Harris Fraser |
Research Insights
19 October, 2022
China – Looking Out for More Policy Guidance

Chinese markets remain under pressure due to weakness in market sentiment. Economic fundamentals are soft, confidence weak, uncertainties over the policy direction and COVID restrictions casted a shadow over the market outlook. Over the month of September, the CSI 300 Index slumped 6.72% (9.67% in US$ terms), while the Hang Seng Index crashed 13.85% (13.86% in US$ terms) over the same period.

Economic fundamentals have yet to recover, with most PMIs close to or staying in the contraction zone, sector indicators also show muted consumption, investment, and industrial activity. The overarching backdrop has not changed, with the property sector in China remaining in deep trouble. Local authorities have been active in attempting to support the sector via policy initiatives. However, the effectiveness of the policies are yet to be seen given the dismal property sales in the country.

With the issue in the property market unsolved, economic effects rippled through the economy. The property sector has a large direct and indirect impact on the GDP itself, and the reverse wealth effect will impact the consumption power of the middle class. Moreover, the ongoing COVID outbreak also dampens consumer sentiment. With the 20th National Congress of the Chinese Communist Party coming up, we hope for more clarity on the policy direction, and will suggest investors to hold off from building Chinese equity exposure before we see further guidance.


 

Research Insights
19 October, 2022
US – Expect Further Correction

The bear market continued in September, equities saw large corrections as market sentiment deteriorated significantly on the back of aggressive monetary policy expectations, as well as fears of economic recession. Over the month of September, all 3 major indices saw large crashes, the Dow, S&P 500, and the NASDAQ lost 8.84, 9.34, and 10.50% respectively.

The problem of high inflation remains in place. Although energy related items have slightly eased, other sections of the inflation basket have picked up the slack, with wages and shelter costs contributing more to the CPI. In response to the situation, the US Fed will likely continue to tighten their monetary policy, with Fed Funds rate expected to peak around 4.5% to 5.0% in 2023. The macro backdrop remains largely unchanged, monetary tightness will exert pressure onto investment market valuations, business and consumer sentiment will also be hit, driving recessionary risks higher.

Economic indicators showed mixed signals, though the key labour market remains red hot, with initial and continuing jobless claims still lower than pre-pandemic levels. Although job vacancies have slightly come down from their earlier peak, it remains significantly higher than pre-2020, suggesting that the labour market remains very tight. We think that Fed pivots are unlikely in the short term, not before we see significant improvement in the labour market. Given the unchanged backdrop, although short term rebounds are possible, expect further correction before the market hits the trough. We shall refrain from building additional equity exposure in the US equity market in the short to medium term.


 

Research Insights
15 October, 2022
Weekly Insight October 14

Weekly Insight October 14

usa ​US

Despite latest inflation data coming in higher than expected, US equities still rebounded on Thursday, driven by technicals. Over the past 5 days ending Thursday, the Dow was up 0.37%, while the S&P 500 and NASDAQ were down 1.99% and 3.83% respectively. The US Fed release their September interest rate meeting notes on Wednesday, it showed that officials still considered inflation to be too high. There are plans to hike rates further, and the rates will stay at the restrictive level until inflation does return to 2%, the noted also indicated that members project the terminal rate to be around 4.6%. Cleveland Fed President Loretta Mester suggested that existing rate hikes have yet to have its impact on inflation, and more restrictive policy is needed to rein in inflation. Fed Governor Michelle Bowman echoed the generic view of Fed members, supporting more rate hikes in order to get inflation down. The communication from Fed strengthens the idea that a Fed pivot is unlikely in the short term.

As for economic, the most important CPI data in September figure was 8.2% YoY, which is higher than the expected 8.1%. The figure equates to a 0.4% growth MoM, which was higher than the market consensus of 0.2%. Stripping off the impacts of energy and food costs, the core CPI in September also stayed strong at 6.6% YoY, which is higher than both market expectations and the previous value. Inflationary pressures seems to remain elevated. Labour markets data however showed slight easing, as both initial and continuing jobless claims are higher than market expectations and their previous values. It remains to be seen if this trend would continue. Next week, US will release its September figures for industrial production, building permits, as well as existing home sales, alongside the Fed Beige Book. The earnings season will also be in focus, with big names including Johnson & Johnson and Tesla expected to provide further guidance.

