The epidemic continued to spread across emerging markets, with major EM economies like Brazil, Russia and India claiming the next 3 places for total covid cases after the US, yet local governments still continued to proceed with their original reopening plans. With the second wave outbreak underway, one might be concerned over its economic impact on the recovering economy. As repeatedly mentioned, with the epidemic as an example, emerging markets will continue to face extended external risks, which would serve as the main concern over investing in the region.

Betting on a gradual recovery in the global economy, emerging markets pose as a more attractive alternative with stronger rebound potential, considering the developed markets’ higher valuation. If the market sentiment continues to improve and the epidemic situation does not significantly worsen, we could possibly see EM outperform DM in the short to mid-term. Among emerging markets, we continue to see Asia markets as a better option over Latin America, prioritizing the Vietnam market in particular for its stronger secular growth.

Entering the third quarter, as global concerns over the epidemic gradually die out, bonds became a less attractive option. Given the current low risk free rate, even with a widening credit spread we can still only earn limited return, unless we venture in the higher yielding bonds on the riskier side.

Therefore, one should be more selective in choosing bond names, with more emphasis on the credit quality itself, and eyeing for better opportunities when they arise. Possible yield enhancing options include new fallen angel bonds, which often give rise to one-off opportunities; specific company news regarding market events could also give rise to unique opportunities to further enhance yield without overly compromising risk control in the portfolio. Simply put, for investor investing in bonds, bear in mind the importance of quality when seeking risk diversification, while shorting duration when seeking extra yield.

The epidemic situation stayed relatively steady. Even though there are sparse cases in mainly in the metropolitan regions like Tokyo, the government saw limited concerns over another major outbreak, reopening continued and economic activities gradually picked up. However, with the pandemic ongoing on the global scale, key sectors like tourism and retail continued to suffer, May tourist figures even logged a staggering 99.9% drop YoY.

While the investment market should continue to receive support from the Bank of Japan, as outlined by weak leading economic indicators, the real economy is not expected to significantly improve in the short to mid-term. Thus, we will continue to take a neutral view over the market.

With that out of the way, Brexit matters are finally back on the table. Currently, the negotiations are in a deadlock, as both sides have yet to reach consensus on several key issues including fisheries and court matters. With the transition period not extending, corporations are worried that there will be a no-deal Brexit as both the Prime Minister Boris Johnson and the Bank of England suggested.

Economically, Europe is still in limbo. Despite the continued uptrend, global demand remains far from a full recovery, various indicators still show a contracting local economy. Disregarding the limited positive signs, fundamental weakness and Brexit concerns should continue to haunt the investment market, we would not suggest significant investment in the region.

Apart from a few isolated infection groups in Beijing and Anxin County, China has left the epidemic cycle early, far leading other countries who are still struggling to kick start their economies. Leading indicators hinted at an improving economy, all PMIs are in the expansion zone for 2 months in a row, with the Caixin services PMI even rising to a 10-year-high.

However, even as various economic indicators like retail sales and export figures indicate visible bottoming out in the overall economy, these figures remained lower than pre-crisis levels. With the politburo stressing the importance of stability and livelihood guarantees, the overall economy is still expected to significantly slow down for the year. Therefore, choosing the right sector is more important, with the Chinese “new economy” sector expected to grow at a higher pace insulated from market conditions, we would hold the sector to higher regards in the mid to long-term.

The second wave outbreak in the US was geographically widespread, while previous epicentres like New York and New Jersey did not see the local cases skyrocket, states like California, Texas, and Florida saw infection figures jump, raising concerns over possible economy shutdown again in near future. However, recent statements from the White House indicated that the administration do not intent to adopt any plans that might damage the economy.

