While the US CPI and PCE figures continue to stay elevated, the GDP growth figure falling short of market expectations, and the resurgence in COVID cases due to the delta variant, led to market speculation that the current inflation is actually transitory, as a slowdown in the economy would likely alleviate inflationary pressure from the wage and demand side. This echoes with the Fed claims that the inflation will not be sustained, and sent bond yields lower and bond prices higher.

Despite the recent positive sentiment, our view have not changed on the mid-term, as market is still expecting rate hikes in the coming few years down the road. As the latest Fed Dot Plot showed that sentiment among Fed members is shifting towards the hawkish side, the 2022 Dec Fed fund futures shows a 36% chance of a rate hike, we expect announcements on the Fed tapering timeline before the end of the year. Henceforth, duration exposure, as repeated many times in the past, should be minimised to reduce the impact on the portfolio. Thus, we remain more positive on high yields over investment grades with their shorter duration and better carry.

 US

The US Food and Drug Administration (FDA) granted full authorization to Pfizer's COVID vaccine, easing concerns about further spread of the virus, sending US equities higher, with the three major indices gaining between 0.91% and 2.78% over the past five days ending Thursday. The US House of Representatives passed President Joe Biden's US$3.5 trillion budget proposal, House Speaker Nancy Pelosi said they are also pushing for another US$550 billion bipartisan infrastructure bill. 

Recent economic data in the US has slowed down, with the August Markit manufacturing and services indices slowing to an eight-month low, whereas the Richmond Fed Manufacturing Index also fell sharply to 9 in August, well below market expectations. Nonetheless, the main focus is now on the annual Jackson Hole central bank conference, where Fed Chairman Jerome Powell is expected to share his thoughts on tapering bond purchases. Next week, the US will release key data including the ISM manufacturing and services indices, and non-farm payrolls for August.

Europe

European shares have enjoyed relative stability recently, with UK, French, and German indices up between 0.18% and 0.94% over the past five days ending Thursday. The minutes of the ECB's July interest rate meeting showed that there was extensive discussion on the new interest rate guidance, with most members indicating support for the proposed revised forward guidance. ECB chief economist Philip Lane said in an interview that the ECB was prepared to deal with the market impact of the Fed's tapering announcement. Next week, Europe will announce the unemployment rate for July and CPI data for August.

China

The Hang Seng Index briefly rebounded close to the 26,000 level this week, but the rally met resistance and closed at 25,407 on Friday, posting a 2.25% weekly gain; the CSI 300 Index also rose 1.21% for the week. On Friday, it was reported that China plans to ban technology companies possessing large amounts of data from seeking IPOs in the US, which triggered the Hang Seng Technology Index to reverse its gains on the day. In terms of policy news, it was reported that regulators had given guidance to six large state-owned banks and their wealth management arm, while the National People's Congress passed a decision to amend the Population and Family Planning Law, making the three-child birth policy official. Next week, China will release official manufacturing and non-manufacturing PMIs.

 US

Fed meeting minutes last month showed that most officials agreed that tapering of bond purchases could begin within the year, sparking concerns over an earlier tapering, sending global equities lower, with the three major US stock indices falling between 1.23% and 1.85% over the past five days ending Thursday. Minutes showed that most officials believe that US inflation has made progress, although the labour market still has room for improvement. St. Louis Fed President James Bullard was vocal that he would like to see bond purchase tapering done by the first quarter next year, and rate hikes starting in the fourth quarter. Earlier, US Fed Chairman Jerome Powell warned that a resurgence in the epidemic would bring uncertainty to the economic recovery and stressed the limitations of the Fed's tools.

In fact, cases in the US jumped again, with daily deaths in the country reaching a record high since February this year. Just as the epidemic rebounded, the US economy showed signs of slowing down, with July retail sales down by 1.1% MoM, more than the expected 0.3% drop; the August homebuilder confidence index also fell to a 13-month low. With inflation making progress on one hand, and a revival of the epidemic on the other, the market is watching for more insight from Powell at the Jackson Hole meeting on 26-28 August regarding the pace of tapering. Next week, the US will release economic data such as the Markit Manufacturing and Services PMI.

Europe

As global investor sentiment turned cautious, European stocks followed the external markets, with the UK, French, and German indices falling between 1.32% and 4.21% over the past five days ending Thursday. Recent economic data from the Eurozone was lukewarm, with the Harmonised Index of Consumer Prices (HICP) up 2.2% YoY in July, in line with expectations, the final GDP growth of 2% QoQ in 2021 Q2 also met market expectations. Next week, the Eurozone will release more data including the August Markit Manufacturing PMI.

