US

US stocks erased much of their previous gains on Thursday alone, amid concerns that the US economic impetus may be slowing down. In spite of the Thursday drawdown, US stocks still outperformed the other major equity markets over the past five days ending Thursday, with the S&P 500 and NASDAQ up 0.54% and 0.38% respectively. On the US data front, the labour market continued to improve, with a record number of 9.2 million job openings in May, reflecting further strengthening of the job market. However, the pace of expansion in the US service sector, reflecting service sector activity, was weaker than expected in June, raising concerns that the US economic growth momentum may have peaked, triggering a market correction. Longer-term inflation pressures have eased as the 30-year US Treasury yield, typically reflecting longer-term inflation expectations, fell to 1.85%, down 66 basis points from its high of 2.51% in March. The minutes of the June meeting of the US Federal Reserve showed that officials expect the timing of the tapering could be earlier, but remain divided on how to scale back purchases of mortgage-backed securities (MBS).

Global oil prices continue to rise, mainly due to concerns over the supply outlook as Saudi Arabia and the UAE failed to reach an agreement on increasing production. No announcement has been made regarding the next OPEC+ meeting, which may mean that production will probably stay unchanged in August, possibly resulting in a 'historic supply gap', and this has spurred a further rise in oil prices to near US$77 per barrel. The market is still closely monitoring oil price action. Next week, the US will release important data such as CPI and retail sales for June, and the Fed will also publish its latest economic beige book.

Europe

European stock markets have been weak recently, with the UK, French, and German equity indices down 1.33%, 2.40% and 1.17% respectively over the past 5 days ending Thursday. The ECB announced the results of its first strategy review since 2003, stating that a medium-term "symmetric" inflation target of 2% will be implemented from 22 July onwards, while allowing inflation to "moderately" exceed this level temporarily. ECB president Christine Lagarde said that the new inflation target does not preclude any potential policy tightening, which was unanimously agreed by central bank policymakers. On the other hand, the European Commission raised its economic growth forecast for the Eurozone from 4.3% to 4.8% this year, saying that the economy is "recovering strongly". Next week, the UK will release CPI data for June.

China

The investigation of DiDi has renewed regulatory concerns in China, and the sharp fall in China concept stocks weighed on the performance of the Hong Kong stock market. The Hang Seng Index was down 3.41% for the week, while the mainland stock market fared better, the CSI 300 Index was slightly lower by 0.23% for the week.  The freshly US-listed vehicles for hire leader DiDi is under investigation, with its share price falling by nearly 20% in a single day after its IPO, and its shares have been in a downward spiral since then, to the extent that US investors have taken it to court. It is reported that the Chinese government may tighten up the supervision of companies listing abroad. On the other hand, China's bond market was supported by the State Council's reintroduction of "timely RRR cuts", which saw the 10-year bond yield briefly falling below 3%. Next week, China will announce its GDP for the second quarter and important data on fixed investment, production and retail sales in June.

 US

US equities stayed in strong form, as concerns over the risk of rate hikes and tapering has temporarily faded, positive economic data further supported markets. Over the past 5 days ending Thursday, US markets went higher, the 3 major equity indices gained 1.06 – 1.28%, the S&P 500 Index in particular set new historic highs for 6 days in a row. Policy wise, the bipartisan infrastructure bill has hit another obstacle, as Republican senators warned that they could withdraw their support for the bipartisan deal if it was bundled with another Democratic bill. Economic data were great, initial jobless claims went below 400k again, hitting a new low since the start of the epidemic. ISM manufacturing PMI fell slightly short of market expectations, but remains in the expansionary zone, consumer confidence also hit a recent high, both highlighting the strength of the current economy. As for monetary policies, Philadelphia Fed Chairman Patrick Harker said the reduction in asset purchases should start within this year, joining in with the growing hawkish sentiment in the Fed. Next week, services PMI from both ISM and Markit will be released, investors might also want to keep an eye out for the latest employment data, while the Fed will release the June FOMC meeting minutes.

