The Japanese Yen further depreciated against the Dollar, over the month of June, the Nikkei 225 lost 3.25% (8.33% in US$ terms), while the TOPIX index was 2.19% lower (7.32% in US$ terms).

Monetary policy in Japan remains one of the loosest globally, the widening interest rate differential between the Yen and the rest continued to exert pressure on the currency itself. The Yen depreciated 5.19% against the Dollar, which will have impact on the Japanese economy. Due to the weaker currency, inflation is felt in Japan, with the YoY CPI figure hitting a 7 year high. The drop in household expenditure is also reflects this very issue, as the rising prices eat into the buying power, which will in turn weaken the economic growth.

Certainly, exporters do benefit from the cheaper currency, the consumer discretionary sector could also perform relatively well as Asia reopens after COVID, and tourism is revitalised. However, the overall market will still likely face more external headwinds as corporate margins continue to be compressed and domestic spending is muted. More importantly, despite the continued monetary support from the Bank of Japan, due to the depreciation of the Yen, total return in foreign currencies such as the Dollar will be compressed. With the conflicting forces present, we continue to stay relatively neutral on the market’s outlook.

Over the month of June, Bloomberg Global Aggregate, US Investment Grades, US High Yields, and Emerging Markets US Dollar Bonds Indices fell 0.88%, 2.80%, 6.73%, and 4.57% respectively.

We see no change in the global macro outlook, as the overarching problem of high inflation remain in place. Not only did energy costs surge, other items ranging from services to food also rose as a knock-on effect. Due to width of the issue, it would take longer before the supply and demand balance could be restored. In response, the ongoing monetary tightening could stay around for longer. Markets expect rates to continue its rise, putting more pressure onto the bond market. Bonds with longer duration, especially investment grades, are expected to take further hits to their performance.

Other than the interest rate risks, we are also concerned about the economic outlook. With high inflation and a slowdown in the global economy, recession probability has risen to considerable levels. As credit spreads tend to widen significantly during economic downturns, we also encourage investors to stay light on credit exposure. Given no change in the external risk factors, we maintain our underweight suggestion on fixed income. If one really needs to invest in bonds, the only option is to get short duration high quality bonds.

Market sentiment soured, emerging markets were also hit hard in the risk off environment, as capital flows back to safe haven assets. Although Chinese markets gained over the month of June, the MSCI emerging markets index still posted a 7.15% loss.

Global inflation remains severe, and there is no sign of abating. We do not expect the issue of high inflation to be resolved in the short term, and could further worsen. Monetary tightening in EM will continue in response before authorities see a clear resolution to the inflation problems, and the rapid pace of the hikes will likely induce business hardships and worsening fiscal conditions. The shrinking liquidity also limits asset valuations, putting more pressure onto the equity market.

In the face of both a deteriorating marketing condition, and well as the risks of recession, market is shifting towards a risk off sentiment, which would likely increase fund outflows from EM equities. Moreover, prices surges on fuel and food will have a disproportionate impact on EM economies due to their larger share of the consumer’s basket. As the monetary policy is already tightened in response to inflation, EM economies do not have much visible upside potential in the short to medium term, we keep our view of underweighting EM equities unchanged barring China.

  US

A further rise in US inflation to its highest level in more than 40 years sparked fears of a straightforward 1% interest rate hike in July, and together with the International Monetary Fund's lowered forecast for economic growth, market sentiment took a hit, with the three major US stock indices falling by 2.40% to 3.19% in the past five days to Thursday. The US Consumer Price Index (CPI) rose 9.1% year-on-year in June, a further record high since 1981 and above market expectations. US President Joe Biden said that the inflation report was out of date and did not adequately reflect the decline in gasoline prices. Nevertheless, the market raised expectations for a 100 basis point rate hike in July and the President of the Atlanta Fed hinted that a 1% rate hike in July was not out of the question. This was followed by the worst inversion in the spread between 2-year and 10-year US bond yields since 2000, suggesting that a recession may be imminent.

