Japanese equities rebounded in July as global market sentiment briefly recovered on the back of optimism over inflation and monetary tightening, alongside decent data from the local economy. Over the month, the Japanese Yen stabilised against the Dollar, the Nikkei 225 gained 5.34% (7.20% in US$ terms), while the TOPIX index was 3.71% higher (5.55% in US$ terms). Early in the month, former Prime Minister Shinzo Abe was assassinated, the unfortunate event though enabled the Liberal Democratic Party to go ahead and win a supermajority in the House, which will help stabilise the political landscape, supporting the Japanese economy outlook. As for the epidemic front, Prime Minister Fumio Kishida said that the government will not re-impose COVID restrictions. Borders are now open to most countries, though the necessity for inbound tourists to be fully guided was a big turnoff for many. Further easing on this front could act as another catalyst for the Japanese economy. Fundamentals too are positive, with decent PMIs and household spending data. However, CPI figures continue to stay above the 2% long term target, partly driven by the depreciation of the Japanese Yen. While the weak currency is somewhat beneficial for exporters, it could put additional pressure onto households’ spending power. At the moment, Japan’s economic outlook is relatively positive, though the weak currency could erode total returns for non-Japanese investors. We remain neutral on the Japanese equity market for the time being, pending further lifting of restrictions, which might offer further upside potential.

US market sentiment was optimistic, as equities rebounded strongly. The focus returned to corporate earnings and the possibility of slowdown in both rate hikes and inflation, market sentiment improved in the meantime as earlier worries including inflation, and fears of recession alike were shoved aside. Over the month of July, the Dow, S&P 500, and the NASDAQ surged 6.73%, 9.1%, and 12.35% respectively. With inflation remaining in multi-decade high, the US Fed announced a further 75 bps hike in July, in line with market expectations. After the meeting, Fed President Jerome Powell mentioned possible slowdown in rate hikes ‘some time’ in the future for the first time, raising market expectations on gradual easing of the monetary tightening. Corporate earnings were also one of the main catalysts, as the overall earnings turned out better than feared, the renewed optimism from their management also helped lifted market sentiment. Fundamentals on the other hand have visibly worsened, with both manufacturing and services PMIs hitting their 2 year lows. While Q2 GDP in the US continued to contract marking a technical recession, authorities disagreed, citing the strong labour market. Unemployment rates are close to historic lows, creating further upward wage pressure. As we expect high inflation to persist in the short term, monetary tightening from the Fed would stay, pressuring equity valuations and financing conditions in the real economy, recessionary risks remain elevated. Henceforth, we would remain cautious on the US equity market, and awaiting further correction before reconsidering re-entry.

Reversing the trend in the previous month, China equities have moved in opposite directions to the rest of the world. Market sentiment worsened as worries over economic fundamentals re-emerged. Over the month of July, the CSI 300 index lost 7.02% (7.64% in US$ terms), whereas the Hang Seng Index lost 7.79% (7.82% in US$ terms). COVID cases seemingly rebounded, casting a shadow over the economic recovery with possible renewed restrictions, the mixed bag of data also reflects the deterioration in sentiment. Although the overall data have seemingly bottomed out in April, Chinese PMIs of both manufacturing and services sectors have deteriorated in July, the official NBS manufacturing PMI in particular have returned to contractionary zone, other sector indicators such as retail sales figures have also remained on the weak end. Apart from the softer fundamentals, the situation in the property sector is another big issue in China. After a series of credit events, property sales figures have fallen significantly. Even though policy support including mortgage rate cuts were rolled out, effectiveness were limited. The situation is further worsened by the rise of mortgage payment boycotts, further hitting confidence and pressuring developers. Considering that the property has high levels of direct and indirect impacts on the GDP, the unresolved issue remains a threat to the economy. That said, given the low valuation levels, as well as the supportive monetary and fiscal policies, further downside is relatively limited, we’ll take a wait-and-see approach on China in the short to medium term.

​ ​US

US markets remained resilient over the week, with the 3 major indices gaining 0.47-1.86% over the past 5 days ending Thursday. The CPI figure was the market’s key focus during the week, core CPI for July came in at 5.9% YoY, below the expected 6.1%; headline CPI for July also retreated to 8.5% YoY from 9.1% in June, and was lower than the market consensus of 8.7%. The milder than expected inflation figures was positive for markets and equities rose on Wednesday, as expectations for a milder pace of rate hike grew, improving the odds of a ‘soft landing’ for the economy.

