Fundamentals wise, Europe continues to post positive figures. Data ranging from various PMIs to consumer confidence all showed continued positive developments, these data further supplement the rhetoric of recovery in the physical economy. With the gradual reopening under way, consumption is expected to recover to pre-pandemic levels. Cyclicals such as materials, industrials, and consumer discretionary, key heavyweights in the European market, would likely benefit more from the consumption boom.

However, we can expect a cap on the further upside in the European equity market due to their heavier cyclical weighing. As we have mentioned previously, overweighting in European markets is intended as a short term tactical allocation. Henceforth, we remain positive on Europe for 2021 Q2, as authorities expect to achieve a 70% vaccination ratio by the end of Q2, which is the ‘herd immunity level’, the positive sentiment arising from the recovery would likely drive the stock market. We expect there to be limited further upside once the recovery is completely priced in, by then we might review the overweight suggestion.

 US

Rising global demand but a supply shortage has led to a surge in commodity prices, and data suggesting an acceleration in inflation has sparked fears of interest rate hikes. The US CPI rose by 4.2% YoY in April, well above market expectations of 3.6% and the previous value of 2.6%, which was also the largest increase in more than a decade; the US PPI also rose more than expected in April; coupled with the projected inflation in the next five years at its highest level since 2006, the headline figures triggered fears of inflation and interest rate hikes, leading to a sharp fall in technology stocks and a shift from growth to value stocks. Over the five past days ending Thursday, the NASDAQ was the worst performer, falling 3.73%, while the Dow and S&P 500 also fell 1.53% and 2.12% respectively over the same period. On the other hand, the latest initial jobless claims in the US hit a record low since the epidemic, several Fed officials believe the economic outlook is bright but risks remain, and are currently discussing whether it is too early to cut back on accommodative measures. Next week, the US will release the Markit Manufacturing PMI data for May and the Fed will also release the minutes of its April meeting.

Europe

European shares followed global equities lower, with the UK, French, and German equity indexes falling by 2.33%, 1.52%, and 1.30% respectively over the past five days ending Thursday, mainly due to the unexpectedly sharp rise in US inflation data. On the data front, Germany's ZEW Economic Sentiment Index surged to 84.4 in May, the highest level since records began in 2004. The European Union said it expected the epidemic to subside amid the encouraging progress of the COVID vaccination programme, and therefore revised its economic growth forecast higher to 4.2% and 4.4% respectively for 2021 and 2022. As for the central bank policy, an ECB official said that the suggestions that the central bank should withdraw its special bond buying programme early was "pure speculation". Next week, the Eurozone will announce the GDP growth 2021 Q1 and the final CPI for April.

China

China equities improved this week, with the CSI 300 Index rising by 2.36% on Friday, tallying a 2.29% rise for the week, while Hong Kong stocks were bogged down by the weakness in external markets, sending the HSI down 2.04% over the week. China's regulation of platform businesses continued as 10 transportation platforms, including Didi and Meituan, were summoned by authorities, resulting in pressure on the relevant sectors. In addition, inflation concerns in the US also weighed on the performance of the Chinese technology sector and the MSCI China Index. Next week, China is expected to release the April fixed investment, industrial production, and retail sales data, the latest LPR will also be announced.

A point of concern, especially in the Hong Kong market, was the Chinese authorities taking action against the tech companies in China, ordering them to rectify their ill practices in their businesses over antitrust matters and certain business segments going out of line. The announcements have sparked market concerns over these heavyweights, dragging down the market despite the overall strong economy and corporate earnings backdrop.

More importantly, expect both the Chinese fiscal and monetary policies to tighten this year. As a result, market liquidity have been limited recently, which ended in valuation compression for the high growth stocks. Henceforth, investors would need to look elsewhere to find sources of growth, surplus household savings built up over the course of the pandemic is potentially an untapped opportunity, where the catch-up in consumption spending could be a worthwhile investment idea. Overall, while valuations should stay low, we still expect positive returns for the Chinese market over the year on the grounds of continued recovery in the economy and corporation earnings.

The US economic fundamentals remained strong ever since the pandemic low, which is further boosted by the robust vaccine deployment. Currently, with the pandemic past its peak in the US, local governments have relaxed restrictions accordingly, business environment is returning back to normal in a majority of States. Under the overall economic recovery, we keep our views on US equities unchanged, with the emphasis on small caps for the recovery play.