Indeed, the International Monetary Fund (IMF) has cut its growth forecast for the US this year and next to 2.3% from 2.9% and 1% next year from 1.7%, with the head of the IMF saying that a global debt crisis is brewing after a wave of interest rate hikes following the epidemic and war. The U.S. Federal Reserve Releases Beige Book showed that price inflation was significant in all jurisdictions, while demand showed signs of slowing and recession fears were rising. In addition, the US is entering a peak earnings period, with quarterly net profits down 28% year-on-year at Morgan Stanley and 28% year-on-year at JP Morgan Chase, and the market is concerned about the performance of US stocks this quarter. The US manufacturing PMI for July will be released.

Europe

The euro has fallen to 1:1 against the dollar for the first time in 20 years, but this has not helped European stocks to rally, with inflationary pressures leading to concerns about growth, with UK, French and German stocks down between 1.95% and 3.81% in the last five days to Thursday. In the face of the euro's decline, the ECB said it needed to be concerned about the impact of the exchange rate on imported inflation. In addition, the EU cut its economic growth forecast for the eurozone next year to 1.4%, while expecting the impact of inflation to last longer. Italian Prime Minister Mario Draghi said he would not continue to lead the government if the Five Star Movement left the ruling coalition. The Eurozone will release manufacturing PMI, the UK will release CPI and other data, and the ECB will meet in July.

China

Chinese equities continued the weakness seen since July, with the CSI 300 index down 4.07% and the Hang Seng index down 6.57% for the week. China's GDP fell 2.6% sequentially and narrowed to 0.4% year-on-year in the second quarter of the year due to the impact of the epidemic. Aggregate financing rose, to RMB5.17 trillion in June, while the amount of new RMB loans rose to RMB2.81 trillion over the same period. Premier Li Keqiang said the economy has stabilized and rebounded, but a new round of epidemic prevention and control may have a greater impact and consumption may recover more slowly in the second half of the year. China will announce 1-year and 5-year LPR rates.

  US

Despite weak economic data and hawkish signals from the Fed minutes, US stocks have managed to rebound over the past few days, with the Dow, S&P and NASDAQ rising between 1.14% and 3.97% in the last five trading days ending Thursday. In the June Fed minutes just released, officials made no mention of a possible recession, instead suggesting that interest rates may be raised to a more restrictive level if inflation remains high. Later, Fed Governor Christopher Waller and St. Louis Fed President James Bullard both expressed support for a 75 basis point rate hike in the July meeting.

While both officials expressed optimism over a soft landing for the US economy, other market participants expressed concerns over the possibility of a recession, for instance Nomura estimates that some major economies will slip into recession in the next year. Economic data was also lacklustre, with the US ISM Services Index falling to 55.3 in June, the lowest level in over two years. Although the number of job openings in the US fell slightly to 11.254 million in May, it remained near record highs, reflecting the tight labour market. Next week, the US will release CPI and retail sales for June, the University of Michigan market sentiment, as well as the Fed Beige Book.

Europe

European equities edged higher, with UK, French, and German indices rebounding between 0.24% and 1.28% over the past 5 days ending Thursday. The ECB released minutes of its June meeting, which showed that officials were broadly in agreement that a gradual rate hike does not imply slow to act, and it is important to avoid limiting rate actions to 25 basis points. On the other hand, the political scene in the UK is in turmoil again, with more departures following the resignations of senior government officials including the Finance and Health Ministers, with Prime Minister Boris Johnson ultimately announcing his resignation as well. Next week, the Eurozone will release data on industrial production in May and the ZEW economic forecast for July.

China

The COVID situation in China was mixed, with the Yangtze Delta region being affected, including the spread of the mutated strain in Shanghai. The A-share market had soft week, with the CSI 300 index down 0.85%; Hong Kong equities were also down, with the Hang Seng index 0.61% lower over the week. Chinese Premier Li Keqiang said the economic recovery was not yet solid and urged regional governments to implement more policies to support the economy. In addition, the mainland government is considering advancing the issuance of some local special bonds amounting to RMB1.5 trillion to boost the economy. Next week, China will announce its Q2 GDP, fixed investment and exports figures for June.

