US

Long dated US bonds saw a heavy sell-off, with the US 10-year bond yield rising above 1.61% during the day. The market is worried about the possibility of an overheated economy and a sharp rise in inflation, which could possibly lead to the Fed tightening. US stocks fell sharply, with pressure on high valuation technology stocks, the NASDAQ index fell 5.38% over the past 5 days ending Thursday, while the S&P 500 and the Dow fell 2.16% and 0.29% respectively over the same period. US Federal Reserve Chairman Jerome Powell said there was no need to worry about inflation and the economy overheating, reiterating that the current economy still needs monetary easing. Other Fed officials also said publicly that the rise in US bond yields was a sign of market optimism about the economic outlook, stressing that there is no plan to tighten monetary policy at the moment. On the economic front, US 2020 Q4 GDP was revised to a 4.1% growth YoY, slightly below market expectations of 4.2%, while the core personal consumption expenditure (PCE) price index rose by 1.4% QoQ over the same period, in line with expectations. Next week, the ISM manufacturing and services indexes, employment data, and the latest Fed Beige Book will be released.

 Europe

Against the backdrop of a correction in global equities, European equities fared better, with the UK and French equities gaining 0.53% and 0.57% over the past 5 days ending Thursday, while German equities edged down 0.05% over the same period. In view of the recent rise in yields on long-term government bonds, ECB President Christine Lagarde said the authorities are closely monitoring the trend in interest rates to determine whether the current financial environment is appropriate for the economy in the face of the epidemic. Bank of France Governor Mr François Villeroy de Galhau, also a member of the ECB Governing Council, said that the Eurozone economy faces no risk of overheating nor of rising inflation. Next week, the Eurozone will announce the unemployment rate for January and the Consumer Price Index (CPI) for February, which is expected to accelerate to 1.1% YoY.

 China

The rise in US long end bond yields triggered a market correction in global equities. Mainland China also tightened up market capital, which saw net withdrawals for the third consecutive week, putting pressure on Hong Kong and Chinese stocks. The CSI 300 Index fell 7.65% over the week, whilst the Hang Seng Index fell over 5%. Emerging market currencies and equity markets came under pressure as there are concerns over rising US bond yields leading to capital outflows from emerging markets, with the USD/CNH briefly touching the 6.5 level. The People's Bank of China conducted a RMB20 billion 7-day reverse repo operation on Friday, but the market still recorded a net withdrawal of RMB20 billion for the week. Next week, China will release the Caixin Manufacturing and Services Purchasing Managers' Index for February. The market will be watching the Two Sessions closely, which is scheduled for 5 March.

Our views on the fixed income market remains unchanged, we continue to value high yield bonds over investment grades as 1) Economic recovery should continue, and 2) High yields have more upside potential. Vaccinations programmes across the globe continue, which forms the basis for global economic activity to return to normal. In a cyclical recovery environment, high yields usually outperform investment grades, as market anticipate improvements in the business environment alongside credit and liquidity conditions.

As global central banks have repeatedly confirmed that the current interest rate doctrine will be kept constant as long as the overall economy is still below its original level, regardless of the inflation situation. This should guarantee the current low interest rate environment as the norm, credit spreads would form the main source of return, which is offered by high yield bonds. We will stay bullish on high yields and Asian credit for the year ahead, for they should offer the best risk adjusted return in the market with their higher upside potential under the backdrop of overall improving economy across the globe.

Epidemic continued to take the headlines in the country, cases remain higher and the government will likely extend the current state of emergency announcement in the short term, undermining the potential recovery in the local economy. The lack of tourism continues to take its toll on the service industry, stimulus checks expiring also lowers expectations on the economic outlook. As a result, business and consumer confidence remains on the weaker end, fundamentals should remain under pressure in the short to mid-term.

More importantly, Olympics news remains concerning. While Japanese officials intend to go ahead with the delayed Olympics, there has been more dissenting voices from both the international and local communities, it was reported that an Olympics without spectators is being considered right now. If these news are remotely true, it would be the final nail in the coffin for any wild imagination regarding Tokyo Olympics as the key to restarting the Japanese economy. In short, economy remains sluggish and we see limited upside for the market given the current outlook. 