 

euro ​Europe

European equities slid as hopes of a central bank pivot were dashed, although markets rebounded on Thursday in line with global markets. Over the past 5 days ending Thursday, the UK, French, and German equity indices were down 0.96-2.1%. After the earlier rout in the gilts market, the Bank of England Governor Andrew Bailey warned markets that the Bank’s bond buying is only a temporary measure, and further purchases will end on Friday, news shook both the bond and currency markets in the UK. ECB President Christine Lagarde reiterated that rate hikes will continue, and the Council is looking at quantitative tightening, she also argued that the Euro Area is not in a recession right now. As for the economy, the Sentix investor confidence for October worsened to -38.3, lower than both the forecasted -34.7 and previous value of -31.8, it is also the lowest figure since July 2020. The UK GDP on the other hand fell 0.3% QoQ, which is slightly worse than the expected 0.2% fall. Next week, the UK will release its CPI and retail sales data for September, and Germany will be releasing the ZEW Economic Sentiment Index for October.

 

china​China

China A-Share markets resumed trading after the National Day holidays, but trading activity was thin in the eve of the 20th National Congress of the Chinese Communist Party. China A-Shares and Hong Kong equities diverged in performance, the CSI 300 index gained 0.99% over the week, while Hang Seng Index fell 6.5%, hitting a new low since the start of the year on Thursday. Chinese authorities had been mentioning Dynamic Zero again before the National Congress takes place, policy pivot on COVID is seemingly less likely in the short term. As for economic data, Chinese Total Aggregate Financing in September was 3,530 billion, far exceeding expectations of 2,725 billion and August’s 2,430 billion. Caixin Services PMI for September on the other hand returned to the contraction zone at 49.3, far below forecasts of 54.5 and the previous value of 55.0. Next week, China will be releasing its Q3 GDP data, as well as September data on exports, retail sales, industrial production, and fixed asset investment. The 20th National Congress will also be held over the week, investors will be looking for further policy guidance from the conference.

 

1

 

 

 

Research Insights
8 October, 2022
Weekly Insight October 7

Weekly Insight October 7

usa ​US

Disappointing economic data translated into market expectations of an earlier Fed pivot, propelling the market’s rebound from the recent bottom. US equities posted a gain over the past 5 days ending Thursday, with the 3 major indices up by 2.40-3.13%. In response to the market optimism, Fed members have voiced out their disagreement. New York Fed President John Williams suggested that Fed rates at the moment are not restrictive and needs to hike further to get inflation down. Both Atlanta Fed President Raphael Bostic and San Francisco Fed President Mary Daly dismissed the idea of an earlier Fed pivot, while Chicago Fed President Charles Evans says Fed will likely hike for another 125 basis points by year end. Markets also reflected the sentiment, pricing in over 80% chance of a 75 bps hike in the next meeting at the time of writing.

On the fundamentals side, ISM manufacturing PMI fell further to 50.9 in September, which was the lowest since June 2020. ISM non-manufacturing PMI on the other hand came in at 56.7 for September, beating market expectations but was slightly lower than the previous value of 56.9. Labour market data on the other hand suggests signs of slight easing. JOLTs Job Openings in August was 10.053 million, significantly lower than the forecasted 10.775 million and July’s 11.17 million. Initial jobless claims of 219K were also higher than both the market forecast and the previous value. Markets will be focusing on whether the easing in the tight labour market would continue. In other news, crude prices gained after OPEC+ announced a production cut of 2 million barrels per day. Although the actual impact to production might fall in the 1 million barrel range according to Saudi officials, the impact on energy prices remains to be seen under the backdrop of global economic slowdown. Next week, US will be releasing the latest retail sales, CPI, and PPI figures for September, as well as and University of Michigan Consumer Sentiment Index for October.

 

euro ​Europe

European equities joined in the global rally, as market sentiment improved over anticipation of a global central bank pivot. Over the past 5 days ending Thursday, the UK, French, and German indices rebounded 1.68-4.57%. The ECB released the minutes for the September interest rate meeting over the week. Minutes showed that members were concerned that the high inflation expectations were getting entrenched, and recession alone could be insufficient to control inflation. ECB President Christine Lagarde stressed that price pressures in the region has become stronger and more persistent, but the ECB will continue to act until inflation is brought back down to the target level. On the economic front more delayed data came out, the Eurozone PPI in August continue to post new highs, hitting 43.3% YoY in August, higher than the forecasted 43.1% and July’s 38.0%, suggesting that prices likely remain elevated. German factory orders contracted 2.4% MoM in August, Eurozone retail sales fell further by 2.0% YoY, both lower than market expectations and the previous value. Next week, Europe will release the Sentix Investor Confidence for October.