Looking forward, risks in the market could have a negative drag on market performance. As the supply gap will likely persist in the short term, inflation is likely here to stay. This could have impact on the future fiscal and monetary policy, where the current easy monetary policy could possibly end earlier in order to limit the inflationary impact. Another thing to look out for is the pending tax reform that could impact the market in 2 major ways, the raise in capital gains tax could trigger a selloff to reduce the taxes payable, while the raise in corporate taxes and implementing minimum tax could impair corporate earnings. While we stay positive on the US market, there could still be more volatility to come depending how these turn out. 

 US

As inflation fears lightened, commodities retreated and yields stabilised, high growth sectors such as tech stocks bounced back. The NASDAQ gained 3.13% over the past 5 days ending Thursday, while the Dow & S&P 500 Index gained 0.18-1.13% over the same period. The Fed released their April meeting minutes, officials were quoted saying tapering will be considered if the economy shows rapid progress. More importantly, they acknowledged the current inflation, but dismissed it as a transitory phenomenon, expecting it to ease eventually. The reduced inflationary expectations further supported high growth stocks, as valuations stabilise under less rate hike pressures. In other news, the wide Crypto market crashed during the week in a spectacular fashion, losing more than 40% in value at one point. While there doesn’t seem to be a sole reason to blame behind the crash, a slew of negative factors, including Elon Musk’s twitter, all which contributed to the sustained selloff.  Next week, the US will release several key economic data, including consumer confidence, University of Michigan Sentiment, durable goods orders, and PCE core deflator. The revised 2021 Q1 GDP will also be released, where the market expects the figure to stay unchanged from the previous reading.

Europe

Europe equities followed global markets higher, equity indices in the UK, France, and Germany gained 0.81-1.12% over the week. On the epidemic front, Europe continues to do a good job on controlling the viral spread, and vaccinations continued its rollout on schedule, major economies have hit the 30% population mark as of date. With the situation under relative control, the European leaders have announced to reopen the region to travellers from third countries, if the travellers are vaccinated and coming from epidemiologically safe third countries, this sparks optimism that businesses could see a further boost with the influx of tourist money. The ECB on the other hand voiced concerns over the increasing debt load in the European service sectors, which could possibly pose as a problem if governments lift their stimulus in the future. The bank is also monitoring the bond market closely as the recent climb in sovereign debt yields have raised eyebrows. Next week, Germany will announce figures for IFO Business Climate and Gfk consumer confidence.

China

Chinese equities stabilised over the week, the CSI 300 Index gained 0.46%. Whereas for Hong Kong, despite Tencent’s subpar earnings report, the Hang Seng Index rose 2.64%, led by the rebound in new economy sectors,. The Chinese banking regulator announced penalties on 5 financial institutions over improper business practices, which shows the Chinese determination on reforming the financial sector. In other news, it was reported that the Chinese authorities will not provide full-fledged support to the troubled Huarong, sending the bond prices of longer dated bonds down for both the onshore and offshore markets. Next week, China will announce the latest figures on industrial profits.

 US

The recovery in global demand led to a strong rise in commodity prices, which in turn boosted the Dow to a new record high, but Yellen's comments on the possible need to raise interest rates in the future triggered a sharp drop in US technology stocks. Over the past five days ending Thursday, the Dow rose 1.43%, while the S&P 500 and the technology-heavy NASDAQ fell 0.23% and 3.19% respectively. Recent data from the US showed further improvement in the economy and job market, with the service PMI posting its second highest increase on record in April, and the number of people claiming initial unemployment benefits falling to a record low since the epidemic.

Base metal prices, including copper, steel, and iron ore, hit record highs, buoyed by infrastructure and consumer demand. Whereas food prices, such as corn and soybeans, also rose to new highs in eight years. As the market anticipates a strong inflationary cycle, US Treasurer Yellen expressed the possibility of higher interest rates in the future, sparking concerns about the relatively expensive technology sector and resulting in a sell-off. Meanwhile, the market is expecting the US Consumer Price Index to rise by 3.6% YoY in April, well above the Fed's target of 2%. Next week, the NFIB Small Business Optimism for April and the University of Michigan Market Sentiment Index for May are also due for release, market expects them to further improve.