As the epidemic news are mostly digested and reflected in the market, subsequent negative news did not trigger significant correction in US equities. Instead, markets slowly rallied in anticipation of more fiscal stimulus, as it was widely reported that more are on the way awaiting bipartisan action. With economic indicators like PMIs and confidence board indexes showing visible improvement, we see limited downside in the overall economy. That said, with the valuation levels at such dizzying heights, selection is the key; we expect technology and healthcare sectors to extend their great performance with robust earnings and strong fundamentals.

USA

The United States reported more than 62,000 new Covid-19 cases on Wednesday, setting a new record high. Global covid-19 cases continue to rise, yet US president Donald Trump threatened to withhold federal funds unless schools reopen. As markets continued to be concerned over the second wave infections, the Dow and the S&P 500 fell 1.39% and 0.56% respectively on Thursday, while the NASDAQ gained 0.53%. Earlier, Federal Reserve Vice Chairman Richard Clarida said the fed is ready to adopt clearer forward guidance and increase asset purchases if the situation calls for it. The US will release the core CPI, initial jobless claims, and the Federal budget next week.

 Europe

European stocks retreated, the UK, French, and German equity indexes fell 0.94% - 3.06% over the past five days ending Thursday. Most European countries have restarted their economies, the UK also announced a new stimulus plan of 30 billion pounds. Against the background of the gradual recovery of economic activities, the market focus has shifted back to the Brexit trade talks. The EU Brexit negotiators said that there are still key differences between both sides, and they also pointed out that the whole Brexit fiasco will bring greater damage to companies than the covid epidemic; Still, the UK Prime Minister Boris Johnson claimed they are well prepared for a “No deal Brexit”. The European Central Bank will hold an interest rate meeting next week, President Lagarde hinted on Wednesday that the policy rates will remain unchanged.

China

Since the start of the third quarter, the Chinese and Hong Kong stock markets saw heated trading. The turnover of the Shanghai and Shenzhen stock markets broke through the one trillion yuan mark, and the total margin balance also exceeded 1.3 trillion, reaching a 5 year record high. The CSI 300 Index soared 14.15% since the start of July and gained over 7.55% this week. Although the Hang Seng Index did not perform as well as A-shares did, it has also accumulated a gain of 5.32% MTD and 1.40% over the week. China announced that its foreign exchange reserves increased to 3.112 trillion USD in June, aggregate financing figures also increased in June. As for Hong Kong stocks, on the one hand, the HKMA continues to inject capital into the banking system. On the other hand, it was reported that the HSI will launch the "Hong Kong version of the Nasdaq", driving market speculation on new economy stocks such as ATMX. Next week, China will announce its 2020 Q2 GDP growth, market expects the YoY figure recover to 2.5%.

US

The strong US employment data overshadowed market worries about the second wave of covid epidemic. Under the increased risk appetite, global stock markets went up. Over the past 5 days ending Thursday, the three major US stock indexes were up between 1.5% and 2.3%. The number of covid cases in the US increased by more than 56,000 on Thursday, which was the largest increase since 9^th May, worth noting that Chairman Powell of the Federal Reserve mentioned that curbing the epidemic is very important for economic recovery. The US employment data released on Thursday were encouraging, June nonfarm payrolls increased by 4.8 million, well above market expectations of 3.23 million, the unemployment rate also fell to 11.1%. It is reported that the Democratic Party in the United States is planning to enact a new round of stimulus, and Treasury Secretary Mnuchin and Republican senators hoped to complete the legal procedures before the end of July. The US will announce the June ISM non-manufacturing PMI next week, market expects that to rebound to the 50 level.

 EUROPE

European equities also had a good performance. Over the past 5 days ending Thursday, the UK, French, and German indexes rose between 1.3% and 4.3%. With regards to the restarting economy after the epidemic, the UK will reopen pubs, restaurants and hotels on July 4th, market sees this as the right step towards an economic recovery. The Brexit trade talks ended early, both sides will continue to negotiate, the top EU negotiator said it is still possible to reach an agreement. In addition, the German parliament openly supported the European Central Bank’s bond purchase plan, breaking the earlier legal deadlock. The leaders of the 27 EU countries will meet at the summit held on 17^th – 18^th July, discussing the details of the 750 billion Euro economic recovery plan.