China

Reports on the Chinese authorities expanding regulations across more sectors increased the selling pressure on Hong Kong and Chinese markets. The Hang Seng Index fell below the 25,000 level again on Friday and hit a new low since early November last year, adding up to a 5.84% drop over the week, while the CSI 300 Index also fell 3.57% over the same period. The Central Government's latest draft regulations targeting ‘unfair competition’ in the cyberspace and revisiting information infrastructure security put pressure on internet-related sectors, quality stocks such as Tencent were also hit by the news. In addition, well performing sectors, such as electric vehicles and healthcare, were also targeted by new regulations, bringing the overall market down. The market will continue to monitor the latest regulatory developments and their implications.

While the macro environment has slightly shifted, we still think developed markets should outperform emerging markets in the near term, as several factors contribute to the divergence in performance. The resurgence of the Delta variant could potentially derail the economic recovery, as countries have started to re-impose epidemic restrictions in order to control the situation. 

Vaccinations in emerging economies continue to lag behind developed countries due to logistic and supply constraints, which could further amplify the lockdown impact as economic activities gets more limited.

Likewise, inflation also poses as a threat to the emerging market equity performance. The relatively elevated figure across EM countries could force local central banks to tighten up their monetary policy. As a matter of fact, numerous emerging market central banks including Russia and Brazil have already hiked their rates recently, the tightening in liquidity puts a cap on the valuation level. Given no material changes to the macro environment, we will still prefer DM equities in the shorter term, and would avoid taking in more EM exposure.

Economic fundamentals in Europe continue to stay strong. Various PMIs stay close to the all-time high, reflecting the positive business environment at the moment, sentiment indicators such as economic sentiment and consumer confidence indicators are also positive, staying above the long term average. With the continued vaccination efforts, epidemic restrictions in the region should likely follow the UK path and be uplifted. Overall, we expect the outlook of the European economy to stay on the positive note as risks such as COVID fade out.

Apart from a good control over the COVID epidemic and a solid economy, the European market also has a particular advantage in terms of monetary support. With the inflation level lower than most major economies, the ECB have announced no change to rates and the PEPP after the latest interest rate meeting, and further changed the inflation targeting to ‘symmetric 2% inflation target’. These would further cement our idea that there will be no tapering before Q2 2022, and no rate hikes in the short to mid-term. Henceforth, the monetary policy should remain more supportive compared to most other major economies, we continue to hold a positive outlook on the European market in the coming few months.

The fundamentals of the economy remains stable, but most of the indicators have slowed down in line with the previous trend. Base effect wears off, and the moderately tight fiscal and monetary policies was negative for the market. Although the PBoC announced a surprise RRR cut of 50 bps during the month, freeing up 1 trillion CNY in liquidity, which did offer a brief support to market sentiment. However, subsequent policy announcements that impacted several sectors raised uncertainties in the market.

Following the scrutiny over several sectors such as internet platform businesses earlier, the target has since then moved on to other industries. Policies such as limiting overseas listing, a non-profit order for the education sector, and criticising the gaming industry, had material impact on the business themselves, and affected the investment sentiment, which was the main reason behind the market crash in July. Overall, the market remain exposed to the downside in the short to mid-term due to policy uncertainty, such that we would refrain from holding excess positions in the market in the near term.

Recent economic data in the US were mixed. While PMIs were decent, and consumer confidence returned to the pre-pandemic level, employment figures were disappointing. Interestingly, the market did not see this necessarily as a bad thing, as an incomplete recovery in the economy could allow the dovish monetary policy to extend. According to the latest Fed interest rate meeting, Chairman Jerome Powell stood unchanged on the monetary policy as the economy is still ‘some distance away from a full recovery’, citing job market figures as his primary rationale. 

Another thing to consider is that COVID cases are once again on the rise. With the pace of vaccination rollout in the US slowing down, the rise in the Delta variant combined with the lack of herd immunity could still pose a threat to the economy with potential lockdowns and other restrictive policies. In short, expect more downside risks in the short term arising from epidemic resurgence and tapering talks, investors could consider a gradual shift back to more growth exposure when the market potentially corrects, which should offer a better return potential over the longer term.