Europe

With technology stocks being a relatively small part of the European stock market, European stocks were relatively stable, with the FTSE 100 up 1.62% and the French CAC up 0.87% over the past 5 days ending Thursday. The Bank of England kept its policy rate and bond buying target unchanged, but slowed the pace of purchases as the Bank expects the domestic economy to return to pre-epidemic levels within the year. European economic data continued to improve, with Eurozone retail sales rising 2.7% MoM in March, surpassing the expected 1.5%, and the final services PMI rose to 50.5 in April from 49.6 in March. Next week, Germany will release its ZEW economic forecast for May, and the UK will release its GDP growth figures for the first quarter of the year.

China

Strong economic data from China failed to deter the market from falling. It was rumoured that Biden might keep the China investment ban in place, weighing on the performance of Chinese ADRs and the sentiment spread over throughout the Hong Kong and Chinese markets, the Hang Seng Index and CSI 300 index were down by 0.40% and 1.86% respectively for the week. On the data front, the Caixin China Services PMI rose to 56.3 in April, hitting a 4-month high. Exports in US dollars grew by 32.3% YoY in April, beating market expectations of 24.1%. Hong Kong's economy also performed well, GDP grew by 7.8% YoY in 2021 Q1, well ahead of market expectations of a 3.7% growth, and reversing the trend of six consecutive quarters of recession. Next week, China will announce the CPI and PPI figures for April, both which are expected to be higher than in March.

 US

US stocks continued to reach new highs on the back of strong economic data and corporate earnings. The US GDP rose sharply by 6.4% QoQ in the 2021 Q1, while the April Consumer Confidence Index rose to a pre-epidemic levels of 121.7. US corporates also reported strong quarterly results, with more than 87% of the 284 reporting companies beating market expectations, with an average earnings growth of more than 53% YoY.

On the monetary policy front, the US Federal Reserve kept interest rates and the scale of asset purchases unchanged. Fed Chairman Jerome Powell said there was a one-off upward pressure on inflation, but saw it only as a short term phenomenon that will likely not last, and further reiterated that the current interest rate policy is appropriate before employment and inflation targets were met. On the eve of US President Joe Biden’s 100th day in office, he mentioned that it was time to make US corporations and the richest 1% of Americans pay their fair share of taxes. He also mentioned the $1.8 trillion American Family Plan for the next 10 years, which will be partly funded by the increased tax on the wealthy. Next week, the US will release a series of economic data, including the ISM manufacturing and services indexes for April, alongside non-farm payroll data.

Europe

European equities had mixed performances, the UK and French markets were up 0.33% and 0.56% respectively over the past 5 days ending Thursday, while German indexes were down 1.09%. Inflation accelerated in Germany, with the German CPI for April rising above 2% YoY for the first time since 2019. European Commission President Ursula von der Leyen said the €750 billion EU Recovery Fund will be out soon. On the other hand, ECB President Christine Lagarde said it was still too early to tell whether the impact of the epidemic on the economy was over. However, she expects that 70% of the Eurozone population will have received their first dose of the vaccine by the end of June, so the odds of a strong rebound in the second half of the year are good. Next week, Eurozone retail sales figures for March will be released.

China

Weak economic data weighed on the mainland stock market ahead of the Labour Day holidays, with the CSI 300 index falling 0.23% over the week. The Hong Kong markets also faltered, the HSI was down 1.22% for the week as tech heavyweights fell on Friday on news that they had been summoned by state authorities. For economic data, China’s official manufacturing and non-manufacturing PMIs slowed down to 51.1 and 54.9 respectively, while the China Caixin manufacturing PMI further improved to 51.9. On the other hand, regulatory actions were taken against Chinese online platforms, with 13 companies, including Tencent and ByteDance, being summoned by regulators and asked to rectify irregularities in their businesses, it was reported that the authorities are ready to issue a fine of at least RMB 10 billion to Tencent. Next week, China will release data on exports and foreign exchange reserves.