Europe

European equities had mixed performance amidst decent economic data, the UK and German equity indices gained 0.09 - 0.21% over the past 5 days ending Thursday, while French equities lost 1.17% over the same period. Although vaccinations programmes continued, COVID infections in the UK due to the Delta variant are on the rise, which could risk spreading it across the continent with the ongoing UEFA EURO 2020, potentially jeopardising the whole reopening process. Apart from the risk arising from the epidemic, Europe fundamentals remained on the bright side, with various employment, sentiment, and more importantly inflationary data staying on the positive side. The latest figure on inflation came in at 1.9%, which is slightly lower than the previous figure of 2.0%, relieving markets over inflation concerns, and indirectly guaranteeing that the current easy monetary policy can be extended. Next week, Europe will release a range of key economic data, including services PMIs and retails sales figures, while Germany will have further data on ZEW Survey Expectations and industrial production.

China

With a larger correction on Friday, Chinese equity markets underperformed, the CSI 300 index lost 3.03% over the week; Hong Kong markets also felt the impact, falling 1.98% over the past 5 trading days ending Friday. As for fundamentals, economic data in China was less positive than markets had hoped, with both the official PMIs and the Caixin manufacturing PMI lower than the previous reading. The Chinese Communist Party celebrated its 100th anniversary, marking the end of the first centenary, and moving on to the second centenary, which aims to transform China into a modern world power. Markets continued to pay attention to the offshore corporate bond markets, with the recently downgraded Evergrande and Huarong in focus. Next week, China will release more economic data, including Caixin services PMI, CPI, and PPI figures for June.

Fed officials have insisted repeatedly that the current inflation is merely transitory, which would not threaten the long term stability in the economy. The sentiment is echoed over the other side of the Atlantic, where the European Central Bank (ECB) officials see no immediate inflationary pressures, and reiterated the decision to keep the Pandemic Emergency Purchase Programme (PEPP) unchanged at least well into 2022. An unchanged monetary policy direction should continue support bond prices.

Over in the US, as revealed by the latest Fed minutes, Fed members are still evaluating whether it is the right timing for tapering discussion. According to the latest PCE and CPI figures, inflationary figures are running significantly higher than the historic trend, the current supportive monetary policy could end sooner than expected, which poses an interest rate risk to bondholders. Considering the narrow credit spreads in the US and European bond markets, we would prefer Asian names for the better risk to return ratio, and continue to stay short on duration in fear of possible tapering.

Extending last month’s record, economic fundamentals in Japan remain weak, which was a product of the weaker growth potential, and depressed economy outlook due to the epidemic. The 2021 Q1 GDP went negative once again, and was worse than the expected figure, outlining the weak economy in the country. Other fundamental indicators, including industrial production, and retail sales, fell short of expectations, which further supports a weaker outlook on the Japanese economy.

The problems further compounded with the ongoing epidemic in the country, where cases remained at elevated levels. More crucially, the key to a full economy recovery, vaccination progress, have remained sluggish, which could possibly slowdown future economic growth. Henceforth, our view on the Japan equity market remains unchanged – the cyclical trade could benefit the market to a certain extent, but country’s soft fundamentals likely pose a larger risk, we would avoid overweighing the market.

While the rebound in EM equities were formidable, we stand by our view on the DM EM divide. We still see DM equities outperform EM equities over the next few months and for the whole year. The factors we see leading to the DM EM discrepancy has not dissipated, as the risks arising from the slow vaccination progress, mounting external debt, and inflationary risks still looms on the horizon. With the significantly higher exposure to such unhedgeable risks, we find it difficult to make a case for investing in in EM equities at the moment.

One of the key factors lies in the epidemic control, one area which we find the DM economies is doing manifolds better than EM. As EM vaccination progress remains largely lagging behind DM economies, a true reopening is still out of the question, future flare ups can also cause serious disruptions to normal economic activities, as illustrated by the recent outbreaks in Vietnam and Taiwan. Although WHO’s recent approval of additional vaccines for emergency use could help alleviate some of the vaccine supply issues, we still see the outlook of EM as less attractive than their DM counterparts. As fundamental issues are yet to be resolved, we maintain our view of DM over EM in the short to mid-term.

