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.

US

The market still expects more stimulus from Congress, and the recent increase in merger and acquisition activities helped improve market sentiment, driving the rebound in the US stock market. Over the past 5 days ending Thursday, the Dow, NASDAQ, and S&P 500 indexes gained 2.19%, 1.95%, and 0.83% respectively. With the US elections just three weeks away, the market is still concerned if there will be major events affecting the two candidates' prospects. Incumbent US President Donald Trump returned to work in the White House office on Wednesday after undergoing medical treatment, but countrywide polls still show Trump's support lagging behind Biden. The Commission on American Presidential Debates announced that the second presidential debate will be held in video format on the 15th of this month. As for stimulus matters, Trump called off stimulus talks with the Democrats earlier, before adding that he is still willing to support relief measures such as ones for the airline industry, and that he remained open to a larger stimulus package. The US will release CPI, retail sales and other data next week.

EUROPE

European equities followed the rebound in US markets, with the UK, French, and German stocks gaining 1.29% to 2.78% over the past 5 days ending Thursday. The market is concerned about the resurgence of outbreaks in Europe. Even with a new round of lockdown measures, the number of daily cases in many European countries is still at record highs, governments and the European Central Bank said they will provide more support to the economy. That said, European regulators admitted that it is “unlikely” that the vaccine will be available before the end of the year. As for the Brexit trade talks, it was reported that the UK will withdraw from the talks if an agreement is not reached by next week. European Council President Charles Michel also mentioned that the Brexit negotiations have reached a “critical moment”. Next week, the UK will announce the unemployment rate and the Eurozone will release the ZEW economic sentiment index.

CHINA

After the weeklong National Day holiday in China, RMB strengthened, the CNH USD rate even closed in the 6.7090 level at one point. The appreciation of the RMB drove the China A-share market up after the long holiday, with the CSI 300 index rising over 2% in a single day. Alibaba's Ant Group will be listed in two markets soon, raising US$35 billion, this will be the largest IPO in the world since Saudi Aramco’s listing. Next week, China's CPI, PPI, and import/export data will be released.

Weekly Insight September 25

US

With no signs of improvement in the global epidemic, and US officials expressing worries over the progress of economic recovery, the US stock market continued its downtrend. The Dow, the S&P 500 and the NASDAQ were down between 2.18% and 3.89% over the past 5 days ending Thursday. US Federal Reserve Chairman Jerome Powell said that the progress of the economic recovery remains "highly uncertain", as evidenced by the elevated number of unemployment claims. In addition, several officials continued to call for additional fiscal stimulus. It was reported that the White House and Congress are planning to restart the stimulus talks, and the Democratic Party is ready to draft a $2.4 trillion stimulus package, but the new downsized package is still far above what the Republican Party would accept. Next week, figures on unemployment rate, ISM manufacturing index and consumer confidence index will be released.

EU

Europe equities continued to fall, with the UK, French, and German indexes losing 3.75% - 5.49% over the past five days ending Thursday, amid worries over the reintroduction of lockdown measures due to the worsening epidemic in Europe. In the UK and France, both governments announced new restrictions in response to the new daily infection record highs. In addition, the European Central Bank President Christine Lagarde states that it will increase the monetary policy stimulus if necessary. Earlier, the Bank of England (BoE) stated that a negative interest rate policy in the future is being considered. The announcement put the Pound under pressure, but the BoE Governor Andrew Bailey explained that market participants should not read too much between the lines, stabilizing the Pound in the short term. Next week, the Eurozone will release CPI and unemployment figures.

CHINA

Weighed down by the HSBC-led banking sector, Hong Kong stocks continued to fall over the week, with the Hang Seng Index losing nearly 5% over the week; China A-shares also fell, the CSI 300 Index was down 3.53% over the same period. The market expressed concern over the Evergrande Group, as documents and screenshots related to its rumoured restructuring were circulated on the Internet recently. The Group subsequently issued a statement saying that the information was fabricated and defamatory, and had reported the case to the authorities. On the other hand, FTSE Russell announced the inclusion of Chinese government bonds into its flagship index, starting from October next year, which is expected to result in an inflow of hundreds of billions of US dollars into the Chinese onshore bond market. Next week, China will release various data including the official manufacturing PMI.

August was a relatively calm month for the Japanese market, equities continued to climb with the help of the dovish central bank. The Nikkei 225 Index gained 6.59% (6.61% in US$ terms) and the TOPIX Index surged 8.16% (8.18% in US$ terms) over the month.

The biggest news in the month is the Japanese PM Shinzo Abe’s announcing to step down from the country’s top position at the end of the month, citing declining health conditions as the primary consideration. Markets were initially concerned about the implied uncertainty due to the vacuum of power left behind in Abe’s wake, but Liberal Democratic Party elders will adopt an emergency procedure, which prevents a full party vote, likely securing a continuity of the Abe policy for the remaining term before the national polls in 2021.

The biggest question the new PM would have to answer is how the country can exit the covid crisis. When Shinzo Abe was still the PM, he was repeatedly criticised for being overly passive in fighting the covid, which ravaged across the Japanese economy and resulted in one of the most serious recessions ever. With the future of the delayed Olympics still uncertain, the upcoming leader would have to come up with a more solid framework to rejuvenate the Japanese economy. With issues and concerns unanswered, we would refrain from investing in the Japanese market.

The Bloomberg Barclays Global Aggregate Bond Index were down 0.15%, US Investment Grades lost 1.38%, while Emerging Markets US dollar Bonds and US High-yield bonds gained 0.54% and 0.95% respectively.

At the annual Jackson Hole Economic Symposium, Fed chair Jerome Powell gave a speech outlining the upcoming policy direction of the Fed. According to him, the Fed will shift the policy target from an inflation based one, to an employment and economy driven one, where inflation could go above the long term target of 2% without any reaction from Fed. Market interprets the statement as a guarantee for a low interest rates for an extended period, resulting in a much lower risk of rate hikes in the meantime, giving additional downside protection for bonds.

Moving forward, quality remains a key aspect with the difficult macroeconomic environment for businesses continuing, and we remain positive on quality Asian bonds with their better yield to risk trade-off due to the better operating environment in general. Investors should also keep governmental support in mind when selecting fixed income names, as these could cover potentially weaker businesses. As they are expected to expire sometime in the future, this could potentially expose investors to unnecessary risks.