US

In the first meeting of the year, the Federal Reserve further reinforced the idea of faster interest rate hikes and tapering, suggesting that an interest rate hike at the March meeting is almost certainly going to happen. Together with the rising tensions between Russia and Ukraine, global stock markets including the US further slipped, with the Dow, S&P 500 and NASDAQ down by 5.99%, 9.22%, and 14.65% respectively over the 18 trading days since the beginning of the year. Despite the volatility in the US market, the Federal Reserve delivered a hawkish statement instead, saying that interest rates would hike soon, and tapering would follow. Chairman Jerome Powell also said that the US is now facing a different economic expansion compared to the last tightening, sparking speculation that the pace of tightening would be more aggressive this time around.

Tensions over the Ukraine situation are also worrying markets. The Ukrainian government estimates that more than 100,000 Russian troops have been deployed. Whereas the White House said 8,500 US troops are ready to aid NATO, called for the evacuation of US Nationals from Ukraine, and suggested sanctions against Putin himself. Despite Russia's repeated denials of its plans to invade Ukraine, tensions have escalated.

As for the fundamentals, although the IMF has lowered its growth forecast for the US economy, the estimated 2.6% growth in 2023 is still higher than the long-term average of 1.9%. US GDP growth for 2021 of 6.9% QoQ was well ahead of the 5.5% market estimate. In addition, Q4 earnings were strong, with 78% of the 159 reporting companies posting earnings beats, key players such as Microsoft, Apple and Tesla also reported solid results. Next week, the ISM manufacturing and services indices will be released, along with key data including non-farm payrolls.
 

Europe

Affected by the neighbouring Ukraine situation, and the poor global market sentiment, European equities struggled to perform, with the STOXX 600 index down 2.69% over the past five days ending Thursday, while the German and French indices lost 2.44% and 2.37% respectively over the same period. The German government lowered its economic growth forecast to 3.6% this year in the face of a number of headwinds including the epidemic, inflation, and the geopolitical tensions. ECB's chief economist Philip Lane said in an interview that the ECB would tighten its monetary policy if inflation remained above target. Next week, the Eurozone will release its 2021 Q4 GDP and CPI data for January.

China

Hong Kong stocks almost wiped out all the YTD gains in just one week, as the HSI fell 5.67% for the week, trimming the YTD returns to just 0.65%; China A-shares remained soft, with the CSI 300 Index down 4.51% for the week, extending its YTD losses to 7.62%, almost reaching the bear market territory of over 20% down from its 2021 February high. China's 2021 GDP grew better than expected at 8.1%, but the economy remains under pressure as retail sales growth slowed markedly in December, and the problems of the real estate sector persist. China's Premier Li Keqiang said that macro policies need to be stepped up, and growth stabilisation will take a greater priority, but he insisted that there would be no excess stimulus. Earlier, the People's Bank of China lowered the one-year and five-year LPR rates to help the economy. The market will still be watching to see if China will further loosen its policies.

Gong Hei Fat Choy! Wishing you fullness of the vigor and vitality of the tiger.

Chinese New Year Office Hours Notice：

H​​​​arris Fraser Hong Kong office's special working hour on 31 January 2022 will be from 9:00 am to 4:00 pm. And the office will be closed on Chinese New Year holiday (1 to 3 February 2022). Any request received during the holiday will be processed on the next working day (4 February 2022 ).

Inflation in major economies remain severe, both the US and Europe figures are close to record highs. The US Fed sped up its tapering schedule in response, where the tapering of bond purchases will now be complete by March, the end of bond purchases opens up the opportunity for rate hikes. At the time of writing, rate futures markets expect 3 rate hikes from the Fed in 2022; meanwhile, treasury yields are also climbing higher, these would be problematic for the fixed income market if they do materialise.

Henceforth, ‘HY over IG’ will remain our core view on the fixed income market into 2022. We still expect the longer duration IG bonds to suffer more as global interest rates move higher over the year. In contrast, we still see opportunities in the high yield space. Global high yields should see further improvement with the continued pandemic exit, while remaining relatively unaffected by the rising rates due to their lower duration. Asian high yields in particular could offer a rare opportunity, as the anticipated loosening monetary environment in the Chinese market could potentially start the recovery in this badly hit market in 2022.
 

While COVID cases were still far below their previous peaks, the trend has been upwards, prompting the government to tighten restrictions over borders and local economic activities. If the latest wave of Omicron does manage to gain a foothold in the country, it could spell more restrictions for longer, inevitably impacting the economy. The travel ban in particular is hard on relevant sectors such as travel, retail, and hospitality related, dampening the Japanese economic outlook in the short term. 

Overall, outlook of the Japan equity market is affected by 2 aspects. On one hand, the economic fundamentals remain weaker, as suggested by the leading indicators. The headwinds from the renewed COVID crisis also do no favours to the 2022 economic outlook. However, this is still somewhat balanced out by the loose monetary policy, guaranteed by the low inflation which has diverged from the global trend. The dovish monetary policy could also potentially support equity valuation, while the weak local currency due to the widening yield cap could potentially supporting corporate earnings. Considering factors from both sides, we stay neutral on the Japan market for 2022. 
 