However, contrary to market expectations, Fed members have been sending out more hawkish signals. Chicago Fed President Charles Evans said while inflation did slow down, it remains far too high and supported further tightening. San Francisco Fed President Mary Daly said it is too early to claim victory over inflation, mentioning that a 75bps hike is still on the table for the September meeting. Minneapolis Fed President Neel Kashkari mentioned that he still thinks a further 150 bps hike before the end of the year would be appropriate, and inflation would need to return to the 2% level even if it means recession. Next week, the US will release data on retail sales and industrial production, as well as the July FOMC meeting minutes.

 ​Europe

European equities were relatively stable over the week, the UK, French, and German equities edged 0.23-0.48% higher over the past 5 days ending Thursday. UK’s Q2 GDP contracted by 0.1% QoQ, which could be the beginning of the anticipated year-long recession. Deputy governor of the Bank of England Dave Ramsden said the Bank would probably have to further raise rates with inflation in the UK expected to peak at 13% in October. On the data front, Sentix Investor Confidence was -25.2 for August, slightly improving from July’s figure of -26.4 but missed market expectations of -24.7. Next week, the German ZEW economic sentiment for August, UK CPI for July and unemployment for June will be released, the Eurozone will also publish their prelim Q2 GDP figures.

​China

After the earlier tensions over the Taiwan Strait, both Hong Kong equities and China A-shares recovered this week, with the CSI 300 Index up 0.82%, while the Hang Seng Index is slightly down 0.13%. Troubles continue to emerge from the Chinese property sector, with Longfor Properties rumoured to have missed payments on commercial paper, which the company later denied. Economic data wise, inflation has slightly eased. CPI was 2.7% YoY in July, compared to the expected 2.9%; July PPI was 4.2% YoY, also lower than markets expected figure of 4.8%. Next week, figures on fixed asset investment, industrial production and retail sales are expected to be released.

US

While Asian stock markets were shaken by US House Speaker Nancy Pelosi's visit to Taiwan, US stocks managed to maintain their momentum, with the tech heavy NASDAQ seeing a bigger rebound, up 4.59% over the past 5 days ending Thursday, while the S&P 500 and Dow rose 1.95% and 0.61% over the same period. Several Fed officials have recently made hawkish comments, reiterating that maintaining price stability is their top priority. The Cleveland Fed President reiterated the Administration's determination to curb inflation by raising interest rates, while the San Francisco Fed President also said that a 50 bps hike is most likely at the September meeting.

Recent data from the US was mixed, with the ISM Manufacturing Index falling to a two-year low of 52.8 in July, mainly due to a contraction in orders and an increase in inventories, while the ISM Services Index unexpectedly rose to a three-month high of 56.7 in July, ahead of market expectations of 53.5. The number of job openings in the US fell to a nine-month low of 10.698 million in June, slightly below market expectations of 11 million, indicating a slight moderation in labour demand. Next week, the University of Michigan market sentiment for August and the CPI for July will be released, with the market expecting the annual CPI rate to slow to 8.8% from 9.1% in June.

Europe

European equities followed US markets, with the UK, French, and German equities rising between 0.33% and 1.32% over the past 5 days ending Thursday. The Bank of England raised its policy rate by 50 bps to 1.75% after the interest rate meeting, which was the largest hike since 1995. The central bank warned that the UK could face more than a year of recession under the pressure of soaring inflation. On the data front, the Eurozone's preliminary Harmonised Index of Consumer Prices (HICP) rose by a record 8.9% YoY in July, adding to concerns over inflationary pressures; retail sales in the Eurozone fell by 3.7% YoY in June, exceeding the expected drop of 1.7%. Next week, the Eurozone industrial production for June and the Sentix Investor Confidence Index for August will be released.

China

Tensions over the Taiwan Strait triggered a sharp fall across Asian stock markets, affecting both China A-shares and Hong Kong stocks, though both recovered lost ground later on. The CSI 300 Index was slightly down 0.32% over the week, while the Hang Seng Index edged up 0.23%, investors remained on the lookout for the latest developments. On the earnings front, Alibaba's second quarter revenue fell for the first time on record, but the drop was smaller than expected. In addition, the People's Bank of China (PBOC) held the working meeting for the second half of the year, which called for maintaining adequate liquidity, stable and moderate growth in monetary and credit terms, and prudent resolution of risks in key areas. Next week, China will announce the PPI and CPI for July.