 

china​China

China A-Share markets remain closed over the week in observation of the National Day holidays, while Hong Kong equities mounted a slight comeback, the Hang Seng Index surged 5.90% on Wednesday alone, and posted a respectable 3.34% gain over the week. China FX reserves in September was 3.029 trillion USD, slightly lower than the 3.055 trillion USD in August. It was rumoured that cross-border travel restrictions will be eased after the 20th National Congress of the Chinese Communist Party, and the Hong Kong government might be giving out 500,000 free tickets to attract tourists. Markets await further policy details after the National Congress concludes. Next week, China markets will reopen, and more September economic data is set for release, including CPI and PPI, as well as import and export data.

 

1

 

 

 

Research Insights
1 October, 2022
Weekly Insight September 30

Weekly Insight September 30

usa ​US

Losses extended in the US equity markets, as recessionary fears and monetary tightening continue to impact market sentiment. Over the past 5 days ending Thursday, the 3 major equity indices lost 2.83-3.13%. Over the week, several Fed members commented on the market and policy, St. Louis Fed President James Bullard agreed that recessionary risks are present, but reiterated that inflation is still the priority for the Fed. Cleveland Fed President Loretta Mester took a more hawkish stance, stating that interest rates have to go higher to keep inflation down, claiming that the Fed is still not yet ‘in restricted territory on the funds rate’. Atlanta Fed President Raphael Bostic supported a 75 bps at the next meeting, while Chicago Fed President Charles Evans projects the Fed rates to peak at March next year. According to Bloomberg interest rate futures data, markets are also pricing in a high chance for another 75 bps rate hike at the coming November meeting.

On the economic front, housing data was somewhat mixed, with new home sales better than expected, while pending home sales slumped in August, falling 2% MoM, lower than both market forecasts of a 1.4% decline and July’s -0.6% figure. On the other hand, Consumer Board Consumer Confidence Index was 108 in September, better than both the expected 104.5 and August’s 103.6, and it was also the highest since February 2022. The labour market remains red hot, both initial and continuing jobless claims were at recent lows, beating market expectations and previous values. The tightness in the labour market continue increases the risk for further monetary tightening due to persistent inflation. Next week, we will have more important data coming from the US, including ISM PMIs for September, as well as more labour market data in form of unemployment rate, ADP nonfarm employment change, as well as nonfarm payrolls for September.

 

euro ​Europe

European markets saw larger corrections over the week, as markets faced further headwinds in form of an energy crisis, in addition to the recessionary fears and monetary tightening. The UK, French, and German indices were down 3.88-4.44% over the past 5 days ending Thursday. Markets expressed disapproval towards the UK government’s ‘mini-budget’, voices in the market including the IMF criticised the unfunded tax cut in the midst of an inflation crisis. UK Gilt yields surged amidst market volatility, and the Bank of England had to announce an emergency market operation to purchase long dated UK bonds, pledging to buy around 65 billion pounds in UK bonds until 14th October to maintain market stability. Over in Italy, the Brothers of Italy led by Giorgia Meloni became the largest party in the new parliament, a right wing government will likely be formed. ECB President Chirstine Lagarde mentioned that fighting inflation is important, and the Bank will raise rates in the coming few meetings. On the economic front, German Ifo data was 84.3 in September, lower than both the expected 87 and the 88.5 in August, it was also the lowest reading since May 2020. Next week, August data on German factory orders will be released, alongside Eurozone PPI and retails sales data, ECB will also release the minutes of the September meeting.

 

china​China

Hong Kong and Chinese equity markets continued to slip, as market sentiment remains weak. The Hang Seng Index briefly touched a new low of 17,016.28 for the year on Friday intraday, before recouping losses later on. Over the week, the CSI 300 was down 1.33%, while the Hang Seng Index was further down 3.96%. Trading activity was relatively muted ahead of the National Day holidays, and the 20th National Congress of the Chinese Communist Party, investors are still split on the policy direction expectations. To further support the property sector, the government has allowed several cities to lower mortgage rates for first time home buyers. China’s economic data were mixed this week, NBS Official Manufacturing PMI returned to expansionary zone in September at 50.1, which was better than the expected 49.6 and the August figure of 49.4. However, Caixin Manufacturing PMI slipped further to 48.1, missing both forecasts and the previous value. China markets will be close in the coming week to celebrate the National Day Holidays.

