US

The US presidential race has been dramatic, with incumbent President Donald Trump claiming to have won the election, but since then the race has shifted in favour of former vice President Joe Biden, prompting Trump to file lawsuits over vote counting procedures in several states. Despite the back and forth, US stocks have risen sharply over the past few days, with the three major US indexes recording gains ranging from 6.05% to 6.49% over the past 5 days ending Thursday. Up till now, the results of the election remain uncertain; while Biden could win the presidential race with more than 270 votes if he wins in two more key battleground states, there will likely be no confirmation of the election results in the near future with legal challenges on the way; on the other hand, the market expects the Republican Party to retain control of the Senate. On the epidemic front, the US became the first country to break the 100,000 mark for daily new cases, while European countries are also logging in record daily covid cases. The US Federal Reserve left policy rates unchanged, but noted that the epidemic still poses high risk to the medium-term outlook. As for fundamentals, the ISM Manufacturing Index rose 3.9 to 59.3 in October, its largest jump since 2018. Next week, the US will release October CPI and November Michigan consumer sentiment data.

EUROPE

The covid epidemic in Europe continued to be severe, with the UK, France, and Germany all imposing lockdown measures. However, this has not dampened the sentiment of the investment market, as European equities followed the rise of US equities, and the UK, French, and German equity indexes rebounded by 5.81%, 9.07%, and 8.36% respectively over the past 5 days ending Thursday. Against the backdrop of a high number of new cases in the UK, the Bank of England decided to increase its bond purchases by an additional £150 billion to £895 billion, exceeding market expectations. Next week, both the Eurozone and the UK will release preliminary GDP figures for Q3 2020.

CHINA

China and Hong Kong equities gained over the week, with the CSI 300 Index rising 4.05% and the Hang Seng Index surging 6.66%. It was reported that Chairman Xi Jinping clearly stated the economic growth target in his speech regarding the 14^th Five-Year Plan, and set the goal of doubling the total economy or per capita income by 2035. As for economic data, the Caixin China Manufacturing PMI and official Services PMI for October were 53.6 and 56.8 respectively, both beating market expectations. In addition, Alibaba reported strong second-quarter results, growing 44% on a YoY basis. Next week, China's October CPI and PPI will be released.

US

With new covid cases in many European countries hitting record highs, France and Germany both rolled out emergency lockdowns, raising fears of the epidemic crippling economic recovery. This resulted in sharp drop in both US and European markets, the S&P 500 index in particular posted its biggest single-day drop since June 2020. The outbreak in the US is also concerning, with daily cases hitting record highs in the Midwest. With less than four days until the election, polls showed Biden maintaining his lead, but markets are still focused on key swing states. As for the earnings season, more than half of the companies in the S&P 500 index have already reported, with 84% of them beating market expectations; in particular the FAAG+M, top 5 companies in the market by market capitalization, reported better than expected quarterly earnings, alongside with a record breaking Q3 US GDP growth of 33% QoQ annualised, beating expectations, drove market recovery on Thursday. Next week, the US will release the Markit Manufacturing PMI, ISM Manufacturing Index, and other relevant employment data, the Federal Reserve will also hold an interest rate meeting.

EUROPE

With the covid epidemic surging in Europe, French President Emmanuel Macron announced on Wednesday that the whole country would be in lockdown again from Friday onwards, and it would last until at least early December this year. European equities crashed in response, German, French, and UK equity indexes fell 8.28%, 6.92%, and 4.75% respectively over the past 5 days ending Thursday. The ECB kept interest rates and its QE plan unchanged after the interest rate meeting, and ECB President Christine Lagarde said the economy was losing momentum faster than expected. The Bank of England will hold an interest rate meeting next week, markets expect the Bank to keep rates unchanged, but should see an increase in monthly asset purchases to £845 billion.

CHINA

Hong Kong equities trailed the sharp fall of global markets on Friday afternoon, but the HSI still managed to close above 24,000, logging in a 2.74% fall over the week. Chinese markets fared better, with the CSI 300 index only slightly slipping 0.49% over the same period. China announced its "14^th Five-Year Plan", key targets include high quality development and transforming into a technological superpower, but the GDP growth target was nowhere to be found. On the other hand, Ant Group's IPO will raise US$34.5 billion, which will be the world's largest IPO ever recorded. Next week, China will release the Caixin Manufacturing PMI

The longest serving PM in Japanese history Shinzo Abe stepped down in September, and Yoshihide Suga, former aide of Abe, successfully courted the fragmented factions within the Liberal Democratic Party to become the next PM. According to his public statements and promises, it is widely believed that the policy direction will stay in line with the Abenomics, relieving markets with somewhat reduced uncertainties.