US

Market rallied on the back of optimism over moderation in monetary tightening, alongside some upbeat corporate earnings this week has lifted market sentiment despite ongoing worries over recession, the 3 major indices gained 0.85-1.84% over the past 5 days ending Thursday. The US Fed announced a rate hike of 75 bps, in line with market expectations. In the statement, the Fed had acknowledged that economic indicators have softened for the first time, Fed President Jerome Powell admitted that the inflation is still too high, reiterating the Fed’s determination to fight inflation, but also mentioned that a slowdown in the pace of rate hikes will be likely ‘at some point’. He also emphasised that the Fed does not believe the US is in a recession, citing the strong labour market and other factors.

On the corporate earnings front, Meta, Alphabet, and Microsoft all missed market estimates, but the latter provided an optimistic outlook for the year. Amazon and Apple on the other hand defied expectations and had a strong quarter, showing solid growth amid the slowing economy, lifting market sentiment. As for fundamentals, Consumer Board consumer confidence index of 95.7 in July missed expectations of 97.2, new home and pending home sales also missed expectations. The US preliminary Q2 GDP came in at -0.9% QoQ, lower than the market expected 0.5% expansion. With the Q1 GDP contracting at -1.6% QoQ, the US has entered technical recession. However, according to the National Bureau of Economic Research (NBER) definition, which is more commonly used by US officials, the US has yet to enter recession. Next week, US will be releasing various ISM indices for July, as well as unemployment and nonfarm payroll figures.

Europe

Despite the surprise in rate hikes earlier, European equities continued to rally on the back of improved market sentiment. Over the past 5 days ending Thursday, the UK, French, and German indices gained 0.27-2.23%. The Nord Stream 1 has returned online after the earlier maintenance, and had been operating at 40% capacity. Russian gas giant Gazprom announced further supply cuts to 20% on Monday, citing maintenance and repairs. The further cut in supplies raises concerns over a potential energy crisis, which could intensify if Russia completely cuts off gas supplies to Europe. European countries agreed to reduce usage of natural gas by 15% so as to counter Russian threats. For fundamentals, sentiment indicators in Europe continued the slide and missed expectations, CPI for July was 8.9%, hitting another new record high. Next week, Eurozone unemployment data for June will be released, the Bank of England will also hold its interest rate meeting.

China

Both Hong Kong and Chinese equity markets were volatile this week, the Hang Seng Index lost 2.20%, while the CSI 300 slipped 1.61%. The economy remains under pressure due to the COVID situation, affecting market sentiment. Alibaba founder Jack Ma announced the decision to give up control over Ant Group, which would complicate plans for the latter to go public in accordance to listing rules in Hong Kong. According to The Paper, former China Securities Regulatory Commission chairman Xiao Gang suggests more oversight on cooperation between financials, internet platforms, and technology companies. Industrial profits for June released earlier showed improvement over the previous month figure. Next week, China will release the Caxin PMIs for July.

  US

Despite the disappointing results of some of the financials reporting earlier, US stocks continued the rebound, with the three major indices rising between 4.59% and 7.19% over the past five days ending Thursday. US President Joe Biden was reported to have contracted COVID, but he will continue to carry out his duties as President. The market paid great attention to the earnings season, where 71.9% of the 96 reporting S&P constituents beat market expectations. The energy sector had the lowest percentage of earnings beats among all sectors at 33%. According to Bloomberg data, among the 96 reporting companies, the average earnings were down 5.9% YoY.

Large banks were the first to report earnings, apart from Morgan Stanley and JPMorgan Chase, both which reported YoY earnings drops, Bank of America and Goldman Sachs also reported the same. Goldman Sachs' investment banking business reported a decline, and the bank will slow down hiring in an effort to control expenses. Sources said that investment banking in Europe and the US might see a new wave of layoffs unless trading activity rises sharply in September. Despite the banking sector's disappointing results, Tesla reported better-than-expected second-quarter earnings and kept its annual production growth target of 50% unchanged, it also announced that it had converted around three quarters of its bitcoin to fiat currency. Focus next week will be on quarterly results from several Big Tech companies, alongside the release of US Q2 GDP, as well as the Fed's interest rate meeting.

