While the current pandemic is still currently dominated by the Delta strain at the time of writing, the Omicron has caused fear in the market due to the uncertainty it brings. Early studies have showed that the new variant have a large number of mutations, and that the virus could be more infectious than previous strains. Market fears that there could be more disruption to the global supply chains, and the global service sector could suffer, short term equity market sentiment would likely remain at the lower level before we get more clarity.

Putting that aside, the economy is decent, but inflation remains as the important unresolved issue, with the figures hitting new record highs in recent decades. To tackle the issue, US Fed President Jerome Powell mentioned that a faster tapering could be appropriate considering the inflation and economic environment, raising the odds of more rate hikes in 2022. While this could limit the equity upside in form of valuation expansion, this marks the end of early recovery in the economic cycle. Henceforth, if the pandemic risk does not fully materialise, we see growth stocks as one of our main picks in the US market for 2022.

  US

Short term volatility increased in the US equity market, as the Fed announced a ramp up in the pace of tapering. The S&P 500 and Dow saw little movement over the past 5 days ending Thursday, while the NASDAQ was down 2.17%. The US Federal Reserve announced a doubling of the tapering of bond purchases to US$30 billion per month after its interest rate meeting, and markets expect the programme to end in March next year. According to the Fed dot plot, officials are anticipating three interest rate hikes next year and three in the year after. Chairman Powell said he would not rule out raising interest rates before full employment is achieved.

The US Senate's latest bill to raise the debt ceiling by US$2.5 trillion has now been sent to the House of Representatives for voting. The Bill is expected to extend the US government's ability to raise debt until early 2023. The Omicron variant has emerged in 33 US states, with hospitalisations in New York State rising by 70% since Thanksgiving, raising concerns about the spread of the new variant. Next week, the US will release the Conference Board Consumer Confidence index and the University of Michigan Consumer Sentiment for December.

Europe

The European stock market saw little movement over the past five days ending Thursday, but the UK market was affected by the Bank of England's unexpected interest rate hike, sending the FTSE 100 index 0.43% lower over the same period. The Bank of England unexpectedly raised interest rates by 15 basis points to 0.25% after the interest rate meeting. The Bank stated that with inflation rising and likely to peak at around 6% by April next year, the Bank might need 'modest tightening’ down the road. The ECB kept its policy rate unchanged, and announced that it would temporarily increase the size of its regular bond-buying operations from the second quarter next year onwards, in order to hedge against the impact of the end of the Pandemic Emergency Purchase Programme (PEPP). ECB President Christine Lagarde said that the central bank will unlikely raise interest rates next year. Next week, Germany will release the GfK consumer confidence index for January.

China

Fears over the faster pace of global monetary policy tightening continued, with the Hang Seng Index under pressure, down 3.35% over the week, while the CSI 300 index was also 1.99% lower. The latest YTD growth rates for fixed investment, retail sales, and industrial production in China for November were 5.2%, 13.7% and 10.1% respectively, all lower than the previous month. The market will be on the lookout for more accommodative measures from the Chinese government to support the economy. On the other hand, the market is still watching the development of the property market, as both hare and bond prices of Chinese real estate companies have fallen amidst the resurgence of risks in the sector. Next week, China will announce the one year LPR rate.

  US

US stocks rebounded sharply as market sentiment was boosted by easing concerns over the Omicron variant, with the Dow, S&P 500 and NASDAQ rising between 0.88% and 3.22% over the past five days ending Thursday. Data showed that US online retail prices rose by 3.5% YoY in November, the highest since 2014. As for employment data, the initial jobless claims figure also fell to a 52-year low. US Commerce Secretary Gina Raimondo said that inflation would ease when the supply chain and labour market disruptions caused by the epidemic dissipate. That said, there are still concerns that the pandemic countermeasures could negatively impact the economic outlook, neutralising the positive impacts of the vaccine. Next week, US will release retail sales for November and the Markit US Manufacturing PMI for December, while the US Federal Reserve will hold its last interest rate meeting of the year, markets are focused on whether the Fed will accelerate the tapering of bond purchases.

