US

US treasury yields spiked again on Thursday, 10Y Treasury yield rose above 1.7% spooking markets. Growth names, primarily led by big tech, saw some of the larger corrections in the market. Over the past 5 days ending Thursday, the S&P 500 fell 0.61%, the Dow gained 1.16%, while the NASDAQ lost 2.11%. Fed had their interest rate meeting this week, Fed chairman Jerome Powell stated that the Fed is optimistic on the US economic outlook, but also highlighted the risk of the economic boom being short-lived, signalling that rates will likely stay low at least until 2024 to better support the economy. Current fund flows prefer recovery plays, somewhat explaining the Dow’s recent outperformance compared to the NASDAQ. Economy wise, recent data has been rather disappointing, retail sales, industrial production, and initial jobless claims data have all missed market expectations. Investors could focus on next week’s data, where we will see the latest figures on durable goods, services and manufacturing PMIs, Michigan consumer sentiment, and PCE price index.

Europe

European equities have been performing relatively well recently, with the UK, French, and German equity indexes gaining between 0.27% and 1.88% over the past 5 days ending Thursday. On the epidemic front, European countries including Germany and France will resume the deployment of AstraZeneca's Coronavirus vaccine, as the European Medicines Agency concluded that ‘benefits of the Vaccine still outweigh its risks’. However, it was reported the third wave COVID outbreak in France has commenced, with the local government announcing a month-long closure of many areas including Paris. Markets are watching the outbreak with concern. Next week, the Eurozone will release its manufacturing PMI, while Germany will release its IFO economic outlook.

China

Although markets remained choppy, both Hong Kong and Chinese equities somewhat stabilised compared to the beginning of the month. Over the week, the CSI 300 Index was down 2.71% and the Hang Seng Index lost 0.87%. The market is watching the first face-to-face meeting between the US and Chinese Senior Officials since Biden took office, as there were reports that both sides have lashed out at each other on a range of issues. On the economic front, China's industrial production and retail sales both rose at a higher than expected YoY rate in February, while fixed investment growth fell short of expectations. As the Chinese economy recovers, the market is concerned whether the "deleveraging" will persist, as well as the regulatory actions on the so called 'platform economy'. Next week, China will release the 1-year and 5-year LPR data.

The tightening up in market liquidity was one of the reasons for the correction. PBoC officials have mentioned earlier that there are potential bubbles in the property and stock market, subsequent actions such as open market operations and adjustments to the medium-term lending facility (MLF) reduced liquidity in the open market, affecting market sentiment at the same time. However, outlook for the year is still likely positive. Although some of the figures are trending down, fundamentals remain on the positive side, economic growth outlook is still poised to be among the best in 2021 globally, which makes Chinese equities an attractive investment option.

As for policy direction, the ‘Two Sessions’ were held in early March, where we saw a summary of the Chinese policy and development direction in the short to medium term. Economic target for the year was set at a modest level of 6%, similar to our expectations at the start of the year. Another highlight in the ‘two sessions’ was the future carbon roadmap in the country, where the focus was on sectors such as electric vehicles and clean energy network, which is key to achieving the targets of carbon neutrality by 2060. These will likely be some of the sectors in focus with the greatest growth potential in the medium to long term.

Market sentiment improved as vaccine optimism continues to build up, it is estimated that most major western economies would be able to vaccinate most of their population by the end of 2021, which points to a swift return to normal. However, bond yields surged later on in the month, triggering market correction due to the speed of the surge. In our opinion, long end bond yields going higher while the short end stays unchanged is simply a steepening of the yield curve, which is traditionally considered to be an indicator of a positive economic outlook.

Henceforth, the latest market movement is likely a healthy correction, as the market has gained a lot since November 2020. Such a correction reduces the valuation multiple, bringing it more in line with the historic average. Considering the current recovery in the economy, proven by the leading economic indicators, the steady progress of the vaccination rollout, and the passing of the huge stimulus bill, the outlook of the US equity remains positive for the year.

 US

US President Joe Biden signed the US$1.9 trillion stimulus bill on Thursday, pushing the S&P 500 to a new record high in the footsteps of the Dow, and fund flows lifted technology stocks higher, as the three major equity indexes rose between 4.53% and 5.31% over the past 5 days ending Thursday. Earlier, the OECD forecasted that the global economic output would grow by 5.6% YoY, with the US growth rate doubling from the previous forecast to 6.5%. Indeed, recent economic data is encouraging, with the number of initial jobless claims in the US at its lowest level since November 2020, while the core CPI rose at a lower YoY and MoM rate than expected in February, easing concerns about faster inflation and sending US stocks further up after the stimulus package was passed by Congress. Next week, retail sales data and the Conference Board Leading Economic Index will be released, and the Fed will hold the March interest rate meeting, where policy rates are expected to remain unchanged.