Monetary policy is expected to stay supportive to the market well beyond this year. ECB officials mentioned that there is no intention to roll back on the scale of the ongoing Pandemic Emergency Purchase Programme (PEPP) before March 2022, ECB president Christine Lagarde also promised that the ECB will keep the accommodative monetary policy unchanged ‘well into the recovery’. As inflationary pressures in the region remain rather benign compared to other major economies, we could expect the equity market to remain supported by the excess liquidity throughout the year. 

Solid fundamentals across the region also provided extra confidence to the market, important indicators including PMIs and various sentiment indicators stayed strong and beat market expectations. Given the strong sentiment, the key to a sustained economic recovery lies in the pandemic control in the region. With around 50% of the European population having received at least 1 dose of vaccine, European Commissioner for Internal Market Thierry Breton estimates that the region could reach herd immunity by mid-July. That said, keep in mind that the European overweigh is primarily a short term tactical allocation, and we will review the recommendation by the end of the second quarter.

 US

The Fed's dot plot showed officials taking an unexpected hawkish turn, dragging US equities lower, while the tech sector defied the market, gaining on the back of a flattening yield curve. Over the past 5 days ending Thursday, both the S&P 500 and the Dow lost 0.41% and 1.86% respectively, while the NASDAQ gained 1.01% on the back of the tech rebound. After the interest rate meeting, the Fed announced no changes to its asset purchase program, but raised the overnight reverse repo rate and the excess reserve ratio, while also raising its inflation forecast for 2021 to 2023. The Fed's dot plot showed that more officials expects interest rate hikes to start in 2022, up from 4 to 7. The hawkish turn surprised the market and increased short-term volatility, equities retreated and the Dollar rallied, gold prices fell, longer-term treasury yields fell as the yield curve flattened. 

US Treasury Secretary Janet Yellen said the economy was recovering from the impact of the COVID epidemic and hoped the Congress would support Biden's budget proposal. However, US economic data showed signs of a slowdown amidst recent strength. Retail sales figures in May were weaker than expected, falling 1.3% MoM, the number of initial jobless claims also rose for the first time since April, while the Producer Price Index (PPI) accelerated to 6.6% YoY, reflecting higher upstream prices. Next week, the US will release the June manufacturing and services PMI, alongside May core PCE data.

Europe

European equities outperformed the rest of the world recently, with the UK, French, and German equity indices up 0.27%, 0.99%, and 0.22% respectively over the past 5 days ending Thursday. The market still believes that the EU and the European Central Bank (ECB) will not make changes to the current supportive policy direction. It was further reported that the ECB would extend an epidemic relief measure for banks for another nine months. The EU has also announced a 10-year bond issue, raising €20 billion as an initial funding for the EU recovery fund. Next week, the Bank of England will hold an interest rate meeting and Germany will release its IFO economic forecast for June.

China

The Hong Kong and Chinese stock markets saw divergent results, the CSI 300 index fell 3.21% over the week, while the HSI edged up 0.22% over the same period. China's economy held steady, although consumer spending, manufacturing output and fixed investment growth slowed in May YoY. Chinese authorities have recently shifted their attention over commodities, agricultural prices and the foreign exchange market. The market was also concerned about the mainland housing bond market, where data showed that the YTD share of bond issuance by lower-rated real estate entities fell to the lowest level in over a decade. The market remains focused on Chinese policy implications on the market.

Fundamentally, economic indicators, including various PMIs and other concurrent indicators, mostly remain in the positive zone, but we also do note that the numbers have actually been trending down in the recent months, which is likely a result of the low base effect wearing off. Overall, the Chinese economy is still doing decent, despite the recent slowing down. With the corporate earnings on the rise, picking high quality assets with robust earnings and lower valuation volatility should be the priority.