As we have reiterated multiple times, our base case for 2021 has never changed. We still expect global economic recovery efforts to continue, as shown by global governments’ continued push for vaccination programmes. While the risk to the economy remains until global herd immunity is reached, global epidemic cases seemed to have retreated from the earlier peak, suggesting a continuance of the recovery theme which is positive to emerging markets.

In addition, the US Dollar should further weaken under the impacts prolonged quantitative easing and ever widening budget deficit. This will also be positive for the emerging markets considering their strong negative correlations to the Dollar, as the weaker Dollar tend to drive capital to non-USD assets. Emerging markets as a whole will stay as an attractive investment as economic growth in EM economies are expected to outpace developed markets in a cyclical market. Although emerging markets across the globe offer similar opportunities, we would suggest more focus on Asian markets where we believe the growth outlook is the most positive and the key issue of pandemic is better controlled. 

After the long periods of lockdown measures adopted in different countries, the situation does seem to be on an improving trend as cases in most countries are off their previous peak. However, these measures took its toll on the business environment, as indicated by the poor statistics on services PMI, which has been in the contraction zone for 5 months in a row. Officials are hoping that the vaccine rollout will stick to schedule, which could get the economy recovering to the previous level.

However, plans are thwarted when it was reported that the production and delivery was significantly behind schedule, which means that the economy will not likely recover on schedule as expected. This has also sparked disputes between the EU and the UK, drawing attention to the post-Brexit relationship between the EU and the UK, the EU threat to block all vaccine exports out of the bloc also did no good to deescalating the situation. Henceforth, with the Europe outlook remains uncertain and economic fundamentals expected to stay under pressure, we would refrain from overweighting European equities in the meantime.

Fundamentals has stayed strong ever since China has gotten itself out of the COVID crisis, the world’s second largest economy is now poised for over 8% of growth in 2021, which is among the fastest in the major economies. The government’s strong control over the epidemic situation and the relative pricey valuations of the US markets atttracted more fund flows into emerging markets, which Chinese markets indirectly benefitted from it with its nearly 40% weighing in the indexes, and was one of the reasons why there was a surge in emerging North Asian markets early on.

As valuations are still lower, and the economic growth is expected to stay strong, outlook for the year remains positive. We do expect a moderate to tighter monetary and fiscal doctrine in 2021, but Chinese markets should still return positive as the growth drivers are here to stay throughout the year.

 US

While new COVID cases globally continue to decline and market expects Biden's relief plan to help the economy recover, the US Treasury yield edging higher suggests higher inflationary expectations, and the influx of profit taking in tech stocks after the recent surge weighed on the performance of the NASDAQ, which shed 0.77% over the past 5 days ending Thursday, while the Dow and S&P 500 edged up 0.18% and 0.10% respectively. Worldwide daily infection figures fell back to around 400,000 per day, the lowest since October 2020, while on the other hand, market expects vaccine supply in the US to multiply in the coming months following the emergency authorisation of several new COVID vaccines by the FDA (US Food and Drug Administration). On the economic front, the US released strong retail sales figures for January, up 5.3% MoM, much higher than the 1.1% expected growth. US Treasury Secretary Janet Yellen commented that even with the recent positive retail sales data and US equities hitting record highs, the country still needs the US$1.9 trillion in relief measures. Next week, the US will release the revised GDP for 2020 Q4 and the consumer confidence index for February.

 Europe

Equities in the UK and France rose by more than 1% over the past five days ending Thursday as the number of COVID infections continue to fall and vaccination programmes carried on across Europe, raising hopes that the current lockdowns will be eased to boost the economic recovery. New COVID cases in the UK fell to a record low since October 2020 and Prime Minister Boris Johnson said he would announce plans to lift lockdown measures within a week. In addition, President of the Eurogroup Paschal Donohoe said the Eurozone will probably decide when member states could start withdrawing economic support measures by March to May, when vaccines should have been widely administered. Next week, the Eurozone will publish the final figures for the Consumer Price Index in January.