  US

The market is worried that the Fed will take a more aggressive path in hiking interest rates, leading to worsening sentiment and a sharp fall in the US stock market. The Dow was down 4.34%, the S&P 500 5.15% lower and the NASDAQ fell 6.81% over the past five days ending Thursday. The NASDAQ in particular is down by almost 10% this year. Earlier, William Ackman, a famous US hedge fund founder, said that the Fed should raise interest rates by 50 basis points at the March meeting, market is worried about a faster rate hike, which also increased selling pressure in the market. According to Bloomberg interest rate futures, the odds of the Fed raising rates by 25 basis points in March this year have risen to 100%. Although the market is not expecting a 50 basis points hike, but it is still pushing its rate hike expectations gradually higher.

Another event in the spotlight is the US earnings season. Goldman Sachs reported a 13% drop in earnings last quarter, which was weaker than expected and weighed on the banking sector. Of the 61 reporting companies, 77% reported earnings beats. 73% of the 26 financials that reported earnings were better than expected, while all six reporting technology companies managed to beat earnings forecasts, though the most important technology giants such as FAAMG have yet to report their results. It is worth mentioning that crude oil prices surged to a seven-year high, with WTI futures reaching a high of US$87.91 per barrel, before retreating to around US$83. The Organization of the Petroleum Exporting Countries (OPEC) said it expects the global crude oil market to be supported by strong demand this year. Next week, the US will release its interest rate meeting statement in the early hours of 27 January, and markets will be focusing on tapering details. The US will also release its GDP for 2021 Q4 in the evening of the same day.

Europe

While US stocks fell sharply, European stocks were not significantly dragged down, perhaps reflecting the market's confidence in the ECB to maintain its accommodative policy. Over the past five days ending Thursday, UK equities rose by 0.56%, French by 0.72% and German by 0.18%. The ECB released the minutes of its December meeting, which showed that policymakers suggest that inflation in the Eurozone may easily remain above the bank's target, so the central bank should keep its options open. Central Bank President Christine Lagarde said that inflation was expected to fall this year and that there were reasons not to follow the Fed's swift and vigorous response. Next week, the Eurozone will release its manufacturing PMI for January.

China

Hong Kong stocks reversed last year's weakness as the Hang Seng Index continued to rebound this year, gaining 2.39% this week and up 6.7% YTD, which is among the best globally. China A-shares also performed well, with the CSI 300 Index gaining 1.11% over the week. In the face of economic pressure, the People's Bank of China (PBoC) lowered its LPR rate by 5 basis points for 5 years or above and by 10 basis points for the 1 year rates, which is the first in more than a year and half. The PBoC said that the economy is now under three-pronged pressure, and more policies supporting stable growth will be introduced before the downward pressure eases. Next week, China will announce industrial profits for December last year.

Heading into the New Year, our EM outlook has remained largely unchanged, as the external environment is still challenging. The overarching pandemic situation could affect EM economies, as the discrepancy in vaccinations likely leads to divergent economic recovery. With lower vaccinations and less control over the pandemic, expect more and longer restrictions in the respective economies, outlook would likely be less positive than their DM counterparts. Weaker fundamentals as reflected by the EM economic indicators further support our bearish view.

Inflation is another drag factor. Global monetary policies are starting to tighten in response, with a stronger Dollar due to rising yields. This do not bode well for EM equities, as a strong Dollar tends to impact EM equity performance. Moreover, EM central banks have already hiked rates over the year to deal with their own inflation, but these could damage the local economy, as tightening monetary conditions tends to hinder economic recovery. With these macro backdrop factors not dissipating anytime soon, we maintain our conservative view on EM equities in 2022, only staying selectively opportunistic on China which is covered in the other section, and certain Southeast Asia markets which have better pandemic control and are facing less inflationary pressure. 

While the economic data remained positive, the fundamentals are weaker than the US, which dims it outlook as the speed of economic recovery is poised to slow down in 2022. More importantly, inflation remains as an unresolved issue, with the latest CPI figure hitting a new record high again. That said, the ECB was one of the few central bank that have kept their stance unchanged despite rising inflation. The latest figure has retreating in MoM terms could suggest that the peak inflation might have been behind us as suggested by ECB President Lagarde, posing less of a problem. 

The new Omicron variant has become the dominant COVID strain in most countries. While preliminary reports have shown that while this new strain is more infectious, symptoms are seemingly milder, and contracting this strain could offer better protection against previous variants, which is positive for the economic outlook. Even though several European governments have re-imposing certain restrictions, a majority of them are targeting the unvaccinated, henceforth limiting the impact to the overall economy. Expect the European outlook in 2022 to remain modestly positive, weaker economic momentum is balanced out by the supportive monetary policy, while easing pandemic fears should also reduce the downward pressure on the equity market.