CHINA

This week, China and Hong Kong stock markets had a strong showing, A-shares’ performance in particular were outstanding. The CSI 300 index rose 6.78% over the week, while the Hong Kong HSI gained 2.39%. Chinese data released this week were mostly positive across the board, the May industrial profits YoY improved from negative 4.3% to positive 6.0%; the June official manufacturing and non-manufacturing PMIs, and the Caixin manufacturing and services PMI were all better than the previous value. Next week, China will release data such as foreign exchange reserves and CPI figures for June.

United States

Recently, both incidents of the intensifying Sino-Indian border conflicts and the rising North-South Korea tensions have garnered much market attention. According to the latest info, after bilateral talks, China has released 10 Indian captives, seemingly implies that Sino-Indian tensions are cooling down. On the other hand, the epidemic situation once again drew market attention. We saw a rapid increase of new covid-19 cases in some US States, while the local Beijing government also identified a serious epidemic situation in the city, market fears grew over the possible second wave outbreak. Nevertheless, we have yet to see the epidemic situation and geopolitical developments bring great impact on the investment market. In the US, the Fed announced earlier that it began purchasing corporate bonds, other sources reported that the White House is drafting a trillion dollar financial stimulus. With the uplifting US retail figures, US stocks put an end to the recent correction, and the NASDAQ rebounded, challenging the 10,000-point level. Over the past 5 days ending Thursday, the Dow and S&P 500 rose about 3.7%, while the NSADAQ gained nearly 4.8%. The US will release data such as manufacturing PMI and core PCE next week.

 Europe

European stock markets followed global markets and rebounded. Over the past 5 days ending Thursday, the UK, French, and German stock indexes rose between 2.4% and 3.0%. After the interest rate meeting, the Bank of England (BoE) kept the interest rate unchanged at the record low of 0.1%, announced a £100 billion increase in the scale of asset purchases, but will slow down the rate of purchase. In the BoE statement, it was reported that the recent data implied that the UK economy had started its recovery since May, so the Q2 GDP contraction may be less severe than the earlier forecast. Leaders of EU member states held a video conference on Friday to discuss the 750 billion euro economic recovery plan, EU budget commissioner expects the plan to receive support from all member states in July. Eurozone will release data such as manufacturing PMI and consumer confidence index next week.

China

Despite the risk of a second wave outbreak in Beijing, Chinese and Hong Kong stock markets still saw gains, the CSI 300 index rose 2.4% over the week, while Hong Kong stocks also rose around 1.4%. As the number of second wave infections in Beijing reached 180, the local government implemented preventive measures, such as school closures and restoring local community control measures, most flights in and out of the city are also cancelled. As for the Sino-US trade relations, after both sides met in Hawaii, American officials said China reiterated its commitment to fulfil the first-stage trade agreement. Next week, China will announce the latest LPR interest rate, market expects a slight drop of 2 basis points to 3.83%.

We continue to expect fixed income to yield positive returns over the year, under the effects of uncapped quantitative easing, bond prices should continue to appreciate amidst the uncertainty in global economy. Since the restart of the QE programme in March, the Fed balance sheet has ballooned from around 4 trillion to over 7 trillion US dollars. This means around 3 trillion US dollars were injected into the market via asset purchases of open market bonds, providing solid support to the general fixed income market.
In light of the economic uncertainty and increasing tensions across the globe, we see two main reasons for investing in the fixed income market, allocating a portion of the investment portfolio in bonds can help improve risk diversification and reduce overall adjusted risk profile, while still providing yield enhancement over holding cash. With the uncertainty in the economy, the low yields in treasuries, and possible inflation pressure in emerging markets, we would opt for quality in general, and short on duration if we seek additional yield. Hence, we like investment grades for risk diversification, and Asian short duration names for yield enhancement.