Europe

The ECB's surprise 50 bps rate hike and heightened political uncertainty in Italy did not deter European stocks from following the rebound in US stocks, as the UK, French, and German stock indices rebounded 1.56% to 2.97% over the past five days ending Thursday. The ECB unexpectedly raised interest rates by 50 bps in one go and introduced a new anti-fragmentation tool called the Transmission Protection Instrument (TPI). ECB President Christine Lagarde said that the absence of forward guidance would give the ECB more policy flexibility, and that countries in the region would have to comply with EU debt rules to use the tool. On the other hand, Italian Prime Minister Mario Draghi officially resigned and the country's snap election will be held on September 25. Next week, the Eurozone will release important data including the Q2 GDP and CPI for July.

China

The Hong Kong and Chinese stock markets stabilised this week, with the Hang Seng Index up 1.53% and the CSI 300 Index flat for the week. China's economic outlook was under pressure as the number of new cases confirmed remained high. Premier Li Keqiang said that preserving employment and stabilising prices were key, and that deviations in economic growth would be acceptable, reiterating his cautious stance on large-scale stimulus packages. In addition, the China Banking Regulatory Commission (CBRC) said it would support local authorities in "guaranteeing the delivery of properties" to maintain stable and orderly real estate financing. Next week, China will release industrial profits data.

Focus in the market returned to the glaring issues of high inflation, monetary tightening, and the risks of recession. Poor sentiment in the market drove the wide market lower, with the Dow, S&P 500, and the NASDAQ falling 6.71%, 8.39%, and 8.71% respectively over the month of June.

According to Fed President Jerome Powell, it has become increasingly difficult to achieve ‘soft landing’ for the economy. As inflationary pressures remain elevated, monetary tightening is expected to continue, and rates are expected to hit 3.50% by the end of the year. However, economy is also starting to slow down, with surveys finding deteriorating confidence for both corporates and consumers, company executives noted that consumers are growing more cautious on expenditure due to higher prices and the increased uncertainty, companies have also scaled back on their expansion plans. At the moment, we still see the recessionary risks higher.

That said, as not all indicators are negative, recession is not yet at the doorstep. Although short term rebounds are still possible, the equity market is still firmly down trending. We believe that this is not the time to re-enter the US equity market, as recession risks have yet to be fully priced in, given that earnings estimates in the market have yet to be downward revised. If there is further correction, we could then reassess if it presents an investment opportunity.

The CSI 300 index gained a whopping 9.62% (9.17% in US$ terms) over the month of June, while the Hang Seng Index also posted a smaller 2.08% gain (2.07% in US$ terms).

Riding off from the improved sentiment after the supportive policies came out in late May, Chinese equities had a strong rally over the month as valuations recovered. With COVID under control, economic activity have started to pick up pace, both manufacturing and services PMIs have also further rebounded to the expansion zone, reflecting the improvement in business sentiment. However, other indicators have still yet to show a clear bottoming out, which would warrant further monitoring before we can determine there is a complete recovery.

Housing market data also showed positive signs, as home sales in first and second tier cities picked up MoM, which is a good sign for the physical economy outlook. Moreover, given the limited inflation, China has more tools at hand to deal with the uncertainty arising from recessionary risks in external markets, as there is more room for monetary and fiscal loosening. As the valuation levels are relatively lower, we see China is one of the only few markets where its upside potential outweighs the downside risk. Henceforth, we are relatively optimistic on the market in the short to medium term.

Inflation remained an issue in Europe, as the June Eurozone CPI print came in at 8.6%, setting another record high in history. In order to reign in the inflation, ECB president Christine Lagarde noted that the Bank is ready to move rates at a faster pace if the situation calls for it. At the moment, markets are pricing in a total of 75 bps in rate hikes before September, which will bring the European interest rates back to positive territory for the first time since 2014. The drastic shift in the monetary policy will likely put pressure on both valuation levels, as well as corporate fiscal health, hindering future economic growth.

As for fundamentals, European economic conditions appears to be at the worst in recent years. According to Markit, manufacturing output fell for the first time since the start of the epidemic, hitting a 24-month low. Given the Russian oil sanctions will likely be in effect by the end of the year, Europe could face the further threat from Russian gas being cut off. With recessionary risks higher, while continue monitoring other recessionary indicators, investors should also avoid adding exposure to this market as the downside risks far outweigh the upside potential.