With Suga assuming office, the Japanese government should continue to look for additional sources of growth. It was reported that authorities are looking at the possibilities of easing entry restrictions to further foster economic activities and drive recovery. Moreover, officials have said that the Tokyo Olympics would be “held at any cost”, which could possibly help jumpstart the economy in 2021. Yet, PMIs and other indicators still suggest that the Japanese economy is still under water and the path to recovery remains distant, such that we would not consider overweighting the market before any material changes in the economy is observed.

US

Despite the recent progress in the US stimulus package negotiations, markets continued to struggle with pre-election uncertainties. US equities showed weakness, over the past 5 days ending Thursday, the Dow, S&P 500, and Nasdaq saw corrections ranging from 0.46% to 1.77%. As for stimulus matters, it was reported that the House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin were close to reaching consensus on a key element of the stimulus package, adding to the market's positive sentiment. Meanwhile, the last presidential debate was held on Friday morning HKT, and the topics revolved around the covid epidemic, family matters, racial issues, climate change, national security, and leadership, etc. The debate between the two was milder than the previous one, and went deeper into policy discussions. As for US corporate earnings, at the time of writing, 133 S&P 500 companies have released their latest quarterly results, with 84% of them beating market estimates. Out of the 18 banks in the S&P 500, only Wells Fargo's earnings came in worse than expected, equating to a 94% earnings beat for the overall banking sector. The US will release its preliminary GDP for 2020 Q3 next week, market expects a 32% QoQ recovery.

EUROPE

European stock markets had mixed performance, the UK and German indexes were down 0.80% and 1.26% respectively over the past 5 days ending Thursday, while French indexes rose 0.29%. Daily new covid cases are still at record highs in many European countries including the UK, leading to fears that the resurgence will pose a serious challenge to the economic recovery. ECB President Christine Lagarde stated that the current virus wave poses a clear risk to the economy, leading to expectations that the ECB could further increase easing. On the other hand, the Pound saw the biggest one-day gain against the US dollar since March, as the UK agreed to restart trade talks with the European Union, easing the tension over the negotiations. Interest rates are expected to remain unchanged ahead of the ECB's interest rate meeting next week, while the Eurozone will release figures on 2020 Q3 GDP, September unemployment and October inflation.

CHINA

China's A-shares and Hong Kong equities diverged in performance this week, with the Hang Seng Index gaining 2.18% while the CSI 300 Index fell 1.53%. China's GDP grew 4.9% YoY in 2020 Q3, an increase of 2.7% QoQ, and 0.7% YoY for the first three quarters of the year. The 19^th Plenary Session of the Fifth Central Committee of the Chinese Communist Party will be held soon, and the market is focused on the 14^th Five-Year Plan and related policies on the "internal circulation". Another key focus is that Ant Holdings has been given the green light for A+H listing, just as its valuation revised up to US$461 billion.

Disregarding the messy situation arising from the COVID in numerous states, economic fundamentals in various regions are still picking up, with PMIs in large EM countries like India finally hitting higher expansionary levels since the start of the outbreak, cases in various Latin American countries are also seemingly plateauing, outlining a gradual recovery in their local economies.

Yet, we remain largely cautious on EM equity investments, as the Q4 markets still carries quite a significant level of risk, notably in form of US elections. Whether Biden or Trump gets in office, the foreign policy landscape is still very much uncertain, investing in EM before the policy direction is clear would increase unwanted risk in the investment portfolio, and we would be keen to avoid that. Hence, before the US elections are cleared, we would continue to hold a neutral view on EM markets.

While the recent economic fundamentals in Europe seems to stay on the recovery track, it is still treading a fine line. The recent COVID re-emergence is definitely one of the major concerns on the continent, with countries like the UK, Spain, and France reporting higher daily infection figures than the 1^st wave. Lockdown measures are being implemented in some of the harder hit regions, prompting market concerns over the impact on the barely recovering economy.

Even though fundamentals do show continued improvement, the real economy is still rather fragile. This is further compounded by the uncertainties arising from a likely “No Deal” Brexit, and heated debates over the EU Recovery Fund, both which are expected to further dampen the weak recovery. As corporate earnings growth remains on the weak end, we would refrain from overweighting in European equities, only to select certain growth stocks with greater potential, after the US elections uncertainties dissipate.

