duration exposure. However, during the Jackson Hole Symposium in late August, Fed Chairman Jerome Powell has been surprisingly dovish in his speech.

According to Powell, the Fed acknowledged that the current inflation has reached the Fed’s target, but they are still not planning to make any tapering calls within the short term. However, with the bond spreads close to the historic low, we would still avoid holding too much exposure in fixed income assets. If one has to invest in the fixed income spectrum, we would continue to value high yields over investment grades, as the largest source of risk in form of duration tends to be lower in high yields. However, when investing in high yields, bear in mind that the credit quality remain of upmost importance, as the recent defaults and credit warnings in China have shown.

If we would just consider the economic indicators, the Japanese economy still has much room for improvement. Although manufacturing PMI has managed to stay steady and expanding, riding on the recovering global economy, services PMI remained firmly in the contraction zone, which could have been a result of the continued epidemic situation in the Japan; household spending also missed expectations in July, heeding signs that the economy could see further slowdown in the second half of the year. 

However a surprise news did come out lately, as Prime Minister Yoshihide Suga recently announced that he will step down as the party leader. As Mr Suga’s approval rating tanked during his relatively short tenure, markets hoped a new prime minister could bring a breath of fresh air to the leadership. Together with a promising vaccination progress in the country, expectations of getting the pandemic under control could give the much needed boost to the stagnant economy, potentially driving the index higher and play catch-up to other developed markets. Although uncertainties do remain in the short term, a potential upwards drive based on lifted market sentiment is not to be ruled out.
 

The economy in some of the markets continued to bounce back, notably in the ones that did not suffer from the ongoing pandemic, the Indian market among them. However, we remain relatively sceptical over the EM outlook. As repeatedly mentioned, the few factors that contribute to the heightened risk in EM markets, including epidemic control, vaccination progress, inflation threats, and mounting external debt, remained true, which we still believe would undermine the performance of EM equities compared to their DM counterparts.

Although there has been COVID resurgence in some of the DM countries, the improving vaccination progress would likely suppress the further spread. A near ‘herd immunity’ allows economic activities to return to normal, and this exactly is one of the biggest divergences between DM and EM. On contrary, vaccination progress in EM countries remain sluggish, possibly due to supply bottlenecks. The rate hikes by EM central banks so as to counter the heightened inflation also serve as headwinds for equity performance. Although there has been recent EM recovery, we will still prefer DM equities over EM in the medium term..

Economic fundamentals in China further slipped in August, official services PMI even entered the contractionary zone at 47.5, which was the lowest figure since the pandemic trough back in early 2020. The weaker fundamentals could possibly be primarily attributed to two factors, one of which is the resurgence of COVID in the country. The delta variant prompted drastic lockdown measures from the Chinese authorities to limit the spread, the services sector suffered, but the sector outlook is expected to recover as soon as authorities regain control over the epidemic.

Policy uncertainty is the other likely cause in the weaker economic sentiment. As in the most recent politburo meetings, the idea of ‘shared prosperity’ have been reemphasised. Henceforth, we would stay neutral on the market, although the ongoing policy concerns are unlikely to dissipate in the short to mid-term, it should be balanced by attractive valuations and more stable liquidity conditions in the market. If one were to invest in Chinese equities, investors should stay selective, and focus on segments that are structurally integral for the future transition, such that they will face less policy risk.

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해리스 프레이져는 추석을 맞이하여 9월 21일(화요일) 오후 4시에 업무를 종료하며, 9월 22일(수요일)은 휴무입니다.

연휴기간 받은 요청사항은 연휴 후 (9월 23일) 처리가 될 것입니다. 가족과 즐거운 추석 맞으십시오. 

The COVID situation varied country by country, where some have seemingly peaked, while others are just starting its rise. If the UK experience has taught us anything, the key to dealing with the pandemic lies within a comprehensive vaccination programme. Although cases could still climb, severe cases and hospitalisations would stay at a lower level, henceforth allowing the economy to remain open and running as usual. The situation in Europe is exactly that, as economic fundamentals reflect that the economy has not suffered significantly despite the resurgence, which is positive for the equity market.

Even though the Eurozone CPI has slightly overshot forecasts, given the new ECB inflation target, the current level is still within acceptable bounds, and would not warrant an earlier than expected tapering. As ECB President Christine Lagarde has mentioned, ECB is keen on avoiding premature tightening of the policy, which could otherwise result in detrimental impacts on the economy. Markets expect the Bank to keep interest rates unchanged at the current level for an extended period. Henceforth, with the economic growth outlook steady, a possible further boost from the EU Recovery Fund, and ongoing supportive monetary policies, we remain positive on the European equity market.

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.

The 2020-21 Good MPF employer award is organized by the MPFA for six consecutive years since 2015. This year, Harris Fraser is honored to receive the awards for "Good MPF Employer Award" and "e-Contribution Award", as being recognized for the commitments to enhancing the retirement benefits of the employees.

The Good MPF Employer Award aims to not only cultivate employers’ responsibility under the law, but also encourage employers’ efforts to further enhance the retirement protection of their employees.

 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.