  US

Equities gained slightly on the back of slightly subdued recessionary concerns, but markets lacked clear direction, with the 3 major equity indices gaining 1.13-1.79% over the past 5 days ending Wednesday. US Federal Reserve Chair Jerome Powell spoke at ECB forum, admitted that getting the economy to arrive at a ‘soft landing’ has become harder, but reiterated that slowing down inflation and preserving low unemployment remains the Fed’s target from the start. New York Fed President John Williams mentioned that recession is not his base case for the year although a significant slowdown is likely, and supports significantly higher rates to keep inflation under control. Cleveland Fed President Loretta Mester noted on another occasion that she is advocating for a 75 bps hike in the July meeting if economic conditions remain unchanged, echoing other member’s view on the high inflation.

As for fundamentals, pending home sales surprisingly rebounded to a 0.7% expansion MoM, surpassing both previous month figures and market expectations. On the other hand, consumer confidence waned and came at 98.7, missing market expectations and was markedly lower than the May figure of 103.2, it is also the lowest reading since March 2021. Moreover, the final figure for Q1 GDP was slightly revised lower from -1.5% to -1.6%. Next week, key data including June data on unemployment, ISM services, JOLTS job openings, and Nonfarm payroll figures will be released, the FOMC meeting minutes for June will also be published.

Europe

European markets continued to show divergent performances, as the German DAX lost 1.07% over the past 5 days ending Wednesday, whilst the UK FTSE and French CAC gained 1.94-2.15% over the same period. During the forum on Central Banking held by the ECB, ECB President Christine Lagarde stated that she is still expecting positive growth in the region, but made it clear that the Bank is ready to move rates at a faster pace if needed, she also mentioned that ‘anti-fragmentation’ tools will be looked into at the July meeting. Markets are now expecting the rate hikes in the next 2 meetings, entering positive territory by September, which will be the first since 2014. German CPI remain high but was lower than market estimates, markets will watch closely if inflationary pressures will continue to ease. Next week, Europe will release the Sentix investor confidence, as well as retail sales figures for May.

China

Chinese markets had a decent week, with both Hong Kong and Mainland A-share markets posting gains over the past 5 days ending Thursday. The COVID outbreak in China remain under control, authorities announced relaxations on quarantine rules for inbound travellers, moving from a 14-day rule to a 7+3 model. The announcement lifted market sentiment, and investors are hopeful that it would serve as a starting point for further easing. On the economic data front, both official manufacturing and non-manufacturing PMIs returned to the expansion zone after 3 months of contraction. Next week, Caixin services PMI for June, as well as CPI, PPI, and foreign reserves figures will be released.

  US

Stocks stabilised slightly after Fed Chairman Jerome Powell argued at the Congress testimony that recession is not ‘inevitable’, with the Dow and S&P edging up 0.03% and 0.15% and the NASDAQ up 1.2% over the past five days ending Thursday. At the Congress testimony, Powell acknowledged that recession was a possibility and that achieving a 'soft landing' would be challenging, but that the Fed's commitment to reducing inflation is 'unconditional'. Fed Governor Bowman said he would support a 75 bps rate hike in July, followed by several 50 bps hikes. Interest rate futures data suggest that a 75 bps hike is likely at the July meeting, and that rates will reach 3.5% by the end of the year. The market remains concerned over inflation trends and the Fed's comments.

In addition, the market is concerned about whether the US will slip into recession. Recent economic data from the US has been lacklustre, with the preliminary manufacturing PMI at 52.4 for June, down from the previous month's final reading of 57 and below the expected reading of 56. In addition, the rise in US interest rates, with the 30-year mortgage rate at its highest level since 2008, will have a negative impact on the housing market. Market participants are conservative on the economic outlook, with the CEO of Deutsche Bank and economists at Citi predicting a 50% chance of a global recession. Next week, the ISM Manufacturing Index and Consumer Confidence Index will be released in the US.

Europe

After a period of correction, European equities were range bound in the short term, with UK and French equities flat over the past five days ending Thursday while the German DAX was down 1.63%. In the face of inflationary pressures, ECB President Christine Lagarde said she expects a 25 bps rate hike in July, followed by further hikes in September, and noted that financial risks in the region have risen significantly over the course of the year. ECB Governing Council member Olli Rehn said the sharp rise in prices gave a strong case for a rate hike next month. Another member of the Governing Council, Peter Kažimír, said negative interest rates must become a thing of the past by the end of September. German and French manufacturing PMIs both fell in June. Next week, the Eurozone will announce the CPI for June and the unemployment rate for May, with the market expecting the CPI to rise further to 8.3% YoY.