As numerous concurrent and leading indicators showed, Chinese economic fundamentals continued its recent uptrend, industrial production in particular finally achieved a positive growth on a YoY basis, cementing proof that the Chinese economy has hit rock bottom earlier and would continue its recovery with the aid of the government. With the Fifth Plenary Session of the 19th Central Committee scheduled to be held by the end of October, market participants looking for more colour on policy direction should monitor the upcoming 14th Five-Year plan closely.

In the short to mid-term, the “Two circulation” rhetoric should continue, and expect the government to keep its priority on economic stability, these together should continue to support growth in the new economy sectors in the years to come. In addition, the Fifth Plenary Session comes with a potential catalyst for clean energy sectors in particular, as the Chinese government recently mentioned striving for carbon neutrality by 2060, which should signal more policy support in the pipeline. Nevertheless, markets should remain volatile as the US elections close in, investors should stay cautious before the uncertainties are cleared.

Staying wary of the upcoming elections, markets de-risked over the month, which is as expected as we mentioned in the previous issue of Monthly Insight. Together with high valuations and the stalemate in the stimulus bill, the US equity market is exposed to a much larger downside risk compared to its upside potential. As for fundamentals, unemployment remains a big red flag for the economy, suggesting a sluggish growth and recovery in the economy, which should continue to concern investors in the US market with its high dependency on consumption.

With a month to go, election jitters should continue to weigh on markets. While the first debate between the 2 presidential candidates did not provide much insight to their policies, skimming through their campaign promises and public statements, we could conclude that there is a wide rift between both sides on a variety of issues, which likely poses a material risk for anyone who tries to bet on policy winners. Thus, we would prefer to invest in quality growth only after the uncertainties settle.

US

Anticipating the fresh round of stimulus bills to be passed at an earlier date, over the past 5 days ending Thursday, the S&P 500, the Dow, and the NASDAQ gained 1.06%, 0.24%, and 2.56% respectively. We expect the US markets to remain focused on the trifecta for the coming weeks: Elections, covid, and the stimulus bill. With little less than 3 weeks to go, election matters should take the centre stage in the near future. Polls continue to show former VP Joe Biden leading the incumbent President Donald Trump by a fair margin, but one can never be fully sure under the Electoral College system. As for covid, the latest daily infection figures continue to rise, crossing the 60,000 daily mark for the first time since August, expect more volatility in equities in line with the anticipated reintroduction of lockdown measures. As for the stimulus bills, US Treasury Secretary Steven Mnuchin shared his optimism on the bill with House Speaker Nancy Pelosi, citing common ground in seeing the need for relief bills, President Trump also voiced support over a 1.8 trillion stimulus package. However the divergent views between the Senate and the House remains an obstacle. Next week, the US Fed will publish the Beige Book, and various PMI figures will be released.

Europe

Covid continued to take the centre stage, it was reported that the German Chancellor Angela Merkel stated that the European economy cannot afford a second wave of covid epidemic. Worries grew stronger as multiple countries like the UK, France, and Spain began to adopt more stringent lockdown measures. As a result, European markets trended down over the week, the UK, French, and German stock indexes lost 2.43%, 1.52%, and 2.6% respectively over the past 5 days ending Thursday. Brexit talks stalled and are expected to cross the negotiation deadline this week. However, both sides are likely to continue the talks. EU chief negotiator Michel Barnier hoped to reach a deal by the end of October, asking the UK to make “necessary moves” needed for the deal. On the other side, UK Chief Negotiator Lord David Frost fired back, stating that it is unreasonable for the EU to expect the UK to make “all necessary moves” for the talks to progress. With both sides at odds and awaiting the other side to compromise on key issues, the Brexit trade talks are expected to remain in deadlock for the coming weeks. Next week, various CPIs and PMIs for both the Eurozone and the UK will be released.

China

Chinese markets remained strong over the week, the CSI 300 and Shanghai Composite rose 2.36% and 1.96% respectively, while the Hang Seng Index were volatile, slightly rising 1.11% over the same period. Chairman Xi briefly visited Shenzhen and several other Guangdong cities earlier in the week to celebrate the 40^th anniversary of the Shenzhen Special Economic Zone, driving market optimism in anticipation of favourable policies in the future. Looking forward, markets should pay attention to the upcoming Fifth Plenary Session of the 19^th Central Committee, the details on the 14^th Five-Year plan should give investors a better idea of the upcoming policy direction. It was reported that due to strong demand, Ant Holdings has raised its IPO valuation to US$280 billion (i.e. HK$2,178.4 billion) and will raise more than HK$270 billion in the IPO. Next week, GDP, fixed investment, industrial production, and retails sales figures will be released. PBOC will also announce the latest loan prime rate (LPR), market expects that to stay unchanged.