United States

Recently, both incidents of the intensifying Sino-Indian border conflicts and the rising North-South Korea tensions have garnered much market attention. According to the latest info, after bilateral talks, China has released 10 Indian captives, seemingly implies that Sino-Indian tensions are cooling down. On the other hand, the epidemic situation once again drew market attention. We saw a rapid increase of new covid-19 cases in some US States, while the local Beijing government also identified a serious epidemic situation in the city, market fears grew over the possible second wave outbreak. Nevertheless, we have yet to see the epidemic situation and geopolitical developments bring great impact on the investment market. In the US, the Fed announced earlier that it began purchasing corporate bonds, other sources reported that the White House is drafting a trillion dollar financial stimulus. With the uplifting US retail figures, US stocks put an end to the recent correction, and the NASDAQ rebounded, challenging the 10,000-point level. Over the past 5 days ending Thursday, the Dow and S&P 500 rose about 3.7%, while the NSADAQ gained nearly 4.8%. The US will release data such as manufacturing PMI and core PCE next week.

 Europe

European stock markets followed global markets and rebounded. Over the past 5 days ending Thursday, the UK, French, and German stock indexes rose between 2.4% and 3.0%. After the interest rate meeting, the Bank of England (BoE) kept the interest rate unchanged at the record low of 0.1%, announced a £100 billion increase in the scale of asset purchases, but will slow down the rate of purchase. In the BoE statement, it was reported that the recent data implied that the UK economy had started its recovery since May, so the Q2 GDP contraction may be less severe than the earlier forecast. Leaders of EU member states held a video conference on Friday to discuss the 750 billion euro economic recovery plan, EU budget commissioner expects the plan to receive support from all member states in July. Eurozone will release data such as manufacturing PMI and consumer confidence index next week.

China

Despite the risk of a second wave outbreak in Beijing, Chinese and Hong Kong stock markets still saw gains, the CSI 300 index rose 2.4% over the week, while Hong Kong stocks also rose around 1.4%. As the number of second wave infections in Beijing reached 180, the local government implemented preventive measures, such as school closures and restoring local community control measures, most flights in and out of the city are also cancelled. As for the Sino-US trade relations, after both sides met in Hawaii, American officials said China reiterated its commitment to fulfil the first-stage trade agreement. Next week, China will announce the latest LPR interest rate, market expects a slight drop of 2 basis points to 3.83%.

We continue to expect fixed income to yield positive returns over the year, under the effects of uncapped quantitative easing, bond prices should continue to appreciate amidst the uncertainty in global economy. Since the restart of the QE programme in March, the Fed balance sheet has ballooned from around 4 trillion to over 7 trillion US dollars. This means around 3 trillion US dollars were injected into the market via asset purchases of open market bonds, providing solid support to the general fixed income market.
In light of the economic uncertainty and increasing tensions across the globe, we see two main reasons for investing in the fixed income market, allocating a portion of the investment portfolio in bonds can help improve risk diversification and reduce overall adjusted risk profile, while still providing yield enhancement over holding cash. With the uncertainty in the economy, the low yields in treasuries, and possible inflation pressure in emerging markets, we would opt for quality in general, and short on duration if we seek additional yield. Hence, we like investment grades for risk diversification, and Asian short duration names for yield enhancement.
 

With the number of new cases falling to new lows during the month, the epidemic in Japan seems to be over, the Japanese government decided to call an end to the State of Emergency in late May. In anticipation of the lockdown lift, equities continued the strong performance expecting swift recovery from the epidemic.

However, economic data tells a different story, with various leading indicators still lingering in negative territories. As the global epidemic situation has yet to be curbed, tourism and consumer discretionary sectors suffered from travel bans, lockdown orders, and weakening consumer confidence across the world. While the local markets should receive continued support from the Bank of Japan with the ongoing quantitative easing, with the continued economic recession in 2020 Q1, we remain relatively sceptical of the prospects of rapid economic recovery on the island country, hence the neutral outlook on the Japan market.

<Harris Fraser Research Team>

While developed economies barring the US saw infection figures fall, epidemic situation in emerging economies continued to worsen. Emerging markets went sideways after the strong performance in the previous month, rising 0.58% in May. 
The latest ex-US epicentres of infection have now officially shifted from Europe to emerging countries like India, Brazil, and Russia alike, with new infection figures on the continued rise. Emerging economies are hit by the double whammy of recession and the rapidly advancing covid-19 epidemic, especially with falling global demand amidst the epidemic induced recession in developed markets. If forward looking economic indicators reflect anything, emerging markets are likely deep in recession, business confidence remain low, and there is still a long way away from a full recovery.
Marred with the array of risks in form of weaker economy recovery, ongoing epidemic, and rising Sino-US tensions, we expect emerging markets to remain under pressure in the short to mid-term. That said, we could see potential opportunities in ASEAN markets and possibly Latin American markets in the longer horizon, as these are expected beneficiaries in rising trade tensions and relocating production lines. We do note Vietnam as one of the prime candidates with its controlled epidemic situation, high growth and lower valuation, thus, viability as a China alternative. Hence, a positive outlook for the frontier market over the year.