 China

On Tuesday, Hong Kong stocks had a good start in the first trading day of the Year of the Ox, closing over 500 points higher than the previous session. Meanwhile, the market was concerned about the liquidity situation in the market, China's A-shares had a mixed showing on Thursday, with the SSE index closing higher while the SZSE index fell. The People's Bank of China (PBoC) introduced a RMB 200 billion medium-term loan facility (MLF) and made a RMB 20 billion reverse repurchase on Thursday, but the market still saw a net withdrawal of RMB 260 billion. In addition, the RMB weakened on Thursday, with the onshore rate falling 326 pips to a low of 6.4894. Some analysts reckon that was probably due to reduced demand for foreign exchange after the holidays. The market will likely be focused on details of the ‘Two Sessions’ which will be held in early March.

Corporate earnings season started and the market was particularly concerned about the impact of the epidemic in late December, where there has been a reintroduction of the lockdown measures. Up to date, the results were not as bad as markets feared, as more than 80% of the reporting S&P 500 companies still managed to beat market expectations. Economic fundamentals also stayed positive, as various leading indicators such as consumer confidence and PMIs hint at positive outlooks.

Epidemic wise, the country seems to be heading for improvement. Daily new cases and deaths seems to be coming down from the earlier peak, and the vaccination programmes are indeed making slow but visible progress, which puts the US far ahead most other countries. However, it is still too early to make the call that the epidemic will be over within 2021 1H, the currently expensive valuations also show larger potential drawdowns compared to the upside, which suggests exercising caution in the short to mid-term.

Mercer FundWatch website: https://www.mercerfundwatch.com/​

 US

US inflation were moderate, suggesting that the accommodative monetary policy will continue, together with favourable quarterly results, pushed US stocks to new highs, with all three major equity indexes rising by more than 2% over the past five days ending Wednesday. The core consumer price index (CPI) fell further to 1.4% YoY in January, the lowest since June 2020. As inflation remains subdued, Fed Chairman Jerome Powell noted that quantitative easing would continue until the US economy made real progress. Quarterly corporate earnings in the US were impressive, with around 80% of reporting S&P 500 companies beating earnings expectations, where there was a 7.3% YoY growth in overall earnings. With the extensive vaccination programme underway, the number of new COVID cases continued to fall globally, the US in particular fell below the 100,000 daily cases mark for the third consecutive day. In other news, it is worth sharing that the price of Bitcoin has risen again to a record high, following Tesla's announcement of a US$1.5 billion investment in the cryptocurrency, prices reached US$48,215 per coin at one point, and the rally of the volatile instrument continued to drive up market sentiment. Next week, the US will release retail sales and manufacturing PMI data, as well as the Fed meeting minutes.

 Europe

European Commission economics chief Valdis Dombrovskis is optimistic about the COVID outbreak and the economy, but Germany's extension of the lockdown produced mixed results in the European equity market. The UK and French equities are up 0.25% and 1.94% respectively over the past 5 days ending Wednesday, while German stocks have stayed flat. According to Valdis Dombrovskis, the region's economy is expected to improve sharply in the second quarter as vaccination programmes in many European countries should accelerate and gradually relax their lockdown restrictions. In Germany, however, Chancellor Angela Merkel plans to only partially relax restrictions, but the overall lockdown restrictions will stay until 7th March. The dispute between the EU and the UK over the COVID vaccines remains unresolved, with Minister for the Cabinet Office Michael Gove saying that the terms of the Northern Ireland Trade Agreement will need amendments. Next week, the Eurozone is due to release its fourth quarter GDP and February manufacturing PMI figures.

 China

As the Lunar New Year approaches, China and Hong Kong stock market turnover dropped significantly, but the performance this week remained strong, with the SSE Composite Index rising 4.54% in just three trading days, recording a total gain of 22.8% for the year of Rat; while the Hong Kong stock market only had a half-day market on Thursday, the HSI was still in full swing, rising for five days in a row and hitting a new closing high since June 2018, tallying a gain of 2,223 points or 7.9% for the year of Rat. As for data, China recorded a record high of RMB 3.58 trillion in new RMB loans in January, while the increase in aggregate financing in the same month was RMB 5.17 trillion, which was also higher than market expectations of RMB 4.6 trillion. The market will watch the National People's Congress (NPC) meeting commencing on 5 March closely.