Europe

As fears of the epidemic subside, European stocks rebounded in line with global markets, with the UK, French, and German indices gaining between 2.79% and 3.59% over the past five days ending Thursday. There are reports that the European Central Bank (ECB) is studying the possibility of changing its PEPP reinvestment to help its member states cope with the future circumstances. On the monetary policy front, ECB Executive Board member Isabel Schnabel said the bank should not change the sequence of monetary policy tightening, and must only raise interest rates after the end of bond purchase programmes. As for economic data, German exports improved, with a higher-than-expected 0.9% rise in seasonally adjusted exports, to 4.1% MoM in October, suggesting that Germany's recovery may be improving. Next week, the Bank of England and the ECB will hold their December interest rate meetings, while the UK will also release CPI data for November.

China

The market sentiment was boosted by the news of the RRR cut, with Hong Kong and China stocks rising in tandem, the HSI was up 0.96% and the CSI 300 was 3.14% higher for the week. The People's Bank of China (PBoC) announced a 0.5% RRR cut early in the week, which is expected to release about RMB1.2 trillion in long-term funds. Subsequently, PBoC also lowered the refinancing rate for agricultural and small loans by 0.25%. On the economic front, China's CPI rose by 2.3% YoY in November, a 15-month high, while foreign exchange reserves stood at US$3.2224 trillion at the end of November, up from US$3.2176 trillion in the previous month. Next week, China will release key data on fixed investment, retail sales and production in November.

  US

Increased uncertainty affected market sentiment, dragging US equities lower over the week. Over the past 5 days ending Thursday, the 3 major US equity indices lost 2.65-3.25%. US Fed President Jerome Powell mentioned that faster tapering would be discussed in the December Fed meeting, stating that it is appropriate considering the current inflationary and economic circumstances, other Fed members have also echoed Powell’s sentiment. Markets are pricing in the possibilities of a faster taper and earlier rate hikes, at the time of writing, Bloomberg interest rate futures is showing a 99.5% chance of the first rate hike in June 2022.

The resurgence of the COVID pandemic is the other major source of uncertainty. While there is insufficient data on the Omicron variant, global governments have taken a conservative approach, with border closures and lockdown measure re-enacted in several countries. In the US, the government shutdown was avoided as the Senate passed the stopgap bill on Thursday, which should keep the US government running until February next year. In other news, OPEC+ surprisingly announced no changes to their planned output increase. Next week, the US will be releasing important data including initial jobless claims, CPI figures, and University of Michigan sentiment index.

Europe

Similar to the rest of the world, the European market sentiment was hit by the rise of the new Omicron variant, countries in Europe exercised extra caution in response, as the pandemic in Europe was already worsening over the past weeks. Over the past 5 days ending Thursday, equity indices in the UK, France, and Germany lost 2.48-4.11%. The resurgence of COVID in Europe began earlier, and the latest discovery of the Omicron variant resulted in increased uncertainty in the outlook, several countries have tightened restrictions in response. As for the latest economic data, inflation remains as one of the forefront issues. The latest Eurozone CPI have exceeded expectations and hit 4.9% YoY, which is the highest reading since 1991. Markets are looking at the ECB if they would change their inflationary outlook, which could provide clues to the future tightening timeline. Next week, Germany will release their industrial production figures and the ZEW economic sentiment index.

China

Local markets have largely priced in the fear of the new COVID variant, the China A-share markets defied global trends, with the CSI 300 index gaining 0.84% over the week; the Hang Seng index on the other hand was dragged down by the Chinese tech heavyweights, falling 1.30% over the same period. The Chinese tech sector which came under fresh pressure as the US SEC announced new rules regarding audit requirements for foreign stocks, DiDi is reportedly preparing for its delisting from the US stock exchange and move to Hong Kong. The debt crisis in the Chinese real estate market continues, Kaisa Group’s proposal to extend the bond maturity failed, risking potential default. On the economic data front, PMIs were a mixed bag, as both Caixin PMIs missed market expectations, while the official manufacturing PMI managed to return above the 50 level. Next week, China will release both the CPI and PPI figures for November.

  US

The US stock market was closed on 25 November for Thanksgiving. Over the past 5 days ending 24th, the Dow and NASDAQ were down 0.35% and 0.48% respectively, while the S&P was up 0.27%. On the economic front, US Q3 GDP was revised upwards to 2.1% QoQ, but the figure was still slightly below market expectations of 2.2%. US President Joe Biden formally announced the nomination of incumbent Federal Reserve Chairman John Powell for a second term, and also nominated Lael Brainard as Vice Chairman. Following the announcement, short-term interest rate suggests more hawkish expectations for the Fed, with the market anticipating a rate hike as soon as July next year.

