US

The US Food and Drug Administration (FDA) said the Pfizer COVID vaccine is safe and effective, but on the other hand, the US fiscal stimulus package remains in a standstill, with US stocks trading in a narrow range close to historic highs for now. The three major US stock indexes saw minimal movement over the past five days ending Thursday, but the tech giants' performance was hampered by news of the anti-trust lawsuit against Facebook. On the fiscal front, US Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi both said progress was made, but a few key issues remain and are currently going nowhere.  The COVID epidemic continues to ravage across the country, the US saw its daily COVID deaths exceed 3,000 for the first time, whereas the advisory panel to the FDA recently endorsed the Pfizer vaccine based on clinical trials results, which would suggest a likely green light for emergency use authorization. However, recent data shows that the US economy is not performing as well as expected with the recent number of initial jobless claims unexpectedly surging to the highest level since September. In addition, the US Consumer Price Index rose 1.2% YoY in November, slightly surpassing market expectations. Next week, the US Federal Reserve will be in the spotlight as it meets to discuss about the economy and monetary policy outlook for the coming year, the US will also release data on retail sales and manufacturing PMI.

Europe

The European Central Bank's (ECB) announcement to raise the cap and extend the Pandemic Emergency Purchase Programme (PEPP) seems to be ineffective in boosting market sentiment, with the UK, French, and German stock markets lacking momentum over the past 5 days ending Thursday. The ECB kept policy rates unchanged, but increased the size of PEPP by 500 billion Euros and extended it for another nine months. ECB President Christine Lagarde said the second wave of the epidemic could cause the economy to contract sharply in the fourth quarter, so the growth forecast for 2021 was lowered. Brexit talks remain rugged and tortuous, with both sides agreeing to extend the deadline until Sunday, but UK Prime Minister Boris Johnson warned the market to be prepared for a no-deal Brexit, raising fears of more uncertainties in the negotiations, the Pound softened against both the Euro and the US Dollar. Next week, the Eurozone and the UK will release their consumer price index figures.

China

Some of the international Indices were requested by the US government to exclude certain Chinese companies, weighing on individual stock prices and the general market sentiment. China A-shares and Hong Kong stocks softened this week, with the CSI 300 index down 3.48% and the Hang Seng index down 1.23%. China recently released a number of economic data, exports in USD terms rose 21.1% YoY in November, which is the biggest increase since February 2018, while China's CPI fell 0.5% YoY in November, which is the first time CPI went negative since October 2009. Next week, China will release November fixed investment figures, industrial production, and retail sales data.

US

A U.S. Senate panel proposed a $908 billion economic stimulus package, which was subsequently supported by Democrats. The news pushed U.S. stocks higher, but Thursday's report that Pfizer's vaccine production fell short of expectations dragged the stock market down slightly from the highs, but the three indices still recorded a cumulative gain of 0.32% to 2.34% in the five days ending Thursday. Biden is reportedly assembling a new team, and said he has already decided on a number of economic department candidates, including former Federal Reserve Board Chair Yellen as Treasury Secretary, and Brian Deese, a BlackRock executive and former economic advisor to President Obama, to lead the National Economic Council. On the neo-crowning front, the number of new daily confirmed cases worldwide surpassed 700,000 and reached a record high, while Pfizer said it had lowered its earlier vaccine production target by half. In terms of data, the ISM manufacturing and services indices for November were both lower than the previous month, indicating that the pace of economic recovery is slowing. The U.S. will release the Consumer Price Index for November and the University of Michigan Market Sentiment Index for December.

EUROPE

The UK's approval of Pfizer's new coronary vaccine, coupled with the positive news of the Brexit trade negotiations, pushed the UK stock market and the British pound both higher, the UK FTSE 100 index rose 2.0% in the five days ending on Thursday, the French CAC index and Germany's DAX index were both up and down; the pound against the dollar was high at the 1.3500 level, a new one-year high. It is reported that the EU's chief Brexit negotiator Barnier will return to Brussels on Friday, the market is expected to Brexit negotiations may be close to completion, at the same time, the European Commission President also expects Brexit trade negotiations or within a few days to achieve positive results. The European Central Bank (ECB) will hold an interest rate meeting, where markets are expected to expand asset purchases.

CHINA

The stock markets in China and Hong Kong developed separately, with the CSI 300 Index up 1.71% and the Hang Seng Index down slightly. The HKMA spokesperson said that the HKMA is working with the PBoC on a framework study on the implementation of the "Southbound Bonds Connect" after the "Northbound Connect". It is also reported that the PBoC will assess systemically important banks annually from next year to reduce the likelihood of significant risks. China will release its consumer price index for November and trade balance data for November.

US elections posed as one of the largest focus in the investment market in October, as political direction uncertainties could possibly affect the growth prospects of the local market. With fundamental economic indicators staying on the weak end, including various PMIs staying in contraction zones, we find it difficult to build the case for a stronger outlook for the Japanese economy.

