US

Although the US Federal Reserve's 75 bps rate hike was in line with market expectations and allowed the US market to rebound slightly on the same day, market fears of recession continued to grow and US equities plunged again on the following day, with the Dow falling below the 30,000 level and the Nasdaq falling over 4.7% in a single day. Since year start till 16^th June, the S&P 500 and NASDAQ have fallen by 23.1% and 32.0% respectively, both entering technical bear market territory. On the day the hike was announced, Chairman Jerome Powell said large rate hikes would not be the norm, and that a rate hike of only 50 or 75 bps is expected in the next meeting. According to the Fed dot plot, members expect the median federal funds rate to be 3.375% by the end of this year, rising further to 3.75% by the end of 2023, before returning to a moderate 3.375% by the end of 2024, and the median long-term rate is still at a neutral 2.5%. The dot plot showed a sharp increase in members' expectations for interest rates at the end of this year compared to their forecasts in March, with the median of 3.375% in June compared to 1.875% back in March.

With expectations of further rate hikes, bond yields were up across the board, the two-year US Treasury yield rose to 3.45% before the Fed meeting, and the 10-year hit 3.49%. In addition, the 30-year US mortgage rate rose sharply to 5.78%, the largest one-week jump since 1987. Current interest rate futures data suggest that there is still a chance that rates will rise by 75bps at the July meeting, with rates set to rise to around 3.5% by the end of the year. Some economic data were weak, with retail sales falling in May for the first time in five months and New York State manufacturing PMI unexpectedly contracting for the second month in a row. Next week, US manufacturing and services PMI data for June will be released.

Europe

Ahead of the Fed's rate meeting on Wednesday, the European Central Bank (ECB) called an emergency meeting to address the spike in Eurozone bond rates. European equities slightly recovered on the day, but the down trend remains, with UK, French and German stocks falling between 5.77% and 8.17% over the past five days ending Thursday. The ECB said at its emergency meeting that it would create a new tool to counter the recent sell-off in European debt markets, and that it would use the flexibility to reinvest funds from the PEPP to mitigate the fragmentation risk in the region and avoid a potential debt crisis. Just as the US Fed rated hikes aggressively, the Swiss central bank also raised interest rates by 0.5% for the first time in almost 15 years in response to upward pressure on prices. Next week, the Eurozone will release its PMI and consumer confidence data for June.

China

Hong Kong stocks were more affected by external news this week. The market was particularly concerned over whether the US Federal Reserve would tighten monetary policy significantly after the unexpectedly high inflation data in the US, which caused Hong Kong stocks to fall; China A-shares were better off, with the CSI 300 index rising 1.65% over the week. It was reported that the leaders of the US and China might talk on the phone soon, raising expectations that both sides might propose tariff cuts. In addition, the Russian Stock Exchange announced that from 20^th June, local brokers will be able to trade 12 Hong Kong listed shares, which will further increase to 200 and 1,000 by the end of 2022 and 2023 respectively. Next week, China will announce the latest Loan Prime Rate quote (LPR).

  US

The World Bank and the OECD both lowered their global economic forecasts, together with the ECB signalling a tighter policy on Thursday, US markets fell alongside European equities. Over the past five days ending Thursday, the three major US indices fell between 2.93% and 4.57%. According to a report released by the World Bank, the Russian invasion of Ukraine triggered supply chain disruptions, sending energy and food prices higher, while global central banks raising rates from very low levels will limit growth. Thus, the Bank lowered the global economic growth forecast to 2.9% this year, down from 4.1% and 3.2% in January and April reports respectively. The Organisation for Economic Co-operation and Development (OECD) has also lowered its global growth forecast for this year from 4.5% to 3%, citing the potential lasting impact of the Russia-Ukraine war on the global economy and warning of the risk of a global food crisis.

Against the backdrop of high inflation, the Fed is expected to maintain its rapid pace of rate hikes. Alan Blinder, former Vice Chairman of the Federal Reserve, said that a 50 bps rate hike would be needed in each of the next three to four meetings. According to Bloomberg interest rate futures data, the market expects the Fed to raise interest rates by 50 basis points at the June, July, and September meetings. The 10-year US Treasury yield has reached the 3% level once again, while the 2-year yield has also risen to 2.83%, close to its high in early May. Next week, the market will be watching the interest rate meeting on 15 June closely, as well as the US retail sales data.

