US

The US equity markets logged in one of the larger single-day declines on Tuesday, as sentiment was hit amid market uncertainties. Over the past 5 days ending Wednesday, the NASDAQ took the largest hit, losing 2.58%, the S&P 500 lost 0.82%, while the Dow managed to hold a 0.39% gain. On the economic front, core durable goods orders missed market estimates, coming in 0.2% versus the 0.5% consensus. Conference Board Consumer Confidence Index also fared worse, as the reading of 109.3 for September is both lower than the estimate and the August figure. Fed Chairman Jerome Powell still insisted the view that inflation should ease eventually, but admits that the current pressures could stay well into 2022.

Treasury Secretary Janet Yellen told the Congress that the Treasury will run out of cash by 18th October if the debt ceiling is not addressed, potentially risking the first US default and causing systematic risk to the global financial system. The House have passed a bill to suspend the US debt ceiling, but it is expected to fail in the Senate. It remains to be seen how the Democrats will try to avoid the possibility of default. Next week, the US will release important data including the ISM non-manufacturing and Markit Services PMIs, non-farm payrolls, and unemployment rate.

Europe

European equities had mixed performance, UK equities edged 0.35% higher over the past 5 days ending Wednesday, while French and German indices lost 0.91-1.15% over the same period. On the economic front, Eurozone unemployment rate in August was 7.5%, meeting market expectations. European Central Bank (ECB) President Christine Lagarde admitted that there are factors that could potentially lead to higher inflation, but the risks remain limited at the moment. ECB Governing Council Member Mário Centeno reiterated the ECB view that the current inflation level is only temporary, emphasising the need to keep favourable financial conditions until the economy is clearly out of the crisis. Next week, Europe will release the Services PMI and retail sales figures for Eurozone, Germany will also release Industrial Production Data for August.

China

With the national day week holidays ahead, the Chinese and Hong Kong stock markets lacked clear direction. The CSI 300 Index was 0.35% higher over the short week, while the Hang Seng Index also managed a 1.59% gain. An abrupt announcement of electricity curbs came out of China during the week, citing electricity shortage in several provinces, hitting industrial hubs in Guangdong and other north eastern provinces, concerns over the potentially lower Chinese industrial production led to a fall in shipping and materials sectors. The Evergrande incident continues to drag on, as the company missed the second offshore bond interest payment. The Group has arranged an around 10 billion CNY stake in Shengjing Bank, but more work is still needed before the Group can meet all outstanding liabilities. Next week, China will release Caixin Services PMI.

Inflation conditions remain elevated, CPI figures in the US stayed above 5%, which is significantly higher than Fed’s target level. The situation in Europe is similar, where inflation measurements reached a near 10 year high. Concerned over possibilities that the situation could impact the future monetary policy, market participants trimmed their positions to reduce duration exposure. However, during the Jackson Hole Symposium in late August, Fed Chairman Jerome Powell has been surprisingly dovish in his speech.

According to Powell, the Fed acknowledged that the current inflation has reached the Fed’s target, but they are still not planning to make any tapering calls within the short term. However, with the bond spreads close to the historic low, we would still avoid holding too much exposure in fixed income assets. If one has to invest in the fixed income spectrum, we would continue to value high yields over investment grades, as the largest source of risk in form of duration tends to be lower in high yields. However, when investing in high yields, bear in mind that the credit quality remain of upmost importance, as the recent defaults and credit warnings in China have shown.

If we would just consider the economic indicators, the Japanese economy still has much room for improvement. Although manufacturing PMI has managed to stay steady and expanding, riding on the recovering global economy, services PMI remained firmly in the contraction zone, which could have been a result of the continued epidemic situation in the Japan; household spending also missed expectations in July, heeding signs that the economy could see further slowdown in the second half of the year. 

However a surprise news did come out lately, as Prime Minister Yoshihide Suga recently announced that he will step down as the party leader. As Mr Suga’s approval rating tanked during his relatively short tenure, markets hoped a new prime minister could bring a breath of fresh air to the leadership. Together with a promising vaccination progress in the country, expectations of getting the pandemic under control could give the much needed boost to the stagnant economy, potentially driving the index higher and play catch-up to other developed markets. Although uncertainties do remain in the short term, a potential upwards drive based on lifted market sentiment is not to be ruled out.
 

The economy in some of the markets continued to bounce back, notably in the ones that did not suffer from the ongoing pandemic, the Indian market among them. However, we remain relatively sceptical over the EM outlook. As repeatedly mentioned, the few factors that contribute to the heightened risk in EM markets, including epidemic control, vaccination progress, inflation threats, and mounting external debt, remained true, which we still believe would undermine the performance of EM equities compared to their DM counterparts.