As we have reiterated multiple times in the past, we favour Asian high yields in the credit space, as a strong economic recovery is expected, and they offer a better risk adjusted return when compared to their European and US counterparts. In addition, although major central banks have made commitments on keeping the rates low, mounting risks arising from the inflationary pressure could still result in rate hikes, investors should limit the duration in the portfolio. That said, while we continue to hold the view of high yields over investment grades, it is always important to consider the credit quality of issuers beforehand, avoid issuers which overly rely on governmental aid for survival.

At the moment, our outlook of the fixed income market remains unchanged. The backdrop of the economic recovery should continue at least for another year, improving economic conditions would likely lead to narrowing of credit spreads, while increasing inflation pressure stemming from the booming economy on the other hand could push long end interest rates higher. We continue to suggest investors to stay short on duration, while long on credit spreads, given an adequate credit quality.

At the start of the year, we were positive on EM equities as we expected the Dollar to go weaker, given that there were 1) low interest rates; 2) continued quantitative easing; and 3) a widening fiscal deficit. However, the Dollar had a recent bull run, mainly on the back of rising rates fuelled by inflation fears. In the mid to long-term, fundamental factors for a weak Dollar never left, commodities prices are also on the rise, both which should provide further support to the EM. However, we have to acknowledge that the constant dread of the Dollar strengthening poses as a material risk to EM equities.

We also note 3 other factors in play which could potentially act as headwinds against EM equities in the mid to long-term: 1) vaccination progress; 2) inflation risk; and 3) potential fiscal cliff. Vaccinations in the EM space is currently lagging, threat of inflation could mark an end to the easy monetary policy, and mounting external debt could result in fiscal cliffs in the near future. These together create a lot of uncertainties for the EM, which would dissuade us from overweighting the market in the short term. Henceforth, we would prefer overweighting DM instead of EM in this time frame.
 

 US

The US stock market came under pressure at its all-time high as the epidemic worsened around the world, coupled with news of a proposed hike in capital gains tax, the three major equity indices fell between 0.65% and 1.57% over the past five days ending Thursday. The World Health Organisation (WHO) said the number of daily new cases is on the rise in all regions except Europe, and India in particular has set a new global record of more than 310,000 new cases per day, while places such as Tokyo may also enter a state of emergency. The US stock market reacted negatively to reports that Biden would raise capital gains tax to a maximum of 43.4% on the wealthy, sparking fears that participants might sell assets in advance. Meanwhile, in response to Biden's $2.3 trillion infrastructure plan, Senate Republicans proposed a $568 billion alternative on Thursday that focused on more traditional infrastructure projects and omitted the Democratic proposal for a hike in corporate profits tax.

Recent economic figures and corporate earnings were positive, initial jobless claims in the US fell to a record low since the start of the epidemic. As of Thursday, over 75% of reporting S&P 500 index constituents beat market expectations. It is also worth noting that the Bitcoin has plunged recently, falling below the US$48,000 level at the time of writing. Next week, the US Fed will hold the interest rate meeting, and the preliminary GDP for 2021 Q1 will be released. The market is expecting an annualised growth of 6.5% QoQ.

Europe

European markets fell in line with global equity markets, the UK, German, and French indexes were down between 0.31% and 1.16% over the past 5 days ending Thursday. The ECB kept interest rates unchanged and pledged to maintain its 1.85 trillion euro PEPP unchanged at least until March 2022. ECB President Christine Lagarde said that the bank would not keep pace with the Fed, and the central bank is not considering phasing out the PEPP at this time. Eurozone economic data improved, with the Eurozone consumer confidence indicator rising to -8.1 in April, beating market expectations. Next week, Europe will release the preliminary 2021 Q1 GDP and the April inflation data.

China

Chinese equities performed relatively well this week, with the CSI 300 Index rising 3.41% for the week. Hong Kong markets also rebounded on Friday, the Hang Seng Index ended the week in green, logging a gain of 0.38%. It was reported that the People's Bank of China (PBoC) was considering a third-party buyout of Huarong's $100 billion assets, bringing clarity to the "Huarong debacle" that had plagued the Chinese offshore bond markets, meanwhile Huarong International also announced a turnaround in its first quarter results. Separately, Anta Sports and Meituan, two companies that announced share placements earlier, also rebounded for the second consecutive day, easing market concerns. Next week, China will release official manufacturing and non-manufacturing PMI data for April.