Europe

European shares fell after the European Central Bank (ECB) announced that it would end its net bond buying programme, with UK, French, and German equities down 0.75%, 1.96%, and 1.81% respectively over the past five days ending Thursday. The ECB statement noted that the Bank plans to raise interest rates by 25bps in July, and will continue to raise rates in September. If the medium-term inflation outlook remains unchanged or worsens, the rate hike in September could be more substantial. In the UK, incumbent Prime Minister Boris Johnson will remain the leader of the Conservative Party and Prime Minister of the UK after winning a no-confidence vote within his party. Next week, the Bank of England will hold an interest rate meeting and is expected to raise its current interest rate of 1.00% to 1.25%.

China

Supported by various factors such as the epidemic getting under control and the implementation of supportive policies, the Hong Kong and Chinese stock markets remained strong, with the Hang Seng Index gaining 3.43% and the Hang Seng Tech Index surging 9.75% for the week; the China A-share market was equally strong, with the CSI 300 Index rising 3.65% for the week. China's PPI rose at a cooler 6.4% YoY in May, while the CPI remained unchanged at 2.1% YoY over the same period. Aggregate financing and new RMB loans both exceeded market expectations in May, while M2 money supply expanded at a faster pace. The market was also buoyed by a surge in Chinese technology stocks, following reports that the Chinese authorities may end their investigation into DiDi, and that Ants Group was resuming its listing process, which the latter was later debunked. Next week, China will release fixed investment, industrial production, and retail sales figures.

  US

After the biggest weekly gain in a year and a half, US stocks fell in the last two days till Wednesday, mainly due to renewed concerns about the US economic outlook following the release of weak consumer confidence data. The US consumer confidence index fell further to a three-month low of 106.4 in May, with the market putting the blame on the ongoing high inflationary environment. The latest Federal Reserve Economic Beige Book showed a slowdown in the US economic growth momentum in the short term due to negative factors such as rising interest rates and inflation.

The economy and inflation figures will influence the US mid-term elections held at the end of this year. In a meeting between President Joe Biden and Fed Chairman Jerome Powell, Biden said that fighting inflation was the Fed's primary responsibility, but that the Fed's autonomy would be respected. Earlier, Treasury Secretary Janet Yellen also admitted that she had made a mistake in last year’s prediction that inflation would not be persistent. It was also reported that Biden's economic advisor indicated that the White House is considering lowering tariffs to help curb inflation, and the market will be pay attention to whether such a move will boost market sentiment. Next week, the US will release CPI for May and the University of Michigan Market Sentiment Index for June.

Europe

Compared to the US, the rebound in European equities was significantly weaker, with the UK, French, and German equities gaining no more than 1% over the past 5 days ending Wednesday. Europe is currently facing strong inflationary pressures, with the German CPI rising by a record 7.9% YoY in May, while Spanish inflation also accelerated unexpectedly. The surprising inflation data drove up market expectations of the ECB's rate hikes, and according to Bloomberg interest rate futures data, a rate hike in July is now a foregone conclusion. The ECB will hold an interest rate meeting on 9^th June, but rate hikes are not expected at that meeting for now.

China

With the announcement of the full lifting of the Shanghai lockdown, the introduction of economic stabilisation measures, improved economic data and the rebound in external markets, both Hong Kong and China stocks rallied, with the Hang Seng Index rising by 4.8% over the past 5 days ending Thursday, whilst the Hang Seng Technology Index was up by 9.02% and the CSI 300 Index by 2.42% over the same period. The market was optimistic about the recovery, after Shanghai lifted COVID restrictions, with China's epidemic easing and new cases falling to double digits, together with supportive policies such as a cut in car purchase tax and an increase in policy bank credit lines. Although the official manufacturing index for May was 49.6, still slightly below the 50 mark, it was a notable improvement over the previous month's 46.0, and the market will be watching the trend closely. Next week, China will release May CPI and PPI data, as well as import and export data for May.