 

 

 

Research Insights - Cloned
24 September, 2022
Weekly Insight September 23

Weekly Insight September 23

usa ​US

US markets extended the bear run this week, as concerns over the monetary tightening continued to roil markets. Over the past 5 days ending Thursday, the 3 major indices lost 2.86-4.20%. The Federal Reserve held the September interest rate meeting this week, and hikes rates by 75 bps as expected, which was the third supersized hike in a row. The latest Fed Dot Plot also shows consensus between Fed members, expect another 125 bps in rate hikes before year end, and rates in 2023 to be above of that of 2022. In response to the Fed hikes, bond yields further rose, 2Y treasury yields surpassed 4% for the first time since the Global Financial Crisis.

According to Fed President Jerome Powell, he expects below trend growth in the US economy as a price to pay for reigning in inflation, he also admitted that recession is a possibility. The Fed also downward revised GDP growth forecasts for 2022 and 2023 to 0.2% and 1.2%. On the economic front, while existing home sales and housing starts were better than market expected, building permits, a leading indicator for the housing market, dropped by 10% MoM in August. The closely watched labour market remains tight, both initial and continuing jobless claims came in lower than market expected, wage pressure arising from this would remain a concern for market participants. Next week, the US will release August data on durable goods orders and PCE data, as well as the Consumer Board consumer confidence index and final figure for University of Michigan consumer sentiment in September.

 

euro ​Europe

In line with global markets, European equities also fell over the week as concerns over the economy and the prospects of faster rate hikes dampened market sentiment. Over the past 5 days ending Thursday, the UK, French, and German indices were down 1.62-3.89%. Russia announced a partial military mobilisation order, raising concerns over an extended Ukrainian conflict. On the monetary front, the Bank of England held its delayed interest rate meeting this week, raising interest rates by 50 bps, which was slightly lower than the market expected 75 bps. According to the Bank, it expects inflation to hit 11% in October, and the UK to be in recession with a 0.1% contraction in Q3. On the other side of the Channel, the Swiss National Bank hiked interest rates by 75 bps in response to the higher inflation, marking the end of negative interest rates in Europe. Following the hike, US Dollar was up over 1.2% against the Swiss Franc in a single day. For economic fundamentals, Eurozone consumer confidence was -28.8 in September, lower than both the expected -25.8 and the August figure of -25. Eurozone PMI’s on the other hand were disappointing, with September Manufacturing and Services PMIs coming in at 48.5 and 48.9 respectively, both lower than both market expectations and the August figures. Next week, Europe will release its unemployment data for August, as well as business confidence and the latest CPI figure for September.

 

china​China

Chinese equity markets edged lower awaiting further information on the 20th National Congress of the Chinese Communist Party, while Hong Kong equities followed global markets and logged in more losses. Over the week, the CSI 300 was down XX%, while the Hang Seng Index was down XX%, closing below the 18,000 mark on Friday, which was a new low since the start of the year. It was reported that the Hong Kong government is considering further loosening of its COVID border restrictions, cancelling all hotel quarantine requirements in October, hoping to boost the travel and hospitality industry. On the monetary front, major Hong Kong banks including HSBC, Bank of China, and Standard Charted have raised their prime rates in response to the Fed hikes, casting a shadow over the property market. In other news, the 1-year Loan Prime Rate (LPR) in China was kept unchanged, rout in the China property sector remains a concern for markets. Next week, China will release the NBS Official Manufacturing and Services PMIs, as well as Caixin Manufacturing PMIs for September.

1

 

 

Research Insights
20 September, 2022
Japan – Further Reopening Expected

Corporate earnings recovery, as well as anticipation of further policy impetus from a reopening provided support to Japanese market sentiment. However, as the Dollar continued to gain in strength relative to the Japanese Yen, the Yen fell 4.09% against the Dollar, hitting foreign domiciled returns. Over the month of August, the Nikkei 225 gained 1.04% (falling 2.89% in US$ terms), while the TOPIX edged 1.18% higher (2.76% lower in US$ terms).

Although daily infection figures continue to rise to new highs, there are no plans to re-impose the previous restrictions. The Japanese government announced further relaxations to inbound tourism, increasing the daily arrival quota, lifting certain restrictions on entry, and issuing visas for unguided tourists, it was also reported that Japan will eventually scrap the daily cap on inbound travellers. The anticipated boost to the economy via tourism will remain a catalyst for the economic recovery in the country.