As for the shortage of crude oil, the US government announced the release of 50 million barrels of strategic reserves, and oil prices briefly spiked as the market felt that the release was insufficient. However, OPEC later said that the release of the US strategic reserves was expected to increase supply by 1.1 million barrels per day, which would result in an oversupply in crude oil early next year. At the time of writing, WTI crude futures prices had plunged to US$73.4 per barrel. Next week, the US will release several important data including November employment figures and the ISM manufacturing index.

Europe

The UK and German and French stock markets moved in opposite directions, German and French indices were down 1.50% and 0.51% respectively over the past 5 days ending Thursday, while UK equities were up 1.20% over the same period due to the weakening of the Euro against the Pound. The epidemic in Europe is seemingly worsening with the French Prime Minister tested positive, the WHO now expects the death toll in Europe to reach 2.2 million by March 2022. The minutes of the October meeting of the European Central Bank (ECB) showed that the members believe the Bank needs to set aside sufficient policy options beyond its meeting in December this year. Across the Channel, Bank of England Governor Andrew Bailey stated that if wages rise as a result of inflation, the Bank will have to take action. Next week, Eurozone will release the preliminary CPI for November and the market is expecting a fall of 0.2% MoM. 

China

A new COVID variant found in South Africa caused panic in the market, and reports that the Mainland would ban some online payment methods weighed on Hong Kong's tech heavyweights and dragged down the market, the Hang Seng Index fell 2.67% on and extended its weekly loss to 3.87%.  China's A-shares though were relatively stable, only slightly falling 0.61% for the week. According to reports, China will ban the personal money reception codes on WeChat and Alipay from 1st March next year. Next week, the official manufacturing and non-manufacturing indices will be released, as well as the Caixin China Manufacturing and Services Indices.

Into the last quarter of the year, the ongoing energy crisis is shaping up to be a significant issue for the global economy. While earlier supply chain issues remain unresolved, global fuel shortage further exacerbated the price pressures in the market, sending inflation higher. The US figure in particular stayed steady above 5% YoY, while the Eurozone figure hit a new high since 2008, all of which suggesting that the current dovish monetary policy are not here to stay.
Among major economies, the ECB is the minority in deciding to keep monetary policies on the dovish side. Global central banks from the rest of the world have started monetary tightening, encompassing banks from both DM and EM economies. The most influential central bank US Fed has also announced the start of tapering, scaling back quantitative easing and bond sending bond yields higher. The fixed income market outlook remains uncertain, as downside risks stay with the rising interest rate risks. We continue to see high yield bonds as the better option over investment grades as they have a shorter duration on average and the higher carry should offer better risk adjusted return.
 

 US

Anticipating a swift approval of the latest spending bill, together with encouraging quarterly earnings from tech leaders, the S&P500 and the NASDAQ continued to set record highs, over the past 5 days ending Thursday, the tech heavy NASDAQ gained 1.84%, the S&P 500 was up 1.19%, and the Dow was down 0.14%. The US House of Representatives is currently planning to vote on a near US$2 trillion spending plan which, if passed by the House, will then go to the Senate. In addition, President Joe Biden will announce Fed nomination soon, which could impact market expectations of the pace of policy tightening. As for the renewed debate on the US debt ceiling, US Treasury Secretary Yellen said that the Treasury's cash could run out after 3rd December. The market is concerned about the potential impact of these uncertainties on the market.
On the economic front, US retail sales rose to a seven-month high in October, raising the odds of an earlier Fed tightening. According to five indicators used by Fed to assess the inflation outlook, there is now increasing pressure to accelerate monetary policy tightening than three months ago, St. Louis Fed President Bullard also said the Fed should step up on reducing stimulus in response to high inflation. With the release of the core PCE index for October and the minutes of the November Fed meeting next week, markets will be watching the data and news closely to gauge the pace of monetary policy tightening.
 