  US

The minutes of the Fed's latest meeting revealed no further hawkishness within the Board. The news eased market concerns over larger rate hikes and US equities rebounded, with the Dow, S&P 500, and NASDAQ up 4.43%, 4.03%, and 3.09% respectively over the past 5 days ending Thursday. According to the minutes, many officials agreed that a 50 bps rate hike at each of the next two meetings would provide policy flexibility for later in the year. Fed official Raphael Bostic suggested that rate hikes could be suspended in September, but that this would depend on inflation by then.

On the economic front, US GDP was further revised down to a 1.5% QoQ contraction in Q1, versus market expectations for an upward revision to -1.3%. In addition, the latest Purchasing Managers' Indices (PMIs) also showed deceleration in the economy, with the manufacturing PMI falling to 57.5 in May from 59.2 in April; the services PMI in May also fell to 53.5 from 55.6; and the composite PMI fell to 53.8 from 56.0, reflecting declining activity in the US as a whole. The weak data raised market concerns about a possible recession, and will keep an eye on the trend of economic data and the Fed's policy direction. Next week, the US will release its Consumer Confidence Index, ISM Manufacturing and Services Index, Employment data, as well as the Beige Book.

Europe

The rebound in European stocks was limited as market sentiment cooled following the rebound in the Euro, with ECB President Christine Lagarde's signalling that rate hikes may begin in July. In the past 5 days ending Thursday, the UK, French, and German indices gained 1.78-2.37%. Besides indicating a possible rate hike in July, Lagarde also suggested that negative interest rates would cease by the end of September. In an earlier blog post on the ECB's website, Lagarde hinted at a 25 bps rate hike both in July and September. Given the current official rate of negative 0.5%, the ECB would need to raise interest rates by a total of 50 basis points to exit negative interest rates by the end of September, the market will likely keep an eye on the ECB's policy stance. Next week, the Eurozone will announce the CPI for May.

China

Alibaba's positive quarterly earnings and a rebound in the US market boosted sentiment in the Hong Kong equity market, with the Hang Seng Index rebounding 2.89% on Friday, narrowing the week's loss to minus 0.1%, whereas China's A-shares remained under pressure, the CSI 300 Index fell 1.87% for the week. The impact of the epidemic was compounded by weak economic data in China, industrial profits fell by 8.5% YoY in April, the first contraction since early 2020. Earlier in the week, Premier Li Keqiang announced a package of further measures to stabilise the economy, including a tax rebate of over 140 billion yuan. Next week, China will release official and Caixin manufacturing PMI data.

  US

The high inflation in the US has triggered fears of tighter monetary policy and recession, with the S&P 500 index posting its biggest single-day loss in two years on Wednesday and the NASDAQ also fell more than 5% on the same day. Fed Chairman Jerome Powell said he would not hesitate to raise interest rates above the neutral level if needed for curbing high inflation. James Bullard, the most hawkish official in the Fed, avoided the topic on a 75 basis point hike, saying that a 50 basis point hike was a good idea. On the inflation target, US Treasurer Yellen refuted the idea that the Fed should raise its 2% inflation target, stating that stabilising price expectations is of paramount importance.

On the economic front, US retail sales rose by 0.9% MoM in April, slowing from a revised 1.4% in the previous month and slightly below market expectations of 1.0%. The number of initial jobless claims rose unexpectedly to a record high of 218,000 since January, suggesting that labour market conditions remain unsatisfactory. In addition, the US Leading Index fell by 0.3% MoM in April, lower than both the previous month’s 0.3% rise and market expectations of a flat reading. Strategists at major Wall Street firms such as Goldman Sachs and JP Morgan believe that fears of a US recession are premature, although some expect this to be the beginning of the correction in global risk assets. Next week, the US will release data on manufacturing PMI and core PCE, and the Fed will also release minutes of its May meeting.

Europe

European stocks followed the decline in the US market, with UK, German and French stocks falling by 1.56%, 1.41% and 1.04% respectively in the five days to Thursday. The minutes of last month's ECB interest rate meeting revealed that some officials felt that the current accommodative monetary policy stance was no longer consistent with the region's inflation outlook.   Officials expressed general concern about the prolonged inflation and supported the process of policy normalisation. ECB Governing Council member Madis Muller said he would support a 25 basis point increase in interest rates in July. Next week, the Eurozone will release its manufacturing PMI for May and Germany will release its IFO economic confidence index for May.