Although there has been COVID resurgence in some of the DM countries, the improving vaccination progress would likely suppress the further spread. A near ‘herd immunity’ allows economic activities to return to normal, and this exactly is one of the biggest divergences between DM and EM. On contrary, vaccination progress in EM countries remain sluggish, possibly due to supply bottlenecks. The rate hikes by EM central banks so as to counter the heightened inflation also serve as headwinds for equity performance. Although there has been recent EM recovery, we will still prefer DM equities over EM in the medium term..

 US

US stocks continued their rebound as the Fed interest rate meeting came in line with market expectations, with the three major indices rallying 2.07% to 2.49% over the past two days ending Thursday. On the economic front, the number of initial jobless claims rose for the second consecutive week, while Markit services and manufacturing activities for September fell to a one-year low due to supply chain issues. The Fed kept interest rates and its QE programme unchanged after the interest rate meeting, but Chairman Jerome Powell said that tapering could start in November this year and continue until mid-2022. The dot plot released after the meeting showed that officials are still divided on interest rate action for next year.

As the US debt ceiling looms, it was reported that Treasury Secretary Janet Yellen has sought help from Wall Street executives to put pressure on Republicans. However, with Republicans opposed to tying the debt ceiling to the stopgap spending bill, House Speaker Pelosi hinted that Democrats would pass the stopgap spending bill without raising the debt ceiling to avoid a shutdown. Next week, the US will release data such as the Conference Board Consumer Confidence Index and the ISM Manufacturing Index.

Europe

European stocks rebounded after a brief correction, with UK, French, and German equities gaining between 1.23% and 2.01% over the past five days ending Thursday. On the economic front, the preliminary Eurozone manufacturing PMI for September was 58.7, below market expectations of 60.3. Nevertheless, international rating agency S&P raised its forecast for Eurozone economic growth this year from 4.4% to 5.1%. Executive board member of the European Central Bank Isabel Schnabel said the European economic outlook is improving, and the importance of the Pandemic Emergency Purchase Programme (PEPP) has diminished. Next week, the Eurozone will announce the unemployment rate for August and the CPI for September.

China

The market remained focused on the Evergrande incident, with Hong Kong and China markets slid amid volatile market conditions. The CSI 300 Index fell 0.37% for the week, while the Hang Seng Index lost 1.93%. The market was concerned whether Evergrande could pay the interest on its outstanding bonds. During the week, Evergrande indicated that interest payments for its CNY4 billion onshore bonds had been "negotiated off-market", which briefly eased market concerns. However, holders of Evergrande's USD bonds have yet to receive the scheduled interest payments. At the time of writing, Evergrande has yet to make any announcement on the status of the offshore payments. According to the bond terms, Evergrande is not technically in default if it can pay within the 30-day grace period, and the market is keeping a close eye on the latest developments. Next week, China will release official and Caixin manufacturing PMI data.

The COVID situation varied country by country, where some have seemingly peaked, while others are just starting its rise. If the UK experience has taught us anything, the key to dealing with the pandemic lies within a comprehensive vaccination programme. Although cases could still climb, severe cases and hospitalisations would stay at a lower level, henceforth allowing the economy to remain open and running as usual. The situation in Europe is exactly that, as economic fundamentals reflect that the economy has not suffered significantly despite the resurgence, which is positive for the equity market.

Even though the Eurozone CPI has slightly overshot forecasts, given the new ECB inflation target, the current level is still within acceptable bounds, and would not warrant an earlier than expected tapering. As ECB President Christine Lagarde has mentioned, ECB is keen on avoiding premature tightening of the policy, which could otherwise result in detrimental impacts on the economy. Markets expect the Bank to keep interest rates unchanged at the current level for an extended period. Henceforth, with the economic growth outlook steady, a possible further boost from the EU Recovery Fund, and ongoing supportive monetary policies, we remain positive on the European equity market.

Economic fundamentals in China further slipped in August, official services PMI even entered the contractionary zone at 47.5, which was the lowest figure since the pandemic trough back in early 2020. The weaker fundamentals could possibly be primarily attributed to two factors, one of which is the resurgence of COVID in the country. The delta variant prompted drastic lockdown measures from the Chinese authorities to limit the spread, the services sector suffered, but the sector outlook is expected to recover as soon as authorities regain control over the epidemic.

Policy uncertainty is the other likely cause in the weaker economic sentiment. As in the most recent politburo meetings, the idea of ‘shared prosperity’ have been reemphasised. Henceforth, we would stay neutral on the market, although the ongoing policy concerns are unlikely to dissipate in the short to mid-term, it should be balanced by attractive valuations and more stable liquidity conditions in the market. If one were to invest in Chinese equities, investors should stay selective, and focus on segments that are structurally integral for the future transition, such that they will face less policy risk.

Mid-Autumn Festival Holiday:

H​​​​arris Fraser Hong Kong office’s special working hour for 21 Sep 2021 will be from 9:00 am to 4:00 pm and the office will be closed on the day following the Mid-Autumn Festival (22 Sep 2021).  Any request received during the holiday will be processed on the next working day (23 Sep).

We wish you and your family a happy and prosperous Mid-Autumn Festival.