 US

A slowdown in US inflation data eased concerns over an earlier tapering of asset purchases, and the Senate's approval of the US$ 550 billion infrastructure bill boosted market sentiment. The S&P and Dow hit new highs, up 0.72% and 1.24% respectively over the past five days ending Thursday. The US Consumer Price Index (CPI) rose by 0.5% MoM in July, easing from 0.9% in June. The core CPI, which excludes food and energy prices, also slowed to 0.3% MoM in July, down from 0.9% in the previous month, the softening data eased market fears of an earlier tightening of monetary policy. Earlier, following the release of strong US employment data, both the Kansas City and Richmond Fed Presidents suggested that the conditions for tapering would be met soon.

The US Senate passed the $3.5 trillion budget package and the $550 billion infrastructure bill, which may pave the way for President Joe Biden's future economic policies, whilst boosting the reflation trade, the 10-year US Treasury yield briefly hit the 1.377% level. The annual meeting of global central bankers at Jackson Hole will be held between 26-28 August this year, and the market will be watching for any major monetary policy announcements at the event. Next week, the US will release retail sales data for July and the minutes of Fed’s July interest rate meeting.

Europe

European stocks performed well, with the UK, French, and German equities gaining between 0.96% and 1.12% over the past five days ending Thursday. The UK announced its preliminary GDP growth of 22.2% YoY for 2021 Q2, which was a reversal of the 6.1% contraction seen in Q1. The Eurozone CPI rose by 2.2% YoY in July, surpassing market expectations of 2.0%. Bundesbank President and ECB Governing Council member Jens Weidmann said he would keep a close eye on the threat of elevated inflation. Next week, the Eurozone will announce the revised GDP for the 2021 Q2 and the market expects the YoY figure to remain unchanged at 13.7%.

China

Although the market is still digesting the latest regulatory signals from Chinese authorities, the Hong Kong and Chinese stock markets have rebounded this week after the recent sharp correction, Hang Seng Index rebounded 0.81% over the week and CSI 300 Index was 0.50% higher.  China's total social financing and new RMB loans in July both fell short of market expectations and were lower than the previous value, suggesting that the domestic economy could be slowing down. In addition, the China Banking Regulatory Commission announced that it would step up oversight of insurance technology platforms, triggering a sharp fall in related equities. The State Council announced the implementation framework for the next five years, stating that it will step up monitoring of key areas such as food, pharmaceuticals, as well as education and training. The market will be watching the impact of the national policy on different sectors. Next week, China will release key economic data on industrial production, retail sales, and fixed investment.

 US

The Delta variant continues to rage across the globe, threatening the recovery outlook, but strong US earnings have negated worries over the outbreak, with the S&P 500 and Nasdaq up 0.23% and 0.79% respectively over the past five days ending Thursday, both reaching new record highs, while the Dow was down a modest 0.06%. Thus far, about 85.6% of the 439 reporting S&P 500 companies have reported market beats, reflecting a strong overall business conditions.  Economic data has been slightly disappointing, the ISM Manufacturing Index slowed in July, mainly due to supply bottlenecks which limited output.

While the spread of the Delta variant posed a potential concern over slowing economic growth, global central bank monetary policies are leaning towards the hawkish side. US Federal Reserve Governor Christopher Waller said he was optimistic about the economic outlook and expects the Fed to scale back its monetary easing earlier. Vice-Chairman Richard Clarida also suggested that a tapering of bond purchases would be announced at a later date, followed by an interest rate hike for the first time in 2023. Incidentally, Brazil's central bank has already announced the largest rates hike since 2003. Next week, the US will release data on July CPI and University of Michigan market sentiment for August.

Europe

A strong recovery in the Eurozone boosted European markets, with UK, French, and German indices rising between 1.25% and 2.55% over the past five days ending Thursday. 2021 Q2 Eurozone GDP rose by 2.0% QoQ, well above market projections of 1.5%, while the final Eurozone manufacturing PMI for July was 62.8, also above expectations of 62.6. While the Bank of England kept interest rates and policy unchanged after the interest rate meeting, the Bank stated that it would start tapering when the bank rate reaches 0.5%. Next week, the Eurozone will release its ZEW survey expectations and Sentix investor confidence data for August.

China

A strong recovery in the Eurozone boosted European markets, with UK, French, and German indices rising between 1.25% and 2.55% over the past five days ending Thursday. 2021 Q2 Eurozone GDP rose by 2.0% QoQ, well above market projections of 1.5%, while the final Eurozone manufacturing PMI for July was 62.8, also above expectations of 62.6. While the Bank of England kept interest rates and policy unchanged after the interest rate meeting, the Bank stated that it would start tapering when the bank rate reaches 0.5%. Next week, the Eurozone will release its ZEW survey expectations and Sentix investor confidence data for August.

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