China

The People's Bank of China announced a 15 bps cut in the 5 year Loan Prime Rate (LPR), the largest single cut since the LPR reform, which lifted both Hong Kong and Chinese equities, with the CSI 300 Index rising 1.95% on Friday, ending the week with a 2.23% gain, and the Shanghai Composite Index regaining its 3,100 level. The Hang Seng Index rose by nearly 600 points on Friday, extending the week's gain to 4.11%. Premier Li Keqiang said that policies already in place should be implemented as soon as possible to ensure that the economy stays within a reasonable range in the first half of the year as well as the full year. Vice Premier Liu He also expressed his support for the platform economy and enterprises, supporting the performance of related technology stocks in the short term. Next week, China will release the industrial profits data for April.

  US

As US inflation remains high and the market is concerned about further tightening by the Federal Reserve, US stocks have continued the slide, with technology stocks posting greater losses; the Dow and S&P 500 fell 3.84% and 5.23% over the past five days ending Thursday, while the tech heavy NASDAQ was down 7.69%. The US Consumer Price Index (CPI) rose by a higher than expected 8.3% YoY in April, with Biden calling inflation too high, and blamed it on the epidemic and the Russo-Ukrainian war. The Atlanta Fed President said he would support more action on interest rates if inflation remained high, while former New York Fed President Willliam Dudley even suggested the Fed should raise rates to 5% or higher.

Later, Fed Chairman Jerome Powell, who has just been confirmed for a second term by the US Senate, reiterated that he would raise interest rates by 50 basis points at each of the next two policy meetings, but added that he might be prepared to take more action if the data moved in the wrong direction. Earlier, in its semi-annual Financial Stability Report, the Fed noted that liquidity conditions in major financial markets are now showing signs of deterioration due to increased risks from the Russo-Ukrainian war, monetary tightening, and high inflation. Next week, the US will release data on retail sales in April and the leading index for May.

Europe

European stocks followed the US markets lower, but the decline was more moderate due to the lower share of tech stocks. In the past five days ending Thursday, the UK, French, and German indices were down between 1.17% and 3.60%. The European region is facing inflation and tightening issues, with Bank of England deputy governor Dave Ramsden saying that the inflation crisis may take longer to fully resolve and that the central bank must raise interest rates further to deal with the problem. Deutsche Bundesbank President Joachim Nagel also said he would support the ECB's first rate hike in years in the July meeting, if the inflation outlook for next month remains high. Next week, the Eurozone will release its consumer confidence index for May.

China

The Hong Kong and Chinese stock markets had a relatively stable week, with the CSI 300 Index rising 2.04% over the week, while the Hang Seng Index also outperformed external markets over the same period. On the economic front, China's Consumer Price Index (CPI) rose by 2.1% YoY in April to a five-month high, while the Industrial Producer Price Index (PPI) rose by 8.0% over the same period, easing from its previous value. On the other hand, the Hong Kong dollar hit the lower bound of the currency peg, before the HKMA bought another HK$2.847 billion from the market on Friday, for a total of HK$6.947 billion over two days. Next week, China will release key data on fixed investment, industrial production, and retail sales for April.

  US

The US stock market had a dramatic turn of events, with the S&P 500 Index rallying nearly 3% on the very day Fed announced a 50 bps rate hike, only to fall 3.56% in the subsequent session, wiping out all the gains made the day before. On Wednesday, the Fed announced a 50 bps rate hike in one go, the first in over 20 years. The Fed also announced that it would start reducing its balance sheet from 1 June onwards, with a size of US$47.5 billion per month at the start, and ramping up to US$95 billion three months later. Chairman Jerome Powell also refuted that a 75 bps rate hike is not on the table in the near future. According to Bloomberg data, the G7 central banks may reduce their balance sheets by a total of US$410 billion over the course of the year.

In the US, the ISM Manufacturing Index fell to 55.4 in April from 57.1 in the previous month, the lowest since 2020; The ISM Services Index also fell from 58.3 to 57.1 over the same period. Meanwhile, job openings rose unexpectedly to a record high of 11.549 million in March, while the number of resignations also reached a record high, suggesting that employers are still having difficulty recruiting staff, reflecting the continuing severity of labour shortage. On the other hand, the US corporate earnings season is coming to an end. Of the 432 reporting S&P 500 index constituents, 78.6% of them reported market beats, but only 68.2% recorded YoY earnings growth, while 30% of them reported a drop in earnings, with the financial sector being the worst sector at 55.7%. Next week, the US will release CPI figures for April and Michigan market sentiment for May.

