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.

In order to restart the economy, the European Commission announced a “recovery fund” of 750 billion euros, while the European Central Bank increased the bond purchase plan by 600 billion euros. Individual countries also adopted different economic stimuluses, varying from the radical permanent basic income policies in Spain, to multibillion Euro fiscal stimulus in Germany and Italy alike. However, due to their export dependence, it is expected that the continued epidemic on the global scale will put pressure on Europe’s recovery.

From the economic indicators’ point of view, we can claim that while the European economy has bottomed out, but it is still far from full recovery. Despite rebounding from the previous low, PMIs, various sentiment and confidence indicators are still in the negative territory, which reflects a contracting economy. Given the limited manoeuvrability of the European Central Bank, overhanging Brexit concerns, and continued weakness in business confidence, we would hold back from investing in the region in the short term.

As the pandemic ended its ravage in the country, the “Two Sessions” were finally held in Beijing. During the meetings, key points to note for the year include no GDP growth target, a much higher M2 money supply target, and setting a higher budget deficit target. These are expected to outline the Chinese government’s developmental directions for the year: a further consolidation of the economy with no growth targets, more focus on the physical economy with increased budget deficit, plus a looser monetary policy with the increased money supply, we could potentially see RRR cuts or even falling interest rates in the year.

Economic indicators seemed to agree that the Chinese economy is essentially back to normal, PMIs have recovered, all returning into the expansion territory, potentially marking an end to the pandemic induced recession. That said, external risks remain with Sino-US tensions running back to trade war levels, which does dampen the optimism after the recovery. Although external risks remain, which could pressure the equity markets in the short to mid-term, we still expect the Chinese economy to further stabilize as economic activities pick up.

United States

Despite the negative news, markets retained its optimism, and global equities continued to trend up, the NASDAQ index even briefly hit a new intraday high, but failed to close above that. Over the past 5 days ending Thursday, 3 major equity indexes rose between 2.63% - 3.47%. Against the backdrop of rising Sino-US tensions, riots broke out in many cities in the States, State governments ordered curfews to curb the situation, yet it remains unsubdued. Moreover, the latest epidemic development in the United States remains tough, with the latest infection figures reaching 1.87 million, alongside more than 108,000 deaths. Some of the economic data hinted at a bottoming out US economic outlook, as the ISM manufacturing index rebounded from the low of 41.5 last month to 43.1 in May. On a side note, it was reported that the White House officials in the United States are drafting a stipulation that the scale of the next round of economic stimulus plan should not exceed US$1 trillion. Next week, the Federal Reserve will hold an interest rate meeting on Thursday, market expects it to be kept unchanged; In addition, the United States will also release data such as CPI and market sentiment.

 Europe

In anticipation that the European Central Bank (ECB) may increase the scale of asset purchases, European stocks performed relatively well in recent weeks. The final announcement from ECB exceeded expectations in the scale of asset purchases, further improving market sentiment, driving European stocks up. Over the past 5 days ending Thursday, anticipating capital injections from the ongoing quantitative easing, German and French indexes went up 6.63% and 5.04% respectively, while the UK index gained 1.97%. After the ECB interest rate meeting, the policy rate remained unchanged, while the scale of the Pandemic Emergency Purchase Programme (PEPP) was increased by 600 billion Euros, and the plan period was extended to the end of June 2021. The market will focus on whether the funds are sufficient to relieve the downward pressure on the European economy. The Eurozone will announce the final figures of 2020 Q1 GDP next week.

China

The Hong Kong and Chinese stock markets performed well over the week, the CSI 300 index rose more than 3% in the week, while the Hang Seng Index gained over 7%. It was reported that China has suspended imports of certain US agricultural products, while the US further toughened its stance towards China, potentially jeopardizing the earlier first stage Sino-US trade agreement. Despite the deterioration of Sino-US trade relations, anticipating various fiscal measures supporting the economy, speculation in the market continued. The expected dual listing of China concept stocks in HK further supported the stock price of the Hong Kong Stock Exchange, boosting the local market performance. Next week, China will release data such as the May consumer price index, aggregate financing, and new RMB loans.

<Harris Fraser Research Team>

US

The Sino-US relation grew tenser by the day, but global equities still went up over the week. Over the past 5 days ending Thursday, the Dow rose 3.36%, the S&P 500 gained 1.96%, while the NASDAQ slightly fell 0.07%. As for the epidemic situation, cumulative covid-19 cases has exceeded 5.8 million, with the latest infection epicentre moving to developing countries such as Brazil and India. Japan, which saw its outbreak earlier, has announced an end to the state of emergency. On the economic front, the US 2020 Q1 QoQ economic growth annualized was revised down to -5%. In the latest report, New York Federal Reserve officials claimed that US companies lost $1.7 trillion in market value due to the Sino-US trade war, the report further expects that the investment growth of these affected companies will drop nearly 2% YoY by the end of 2020. Next week, the US will release the May figures for Nonfarm Payrolls and also the ISM non-manufacturing index.

 Europe

This week, European stocks outperformed global markets, the UK, French, and German indexes went up 3.38%, 7.35%, and 6.39% respectively over the past 5 days ending Thursday. The UK and the EU will continue trade negotiations next week, the EU Chief Brexit negotiator Michel Barnier expects a conclusion by then. Earlier, the EU trade commissioner Phil Hogan claimed that the UK might have given up on reaching a trade agreement. On the economic front, there seems to be signs of improvement, with the Eurozone economic confidence index rebounding from the earlier record low. Next week, the European Central Bank (ECB) will hold an interest rate meeting, economic data such as unemployment rates and manufacturing PMIs will also be released.

China

Against the background of rising Sino-US tensions, Hong Kong equity performance has been affected, but still stayed relatively stable over the week, the Hang Seng Index slightly gained 0.14%, while the CSI 300 grew 1.12% over the same period. The “Two Sessions” have formally ended, the National People's Congress (NPC) did not set a target economic growth for the year. Premier Li Keqiang pointed out that the "six guarantees" are the focus of this year's "six stabilities". In addition, he claimed that if the key tasks were met, China could still see positive economic growth in 2020. Data such as Caixin Manufacturing PMI will be released next week.

<Harris Fraser Research Team>

With the virus threat fading out in the country, Chinese markets continued to see gains in April, the CSI 300 Index and the Shanghai Composite Index were up by 6.14% (6.43% in USD) and 3.99% (4.27% in USD) respectively, while the Hang Seng Index also gained 4.41% (4.42% in USD).

In terms of economic fundamentals, China seems to have started the recovery from the covid-19 impact, various PMI figures have mostly recovered to pre-crisis levels, other indicators like industrial production, retail sales and export figures have bottomed out, solidifying China’s position as the first major economy to exit the epidemic cycle. The actual epidemic in China has seemed to come to an end, the meeting dates of the previously delayed National People’s Congress have finally been confirmed, implying that the decision makers of the Chinese government determined that situation is the safe enough for the most important people. Moreover, additional fiscal and monetary stimulus is expected, which could further drive the whole economy forward.

Admittedly, risks still exist, especially with foreign demand staying weak and relationships between China and other countries turning sour as countries seek blame for the global outbreak. With the sabre-rattling between China and US, a potential repeat of the dreaded trade war does worries many. Overall, the economy in China remains in recovery mode and seems en route to pre-crisis levels, but one should not underestimate the potential risks.