 Europe

Stocks in the UK, France, and Germany rose further as the ECB pledged to accelerate asset purchases, which sent the three major European Indexes up between 1.29% and 3.65% over the past 5 days ending Thursday. The ECB announced that it would keep its main refinancing rate unchanged at zero and the overall size of the PEPP unchanged at €1.85 trillion, but pledged to accelerate the pace of bond purchases in the coming months to curb the rise in bond yields, which was positive for market sentiment. In addition, the ECB expects Eurozone GDP to grow by 4% this year, which is higher than the forecast made in December last year, and expects the average inflation rate to rise to 1.5% this year, which is also higher than earlier estimates. Next week, the Bank of England will hold a meeting on interest rates, while Germany will release its ZEW survey expectations.

 China

China's national ‘Two sessions’ concluded with Premier Li Keqiang announcing that the growth target for this year was set at over 6%, with the intention of avoiding major swings in the economy. Despite a rebound in the market during the last two days of the National People's Congress, the CSI 300 Index fell by 2.9% throughout the two sessions, posting a loss of 2.21% for the week. As the US dollar strengthened, both the onshore and offshore RMB shed their YTD gains. Hong Kong stocks weakened on Friday, dragging the Hang Seng Index down 1.23% for the week, as it was reported that Tencent was facing a widespread regulatory overhaul on fintech and trading in China. The focus of the market was on Baidu, which is in the process of IPO, and BiliBili, which is likely to be the next in line. Next week, China will release a series of data on fixed investment, industrial production, and retail sales.

 US

Continuing the recent trend, US treasury yields went up again on Thursday, climbing as high as 1.57%. In turn, equity markets reacted to the spike with yet another correction, the S&P 500 and the Dow recorded losses of over 1.5% over the past 5 days ending Thursday, while the NASDAQ saw a larger correction of over 3%, bringing the YTD performance into negative territory once again. Fed chair Jerome Powell earlier mentioned that the inflation is still far from the Fed target level, and the lack of full employment in the US necessitates the loose monetary policy in the near future. As a result of his remarks, yields shot up, causing spot gold to briefly fall below USD 1,690 per oz, while the Dollar index rose 0.83% over the past 5 days ending Thursday. As for the fiscal side of things, the Senate is expected to pass the stimulus bill soon, which could boost the somewhat struggling economy. In other news, OPEC+ decided to keep the current production cuts intact after the meeting on Thursday, Saudi Arabia also promised to keep her voluntary 1 million bpd cut in place. Crude prices jumped as a result, WTI futures rose over the USD 64/barrel mark. Next week, fresh data on CPI, Michigan Consumer Sentiment, and jobless claims will be in focus, possibly giving investors a better picture on the US economy.

 Europe

European stocks performed better this week as sentiment in the region seems to be insulated from the surge in US Treasury yields. Individual equity indexes was mixed bag, German equities led the way with a 1.28% gain over the past 5 days ending Thursday, while the UK FTSE slightly lost 0.02% over the same period. Traditionally, the steepening of the yield curve actually hints at an improving economy, cyclicals such as European financials could likely benefit from the trend. Epidemic wise, vaccination progress in the Eurozone still lags behind other developed countries such as the UK and the US, investors could follow that closely if this could potentially undermine future economic recovery. As for the economy, manufacturing data in the region remain strong, but the weak retail sales and services PMI figures hints at potential weakness. Next week, the ECB will hold another interest rate meeting. Considering the situation of the current economy, market expects no changes to the loose monetary policies. Europe will also release data on industrial production, German CPI, and Eurozone GDP. 

 China

The US equity market correction continue to have ripple effects across the globe, the selloff in the more expensive tech stocks extended to Chinese and Hong Kong markets. We saw more profit taking in the new economy sector, the overall market however saw relatively limited correction. Over the week, the CSI 300 were down more than 1%, the Hang Seng Index edged slightly higher, while the Hang Seng Tech Index lost more than 3%. The national ‘Two Sessions’ have commenced on Thursday, the largest takeaways up till now is the target economic growth of 6% this year, which is close to our estimates at the beginning of the year; and carbon reduction shall be a national policy direction, considering the targets of reaching peak carbon by 2030 and carbon neutrality by 2060, his should continue to benefit relevant sectors, with electric vehicles and clean energy sectors being the largest likely beneficiaries. Next week, China will announce the latest medium-term lending facility (MLF) rates, and release figures for money market M2, CPI, and PPI.