United States

There are early signs of a second wave covid-19 infections across multiple geographies in the United States, raising market concerns over potential delays in restarting the economy, pushing the Dow down by 1861 points or nearly 7% on Thursday, while the S&P 500 and the NASDAQ also fell more than 5% that day. At the moment, the total covid-19 cases in the US exceeded 2 million, and we saw new cases accelerate, States like Florida saw new cases grow at a higher rate than the 7-day average. However, US Treasury Steven Mnuchin stated that even if there is a second wave outbreak, the United States can’t shut down the economy again. The uncertainty in the US economic outlook is reflected in the Fed’s statement this week, Fed Chairman Jerome Powell said the Fed will maintain near zero interest rates in the coming few years, while also maintaining the current rate of balance sheet expansion. The US non-farm payrolls data released earlier were encouraging, market expects the upcoming May retail sales data and the Conference Board Leading Economic Index will show a reverse to the April downtrend.

 Europe

European stocks mirrored the global stock market's decline on Thursday, the UK, French, and German equity indexes fell 3.7% - 4.2% over the past 5 days ending Thursday. New information came in regarding the UK-EU trade agreement, British Prime Minister Boris Johnson and European Commission President Ursula von der Leyen are expected to meet on 15^th June, it was also reported that both sides will initiate a weekly trade deal negotiation, for a total of 5 times starting from late June. It was also rumoured that the extension of the Brexit transition period was officially taken off the table on Friday. Market expects both the UK and the EU to speed up post-Brexit trade negotiations in order to break the deadlock over the past few years. Next week, the United Kingdom will release the May CPI figures, and the Bank of England will also hold an interest rate meeting, market expects interest rates to remain unchanged, but an increase in the scale of asset purchase plans is likely.

China

The Chinese and Hong Kong stock markets had relatively stable performances this week. The CSI 300 Index slightly rose 0.5% over the week, while the Hang Seng Index fell 1.89%, outperforming their European and American counterparts. In terms of Sino-US trade relations, although both sides have yet to reach consensus on the issue, the first phase trade agreement is still observed, as China continued her purchase of soybeans from the United States. China's May export data was better than expected, falling only 3.3% YoY in US dollar terms, which was a notch higher than the market consensus of a 6.5% drop. Inflation data also showed benign development, the May CPI saw a 2.4% YoY increase, which was milder than both the expected 2.7% and the prior value of 3.3%. China will release May data on fixed investment, industrial production and retail sales next week, market expects most data to improve.

<Harris Fraser Research Team>

Even as the epidemic continue to run rampant across the country, numerous states are already uplifting their lockdown measures, including covid-19 epicentres like New York and New Jersey despite continued growing cases. As the global pandemic has lasted for more than 4 months, markets and the society in general have already adopted to the “new normal”, which has minimised the impact to the investment market despite reopening under the “un-flattened curve”.

In terms of economic figures, the US outlook are full of uncertainties as we have yet to see a stronger rebound in various leading indicators, PMIs stayed in the contraction zone, while confidence levels remain far lower than previous levels. Despite the weaker fundamentals, we see 2 main reasons for the stock market to continue its strong performance: anticipation of economy restarting, plus excess liquidity flooding the capital markets. In particular, we stay positive on technology and healthcare sectors, as they remain robust with minimal levels of earnings revised, further bolstered with the prospects of long term structural growth.

<Harris Fraser Research Team>

Weekly Insight June 26

United States

The number of new covid-19 cases in the United States hit a new single day record high, but President Trump said there is currently no plans for new lockdown measures. The market is still evaluating its impact on the restarting economy, limiting equity market performance. Over the past 5 days ending Thursday, the Dow and the S&P 500 fell 1.28% and 1.01% respectively, while the NASDAQ gained 0.74%. Total covid-19 cases exceeded 9.5 million globally, of which the US had a record single day increase of more than 37,000 cases on Thursday. However, White House economic adviser Larry Kudlow pointed out that even as the number of covid-19 cases surge, the economy will not be shut down again. He expects the US GDP to rebound by 20% in the second half of the year, and the unemployment rate will fall below 10% by the end of the year. In addition, Federal financial regulators have relaxed the "Volcker Rule", the market expects this to free up about 40 billion US dollars to the market. Next week, the US will release consumer confidence, ISM manufacturing data and employment figures.

 Europe

European stock markets saw a slight correction. Over the past 5 days ending Thursday, the French CAC and German DAX fell by around 0.8%, while the UK FTSE dropped around 1.2%. According to the minutes of the June European Central Bank (ECB) meeting, the Bank sees the purchase of bonds as the best tool for stimulating the economy. ECB stated that the asset purchase programs implemented in the past and at the present was intended to achieve price stability, and claimed that without the asset purchase programme, the Eurozone economy would have been worse off. Regarding digital taxes, after the United States threatened to retaliate through tariffs, countries such as the UK, France, Italy, and Spain made concessions and proposed to limit the scope of the global tax. The Eurozone will release data such as the consumer price index and unemployment rate next week

China

Earlier, White House trade adviser Peter Navarro clarified that the “Sino-US trade agreement is over” claim quoted by many others was taken out of context. This news favoured the performance of China and Hong Kong stock markets, the CSI 300 index rose nearly 1% over the week, while the HSI had a large drawdown on Friday, resulting in a flat week. As for Sino-Indian relations, the two sides agreed to ease tensions on the disputed border, but it was reported that the armed forces of both sides remained stationed in the region; India will also implement strict border inspection measures and levy tariffs on Chinese imports. Next week, China will release official and Caixin manufacturing PMI data.