The more important issue in the Chinese market lies on the policy direction. As the Chinese equity market hit recent highs early on in the year, authorities emphasised the importance of stability, reducing liquidity to clampdown on excessive speculation, China’s money supply M2 has since then returned to pre-pandemic levels. Historically, during periods of slower money supply growth in relative to GDP, stock performance tends to be weaker, as the tight liquidity in the market limits the valuation levels in the market. With the current money supply staying tight, expect valuation expansion to be limited in the short to medium term. That said, while the monetary base is a limiting factor, with the economy steady and corporate earnings recovering, we maintain our neutral outlook on the Chinese equity market.

In fact, fundamentals remain very strong in the US. PMIs stayed strong, services PMI in particular set a new record high of 70.1. Employment data were also satisfactory, ADP nonfarm payrolls were outstanding, with initial jobless claims falling below the 400,000 mark for the first time since the epidemic started, suggesting that the epidemic’s grip on the economy might have been past its peak. With the recovery plays still under way, expect cyclical sectors such as financials, materials, and industrials to perform well.

Overall, we remain positive on the US market over the year. Vaccination progress in the US continues to progress, the domestic economy will recover, especially the badly hit industries of travel and leisure. However, risks do remain in the equity market, considering the current valuation levels. Given that recent inflation data is rising rapidly, Fed officials have mentioned that there should be discussion over future tapering talks, which suggests possible earlier than expected tapering, if inflation proves to be sustained. Henceforth, while we stay positive over the overall US stock market, be aware of the risks from tightening liquidity, emphasis should be placed on cyclicals sectors, and ones with growth potential and a stronger earnings conviction.

 US

While the economic data doesn’t seem to be too supportive of the market, statements from Fed officials continued to reassure the market, market participants reacted positively. The tech sector in particular bounced further, the NASDAQ index gained 2.98% over the past 5 days ending Thursday, and the S&P 500 index was up 1.10% over the same period, while the Dow was down by 0.32%. The latest CPI figure released on Thursday came in as 5% YoY, which was one of the largest figures in recent years, and exceeded both market expectations and the previous figure. Even if we disregard peripheral data, core CPI was still up by 3.8% YoY, which was the largest figure since 1992.

As the economy is still in the early stages of economy reopening, market expects the Fed to reiterate that the current spike as merely a transitory phenomenon, and any signs of change in monetary policy is expected to be revealed at the Jackson Hole meeting in August. Believing that the risk of a short term monetary tightening has decreased, bond yields flattened on Thursday, while rate sensitive growth stocks rebounded. Next week, the US will release figures on retail sales, while the Fed will also hold an interest rate meeting. Market expects the Fed to maintain the transitory inflation rhetoric unchanged.

Europe

European markets were softer over the week with the mixed economic data released over the week.  Over the past 5 days ending Thursday, the UK and French equity indexes gained 0.34% and 0.59%, while the German DAX lost 0.39%. Fundamentally, 2021 Q1 GDP for the Eurozone was slightly better than market expectations yet remained in contraction, while industrial production figures missed market expectations, as well as the ZEW economic sentiment. On the monetary side, European Central Bank (ECB) President Christine Lagarde rejected the notion that the European inflation could be sustained, stating that inflation is expected to stay below the longer term target over the projection, downplaying the possibility of an early tapering coming from the ECB. The Bank also revised the GDP projections for the Eurozone up to 4.6% in 2021 and 4.7% in 2022.  Next week, the UK will release their unemployment figures and CPI data, Eurozone countries will also release their final CPI figures for May.

China

Chinese equity markets slightly faltered over the week, tightening liquidity conditions continued to pose as an obstacle to equity performance. The CSI 300 and Shanghai composite were both down again over the week, the Hong Kong HSI also underperformed, falling 0.26% over the week. The latest CPI figures in China were lower than market expectations, the mild figure was reassuring for markets, but the spike in PPI to 9.0% YoY is the highest number since 2008. The latest total aggregate financing figure fell short of market expectations, but still gained MoM, reflecting the liquidity in the onshore market. Next week, China will release figures for fixed assets investment, retail sales, and industrial production.