Europe

European stocks followed the US market and were under pressure, with UK, French and German stocks falling 0.08%, 2.53%, and 1.39% respectively over the past five days ending Thursday. The Bank of England raised interest rates by 25 bps to 1% as expected, but the Bank warned that the risk of recession had increased, stating that the country's GDP is expected to contract in 2022 Q4. Olli Rehn of the ECB's Governing Council said that the ECB should start raising interest rates by 0.25% in July this year and gradually normalise interest rates. Next week, the Sentix Investor Confidence Index for May will be released.

China

Due to the domestic pandemic situation and external factors such as the US rate hikes, Hong Kong and Chinese equities were weaker, with the CSI 300 Index falling 2.67% in the two trading days after the Labour Day holidays, while the HSI lost 5.16% in the four trading days this week. In terms of exchange rates, the US/CNY hit a high of 6.69, briefly approaching the 6.7 level, whereas the Hong Kong dollar also closed in to the 7.85 guaranteed limit. In other news, Hong Kong announced a 4.0% YoY contraction in GDP in 2022 Q1, which was worse than the market expected 1.3% decline. Next week, China will release CPI and export data for April.

With the CPI figures in the US and Europe shooting to new highs in decades, we don’t see a change in the inflation trajectory. The current situation is expected to stay, as sanctions on Russian exports had hit the global supply, disruption in Ukraine and nearby regions affects several agricultural commodity exports. Food and energy prices are expected to remain elevated as these supply constraints will likely stay for the time being. Henceforth, so as to tackle the problem, global central banks will certainly continue to move on their original tightening path. 

At the time of writing, Bloomberg interest rate futures indicate that markets expect at least 200 bps in rate hikes from the US Fed and 50 bps from the ECB. With rates climbing, staying short on duration would limit the downside in the portfolio. We also note that the global economy is slowing down due to elevated inflation and uncertainties, the potential stagflation or even recession casts a shadow over high yield bonds. With the tightening expectations further escalating, the fixed income outlook stays pessimistic, and we would currently recommend underweighting fixed income across the spectrum in the short term.
 

Fundamentals remain mixed with several key indicators underperforming. The recent announcement to remove inbound travel restrictions from numerous countries was welcomed by the market. However, there is still no plan to reopen the borders to international tourists, tourist as the key sector of the Japanese economy remains restricted. In the short to medium term, growth in the country will likely stay under pressure due to the economy being far from full power, which could put a limit to the upside in the equity market.

Yet, inflation was surprisingly not a problem in Japan, with its CPI remaining below the Bank of Japan’s long term target. The Bank could keep its monetary policy loose, the surplus liquidity should continue support the market’s valuation levels. However, bond yields in Japan also saw upward pressures in line with global markets. In response to rising bond yields, the Bank of Japan vowed to keep the bond yield under the cap with unlimited bond buying, which put huge pressure on the Japanese Yen. Coupling this with the lukewarm economic fundamentals, we would still avoid overweighting in this market.
 

The situation in Ukraine remains troubling, but further escalation of the current situation seems to be an unlikely event. Henceforth, the direct risks arising from the Ukraine uncertainty should have been well priced into the current market. However, the lingering side effects due to the conflict, including the supply shortage on several key commodities, would likely fuel the high inflation for the time being, posing as a problem to the global economy. We do note that exporting countries could somewhat benefit from the higher commodities prices, but imported inflation remains a problem for many.

Global central banks have raised interest rates and tightened their monetary policy, EM central banks were no exception. While rate hikes could potentially help rein in inflation, they also deal damage to the physical economy, making it a two-edged sword. We still find emerging markets to be less attractive as an investment option, as negative factors such as the weaker economy, capital outflows back to DMs, and the stronger Dollar remain in place for the time being. Henceforth, we remain conservative on EM in the short term, while modestly optimistic on China and Southeast Asian markets over the longer investment horizon.