China

The improving external sentiment led to a stronger performance of the Hong Kong and Chinese stock markets, with the CSI 300 Index up 1.99% and the Hang Seng Index up 3.06% over the week, outperforming external equity markets as a whole. News of the easing epidemic and the implementation of supportive policies continued to support Hong Kong and China's equity markets. In a Central Committee meeting chaired by President Xi Jinping, the healthy growth of payments and financial technology was approved. Market expects more regulatory relief for technology companies such as Ant Group. Next week, China will release official and Caixin manufacturing PMI data for June.

While numerous negative factors remain in play, including economic slowdown concerns, high and sustained inflation, plus monetary tightening, European markets limited losses on the back of improving global market sentiment. Over the month of May, STOXX 600 index lost 1.56% (gained 0.14% in US$ terms).

The spill over effect arising from the Ukrainian conflict has not dissipated, as previous sanctions remained in place, disruption to various production stays, the tightened supply with unchanged demand further contributes to the heightened inflation. Furthermore, the EU has finally finalised the Russian oil ban with all members agreeing, all Russian oil imports with the sole exception of pipelines will be banned. With European energy prices expected to face more price pressures, the current high inflation is at risk of further extending, which would likely put more pressure onto the economy itself.

Looking at the leading indicators, PMIs are fine at a glance, but a further breakdown will show a slowdown in manufacturing output and a fall in new orders; sentiment indicators also show more gloom in the market. More importantly, inflation figures showed no signs of slowing down, and could possibly further intensify with the latest developments. Given that inflation in Europe has hit a new record high, the ECB is poised to pursue a tightening policy, market liquidity and valuations will continue to face more headwinds in the short to medium term, together with a worsening economic outlook, we maintain our view of underweighting European equities in the investment portfolio.

The Chinese equity market performed relatively well in the month. Although economic fundamentals remain under water, the low valuations limited downside, and expectations of more supportive policies from the government lifted market sentiment. Over the month of May, the CSI 300 was 1.87% higher (0.91% in US$ terms), while the Hang Seng Index gained 1.54% (1.54% in US$ terms)

The earlier focus of pandemic concerns has ebbed out somewhat, after months of restrictive measures, new cases in the country have peaked and is now down to lower levels. Henceforth, the government is lifting movement restrictions, in hopes to restore economic growth momentum, which was badly hit throughout the recent pandemic wave. Although economic indicators were weak across the board, the latest PMIs have shown some rebound despite staying in the contraction zone. The recovery in sentiment and confidence should likely continue given the improving pandemic situation.

To further support the economy, the Chinese politburo have announced 33 new policies to stimulate the economy, ranging from food and energy security, to monetary & fiscal loosening, covering a wide range of sectors in the Chinese economy. The announcement has been positive for the market sentiment, as these kinds of tangible policy was the long-awaited support to the market. Given the lower equity valuations at the moment, although short term volatility would likely remain due to external market factors, we remain our positive skew on the Chinese equity outlook over the medium term.

Over the month of May, the Dow and S&P 500 slightly gained 0.04% and 0.01%, while the NASDAQ lost 2.05%.

For the long standing issue of inflation, markets expected inflationary pressures to ease, as reflected by the fall in the 5Y breakeven inflation rate. However, prices and cost of living remain elevated, which erodes the buying power of consumers. The consumer sentiment figures, which has hit a new record low, supports this view, household savings rate has also fallen below the longer term average. As consumption contributes to a large share of the US economic growth, weakness in consumption behaviour could have a material impact on the economy itself.

Although the Fed has been emphasising that the economy is looking at a ‘soft landing’, with the monetary policy tightening in all directions, the investment market suffers due to valuation compression, the reduced liquidity and increased interest rates puts extra burden on both business and consumers. Henceforth, recession is still a possible, further correction in equities cannot be ruled out. Our view on the US equity market has not changed, short term rebound is possible, but the medium term expectations stay gloomy. We will refrain from overweighing in the market until there is a more significant correction or if there are material changes in the external landscape.