The newly formed Japanese government is still trying hard to find a way out for the local economy. As the ongoing covid epidemic continues its spread in the country, even though numerous policies are being considered, ranging from ease of foreign investments to insistence on holding the Olympics, we would keep our hopes for the economy low. While the Olympics could possibly help lift the limited growth, unless the global economy can fully recover to pre-covid levels in the short term, which requires fully functional covid vaccines and a well-executed deployment, we would rather remain cautious and refrain from overweighting on Japanese equities.

In most of the key emerging market economies such as India, Brazil, South Africa, and numerous Southeast Asian countries, the covid epidemic is losing steam with new daily cases falling. This provides further boost to market confidence, concurrent with the solid improvement in economic fundamentals, Brazil and India PMIs in particular have hit new highs in over a decade. With gradual improvement in the local economy and anticipating global demand recovering, we anticipate EM equity performance to follow.

As one of the largest concerns in form of US elections are going to be settled over the coming month, the level of uncertainty should gradually ebb out with the roadmap for the 4 upcoming years mapped out. At the moment, it seems we would likely see a split Congress, suggesting a more or less status quo in terms of policy direction, which should be positive for emerging market performance. However conservative investors could consider to remain on the sidelines until the smoke clears, as the current closely contested elections would likely result in recounts and court cases, which could still drive volatility in the market.

Covid remained the centre of attention as the situation rapidly deteriorated in numerous European countries. Towards the end of the month, daily covid cases in many countries has far exceeded the 1^st wave, resulting in local governments re-imposing full on lockdown measures. As the economy has just started its recovery, the newly ordered month-long lockdown threatens the weak recovery.

Fundamentally, Europe saw improvement in some of its fundamentals, Eurozone manufacturing PMI figures hit a recent high, yet services PMI saw a continued contraction, which is expected to further worsen with the imposed lockdowns. The market remains vulnerable to external shocks, which is compounded by the Brexit uncertainties. The scheduled deadline for a trade deal was delayed, but due to the fundamental divergence on several key issues, the risk of a no-deal Brexit by the end of the year remains high. With all the uncertainties arising from various factors in the European equity market, we expect to see a relatively larger downside risk compared to the upside potential.

The US elections were held at the beginning of November, although the final results have not been officially announced, according to multiple media outlets, former Vice President Joe Biden have seemingly won the presidential race, but incumbent President Donald Trump have yet to admit defeat and allegedly claimed voter fraud. With the races staying tight till the very end, we don’t expect to see final results until later, but there is a very good chance that we will see a Biden administration along with a split Congress.

If the projected result turns out to be true, we could infer 3 key implications out of this. First off, the fiscal stimulus will likely be smaller than the original estimate, as a split Congress should put a cap on the Democrats’ wish list, which might result in less buoyancy to the patchy economy. Secondly, the more controversial policies such as a variety of tax raises will likely be postponed or withdrawn altogether, potentially alleviating the downward pressure on the investment markets. Lastly, an expected normalisation of foreign relations, including a possible rollback of tariffs and sanctions, should support the global economic recovery. That said, the current market is still on the higher end in terms of valuations, yet the US market should see positive gains on the longer term as corporate earnings recover.

September was a rather quiet month for the credit markets. The Bank of England took the spotlight after reported having discussions over negative interest rates, Governor Andrew Bailey however clarified at a later time that it was purely a policy discussion and does not expect having negative rates in the UK anytime soon. With the global central banks’ keeping their interest rates at historic lows, and negative rates out of the equation for both the UK and the USA, the fixed income market is expected to stay steady with limited inflationary pressure.

The November elections remain the largest risk event for all investment markets. With corrections in the equity markets and capital starting a flight-to-quality, increasing the fixed income portion of one’s portfolio according to the risk parity theory might be an answer to the volatility. We would prefer investment grade bonds for better volatility control, which can help stabilise the portfolio before the election.

The longest serving PM in Japanese history Shinzo Abe stepped down in September, and Yoshihide Suga, former aide of Abe, successfully courted the fragmented factions within the Liberal Democratic Party to become the next PM. According to his public statements and promises, it is widely believed that the policy direction will stay in line with the Abenomics, relieving markets with somewhat reduced uncertainties.

With Suga assuming office, the Japanese government should continue to look for additional sources of growth. It was reported that authorities are looking at the possibilities of easing entry restrictions to further foster economic activities and drive recovery. Moreover, officials have said that the Tokyo Olympics would be “held at any cost”, which could possibly help jumpstart the economy in 2021. Yet, PMIs and other indicators still suggest that the Japanese economy is still under water and the path to recovery remains distant, such that we would not consider overweighting the market before any material changes in the economy is observed.

Disregarding the messy situation arising from the COVID in numerous states, economic fundamentals in various regions are still picking up, with PMIs in large EM countries like India finally hitting higher expansionary levels since the start of the outbreak, cases in various Latin American countries are also seemingly plateauing, outlining a gradual recovery in their local economies.

Yet, we remain largely cautious on EM equity investments, as the Q4 markets still carries quite a significant level of risk, notably in form of US elections. Whether Biden or Trump gets in office, the foreign policy landscape is still very much uncertain, investing in EM before the policy direction is clear would increase unwanted risk in the investment portfolio, and we would be keen to avoid that. Hence, before the US elections are cleared, we would continue to hold a neutral view on EM markets.

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