 US

Long dated US bonds saw a heavy sell-off, with the US 10-year bond yield rising above 1.61% during the day. The market is worried about the possibility of an overheated economy and a sharp rise in inflation, which could possibly lead to the Fed tightening. US stocks fell sharply, with pressure on high valuation technology stocks, the NASDAQ index fell 5.38% over the past 5 days ending Thursday, while the S&P 500 and the Dow fell 2.16% and 0.29% respectively over the same period. US Federal Reserve Chairman Jerome Powell said there was no need to worry about inflation and the economy overheating, reiterating that the current economy still needs monetary easing. Other Fed officials also said publicly that the rise in US bond yields was a sign of market optimism about the economic outlook, stressing that there is no plan to tighten monetary policy at the moment. On the economic front, US 2020 Q4 GDP was revised to a 4.1% growth YoY, slightly below market expectations of 4.2%, while the core personal consumption expenditure (PCE) price index rose by 1.4% QoQ over the same period, in line with expectations. Next week, the ISM manufacturing and services indexes, employment data, and the latest Fed Beige Book will be released.

 Europe

Against the backdrop of a correction in global equities, European equities fared better, with the UK and French equities gaining 0.53% and 0.57% over the past 5 days ending Thursday, while German equities edged down 0.05% over the same period. In view of the recent rise in yields on long-term government bonds, ECB President Christine Lagarde said the authorities are closely monitoring the trend in interest rates to determine whether the current financial environment is appropriate for the economy in the face of the epidemic. Bank of France Governor Mr François Villeroy de Galhau, also a member of the ECB Governing Council, said that the Eurozone economy faces no risk of overheating nor of rising inflation. Next week, the Eurozone will announce the unemployment rate for January and the Consumer Price Index (CPI) for February, which is expected to accelerate to 1.1% YoY.

 China

The rise in US long end bond yields triggered a market correction in global equities. Mainland China also tightened up market capital, which saw net withdrawals for the third consecutive week, putting pressure on Hong Kong and Chinese stocks. The CSI 300 Index fell 7.65% over the week, whilst the Hang Seng Index fell over 5%. Emerging market currencies and equity markets came under pressure as there are concerns over rising US bond yields leading to capital outflows from emerging markets, with the USD/CNH briefly touching the 6.5 level. The People's Bank of China conducted a RMB20 billion 7-day reverse repo operation on Friday, but the market still recorded a net withdrawal of RMB20 billion for the week. Next week, China will release the Caixin Manufacturing and Services Purchasing Managers' Index for February. The market will be watching the Two Sessions closely, which is scheduled for 5 March.

As we have reiterated multiple times, our base case for 2021 has never changed. We still expect global economic recovery efforts to continue, as shown by global governments’ continued push for vaccination programmes. While the risk to the economy remains until global herd immunity is reached, global epidemic cases seemed to have retreated from the earlier peak, suggesting a continuance of the recovery theme which is positive to emerging markets.

In addition, the US Dollar should further weaken under the impacts prolonged quantitative easing and ever widening budget deficit. This will also be positive for the emerging markets considering their strong negative correlations to the Dollar, as the weaker Dollar tend to drive capital to non-USD assets. Emerging markets as a whole will stay as an attractive investment as economic growth in EM economies are expected to outpace developed markets in a cyclical market. Although emerging markets across the globe offer similar opportunities, we would suggest more focus on Asian markets where we believe the growth outlook is the most positive and the key issue of pandemic is better controlled. 

After the long periods of lockdown measures adopted in different countries, the situation does seem to be on an improving trend as cases in most countries are off their previous peak. However, these measures took its toll on the business environment, as indicated by the poor statistics on services PMI, which has been in the contraction zone for 5 months in a row. Officials are hoping that the vaccine rollout will stick to schedule, which could get the economy recovering to the previous level.

However, plans are thwarted when it was reported that the production and delivery was significantly behind schedule, which means that the economy will not likely recover on schedule as expected. This has also sparked disputes between the EU and the UK, drawing attention to the post-Brexit relationship between the EU and the UK, the EU threat to block all vaccine exports out of the bloc also did no good to deescalating the situation. Henceforth, with the Europe outlook remains uncertain and economic fundamentals expected to stay under pressure, we would refrain from overweighting European equities in the meantime.