Europe

The Governor of the Bank of England said he was very worried about inflation, while the ECB President said rate hikes next year are unlikely, suggesting a potential divide in monetary policy. With the exchange rate moving in different directions, stock market performance also diverged, with French and German equities up 1.17% and 0.86% respectively over the past 5 days ending Thursday, while UK equities were down 1.74%; the Pound rose 1.25% against the Euro over the same period. The UK CPI rose 4.2% YoY in October, surpassing both the previous reading and market expectations of 3.1% and 3.96%. Bank of England Governor Andrew Bailey said he felt ‘very uneasy’ about the sharp rise in inflation and noted that he would study the data before deciding whether to raise interest rates or not. In contrast, ECB President Christine Lagarde stressed that the Bank was unlikely to raise interest rates next year and that she expects inflation to fall below the Bank's target of 2% in the medium term. Next week, both the UK and Eurozone will release the Markit Manufacturing PMI for November, while Germany will release the latest IFO Business Sentiment Index.

China

The video conference between the US and China leaders showed the way forward for Sino-US relations. However, major banks lowered their price targets for certain Chinese technology giants, sending their Hong Kong listed shares down by almost 11% on Friday, weighing on the overall Hong Kong stock sentiment, with the Hang Seng Index down 1.1% for the week; China A-Shares however stayed flat. Alibaba shares fell sharply after Thursday's US market close, as the company announced much weaker-than-expected net profit for the last quarter, share price plummeted and weighed on the performance of Hong Kong markets. On the other hand, China's economic data showed some stabilisation, with industrial production rising by 3.5% YoY in October, retail sales accelerating to 4.9% YoY and fixed investment growing at a faster than expected YTD.

The LDP election ended with Fumio Kishida as the new prime minister of Japan, there were concerns over whether the LDP can keep the majority in the House of Representatives after the election. Uncertainties further increased with Kishida’s brief mention of capital gains tax changes after becoming the PM, which was unpopular and he did subsequently backtrack, but such comments still raised concerns over the new government’s policy directions. Concerns dissipated as the ruling LDP has once again secured a majority in the latest general election, this should stabilise the political landscape.
This is supportive to the equity market, as the majority in the House allows the economic stimulus plans to be enacted smoothly. Economic fundamentals of Japan have shown improvement recently, we also noticed that Japan have not felt the heat from the rising inflation across the globe, allowing the supportive monetary policy to stay unchanged for the time being. With the local sentiment favourable, we are still confident that the Japanese equity market can perform in the short to mid-term as long as monetary conditions permit.
 

Our view on EM equities remains unchanged, expect them to underperform in the shorter term. Sources of downside risks have not dissipated, concerns over vaccinations, external debt, weak currency, and political uncertainties all contribute to the weaker outlook of EM equities. Many DM countries have achieved herd immunity, economic activities have mostly returned to normal with COVID treated as an endemic; the opposite is happening in EM economies, and without a robust and effective vaccination programme, EM economies will likely remain lagging behind their DM counterparts in the scope of economic recovery. 

To add on, inflation continued to stay as the forefront issue, global central banks have moved forward with monetary tightening as a countermeasure. The most influential US Fed has already announced the start of tapering in asset purchases, the policy turnaround is more pronounced in EM countries with multiple rounds of rate hikes, and this rapidly tightening monetary landscape likely puts more pressure on EM equities. Moreover, limited fiscal ammunition available to EM due to higher external debts also limits further acceleration in the economy, hitting recovery from both fiscal and monetary sides. Henceforth, we still hold reservations over EM equities in the shorter term, and would suggest a more conservative approach if one allocates to EM equities. 

With vaccination rates in Europe hitting target levels, policy making have started to treat covid as a non-factor, with economic activities back to near pre-pandemic levels. Economic fundamentals are steady, but the ongoing energy crisis is expected to last until the end of the year, inflation remain as one of the larger threats to the market. The latest CPI reading in the Eurozone hit a new record high since 2008, markets are concerned if the mounting inflation could force the ECB to tighten their monetary policy earlier than planned. According to Bloomberg interest rate futures, the market is now expecting the ECB to start hiking rates as early as 2022, which could limit the equity upside if it were to materialise.

The ECB kept interest rates unchanged after the interest rate meeting, President Christine Lagarde explicitly mentioned that interest rate futures implied data are not in line with ECB targets. The Bank expects European inflation to fall below 2.0% in 2022 as energy shortage and supply chain issues could resolve by the 1st quarter next year. With the confidence of the ECB, expect monetary policy to stay more accommodative, which should further support equity performance. We remain more positive on European equities in the short to mid-term as valuations and monetary policy stay supportive.