The economic data was mixed, PMIs surpassed expectations, but household spending missed. The more closely watched inflation data edged higher, however it was mainly driven by the weakness in the Yen. Bank of Japan Governor Haruhiko Kuroda admitted that continued easing is the only option given the weak economy. Given the divergence in the monetary policy, the trend in the currency is not expected to reverse anytime soon. With potential catalysts on one hand, and risks arising from inflation and currency depreciation on the other, we shall remain neutral on Japanese equities in the meantime.

Research Insights
20 September, 2022
Fixed income – Flight to Quality

Although the global economy continued to slow down, bond market sentiment deteriorated as attention returned to pricing in the possibilities of further tightening in the global monetary policy. Over the month of August, fixed income indices fell across the board, Bloomberg Global Aggregate, US Investment Grades, US High Yields, and Emerging Markets US Dollar Bonds lost 3.95%, 2.93%, 2.30%, and 0.54% respectively.

Our overarching view on the broad fixed income market hasn’t changed. Global inflationary pressures remain high, exerting pressure on global central bank monetary policies. As both the ECB and the US Fed have indicated, monetary tightening will remain in place before inflationary pressures have materially abated, fixed income markets as a whole are expected to experience further pressure from rising rates in the short term. With the central bankers’ strong rejection over potential rate cuts hopes early next year, we maintain our neutral view on duration in fixed income.

Given the deteriorating economic fundamentals we see at the moment, recessionary risks remain elevated in the short to medium term. We maintain our call to lower high yield bond exposure due to their higher correlation to the economic health. Instead, investors should pay more attention to investment grade bonds, especially ones with a high quality balance sheets such as financial institutions, before there are any material changes to the fixed income market landscape. In the short term, inflation indicators and central bank policy rates will dictate the direction of the fixed income market.

 

Research Insights
20 September, 2022
EM – Dollar Strength Hurts EM Equities

Most EM equity markets fared well in August, with the exception of China, which remained under pressure as markets await for more clarity on policies, dragging the overall index. Commodity exporters continued to benefit from the higher prices, with Russia and Brazil being one of the larger gainers in the month. Over the month of August, the MSCI EM index was slightly up by 0.03%.

Global economic slowdown continue, commodities prices retreat, although they still remain much higher than pre-pandemic levels. Commodity exports among EM economies continue to benefit from the higher prices, corporate earnings are up. However, higher prices is a double edged sword, as the elevated inflation also hits business and consumer confidence. Not only is energy prices higher due to Russian sanctions, food prices are also elevated. As the inflation basket of the EM economies is more food heavy, we continue to see more headwinds in the EM economies.

In response to the extended inflationary environment, global monetary tightening have stepped up, with large hikes from both the ECB and the Fed, which would likely remain in place for longer until inflation returns to long term targets. The continued tightening compresses valuation levels, and the strength of the Dollar pressures EM equities, the risk off sentiment due to the anticipation of recession also pulls capital out of EM. While there are limited direct negative factors, the macro backdrop is still unfavourable, thus we would continue to underweight EM equities in the short to medium term.

1


 

Research Insights
20 September, 2022
Europe – Recession in the Wings

Despite the great pressure on the economy, investment markets continued the rally in early August. Later in the month, equities followed global markets and retreated over recessionary and monetary tightening fears. Over the month of August, the European STOXX 600 index lost 5.29% (6.61% in US$ terms).

Recessionary fears further increased over the month, the energy crisis being one of the biggest worries in the market. Gas supplies through the Nord Stream 1 has once again been suspended at the end of August, the shortfall in the gas supply could potentially result in larger contractions in the economy due to energy rationing in winter months. The shortage is further amplified by the dry weather, which has affected hydropower generation, further burdening the grid when gas is already in short supply. The drought also affected key waterways in the region, hampering power generation and industrial activities along the rivers, exacerbating the already weak economy.

The other glaring issue is the elevated inflation, with the latest CPI hitting another record high of 9.1% YoY, the figure was further amplified by the weakness of the Euro. Monetary policy will stay restrictive for longer, as ECB President Christine Lagarde has suggested. Investment markets will bear the brunt of the tightening as valuation levels compress; while the economy faces more pressure arising from inflation and a weak sentiment. With no change in the existing trends, recession risks have further increased, we would advise against investing in the market before recession is fully priced in. 

1


 

Subscribe to