Macro:

The US unemployment rate remained unchanged at 3.6% in June from a month prior, close to its 50-year low of 3.5% in the first quarter of 2020. Average hourly earnings advanced 0.3% month-over-month and increased 5.1% from the same period a year earlier. The consumer price index gained 9.1% year-over-year in June, a record-high in over four decades, surpassing consensus for an 8.8% increase. Retail sales rose 1.0% in June over the previous month, higher than the consensus of a 0.8% gain and mainly due to rising inflation. Led by an increase in defense aircraft, durable goods orders in the United States surprisingly gained 1.9% in June month-over-month, above the consensus of a 0.5% fall, and higher than the 0.8% increase a month prior. Core capital goods orders rose by 0.5% in June, matching May’s reading.

Stocks:

Equity markets in the US and Europe are holding steady after the recent sharp correction, despite alarming news of soaring inflation, negative GDP growth, and continued market fears of a recession. US stocks had their best month in two years, aided by better-than-expected corporate earnings. The S&P 500 climbed 9.1% in July, cutting the year-to-date loss to 13.3%, while the Dow Jones Industrial Average rose 6.7% and fell 9.6% year-to-date. The Nasdaq Composite Index saw a 12.3% gain in July, recouping more than a third of the losses it suffered in the brutal first half of 2022.

Rates:                                                                        

The 10-year U.S. treasury yield decreased by 36.42bps during the month as the Federal Reserve hikes interest rates by 75bps, the fourth time interest rates have increased this year to fight inflation. The 75bps increase was in line with the market’s expectations and the Fed also signaled a possible third consecutive large increase at the next FOMC meeting at the end of September. The 2-year U.S. treasury yield closed at 2.88% and has exceeded the 10-year rate since July 5. The People’s Bank of China kept the five-year loan prime rate and the one-year loan prime rate unchanged at 4.45% and 3.70% respectively, in line with market expectations. China’s overnight repo rate fell below 1% in the month, in another sign that much of the liquidity the PBOC is providing is sitting in the banks. This underscores the difficulty Beijing faces with boosting growth, ample liquidity is failing to stimulate demand, which remains weak due to the nation’s Covid-Zero strategy and growing housing crisis. The European Central Bank increased interest rates by 50bps, exceeding market expectations of a 25bps increase.

Credit:

Global bonds are headed for the biggest monthly gain since November 2020 as the market’s focus switches to a fear of recession amid rapid Federal Reserve interest-rate hikes, as reported by Bloomberg. Markets are pricing in a peak US interest rate of 3.2 percent by the end of this year and 50 basis points of rate cuts in 2023. China’s bond market is becoming the locus for global capital outflows and there are signs the government is growing concerned about the US$30 billion exodus as it delays data and seeks to manage investor expectations. Foreign funds offloaded 55.9 billion yuan (US$8.3 billion) of the nation’s debt in June, a fifth month of net sales that swelled the total outflows this year to 200 billion yuan. Demand for Chinese bonds has waned in recent months as US 10-year yields surged above 3%, while similar-maturity yields in China remained stuck in a range of 2.7% to 2.85% due to the People’s Bank of China’s accommodative monetary policy.

FX:

The Dollar Index rose by 1.2% in the month and the greenback’s gains this year have been fueled by a combination of higher central bank interest rates, haven buying, and recession concerns. It has been nearly two decades since the US dollar was this strong and there are no alternatives challenging the dollar’s status as the world’s reserve currency. The Euro depreciated by 2.5% against the dollar as the European economy tips toward a recession. The Euro dip below the dollar for the first time in the month in more than two decades. The Yen appreciated by 1.8% against the dollar as traders betting against the Japanese currency reassessed the interest rate outlook. Japan's currency has done a U-turn out of a slump that took it from around 115 to the dollar in mid-March to a 24-year low of 139 earlier this month. The war in Ukraine has accelerated Russia’s pivot east and sent local demand for China’s yuan surging, helping tame a four-month ruble rally that’s piled pressure on companies and the budget.

Commodities:

Brent crude and WTI oil prices decreased by 4.2% and 6.8% respectively during the month of July, falling for the second successive month as weakening demand expectations outpace fears of tightening supplies. Natural gas prices surged 52.2%, and at one point during the month to a 14-year high before correcting, as Russia reduced Nord Stream gas imports to Germany to approximately 20% of capacity due to turbine maintenance issues. The continued outage of Freeport, the second-largest U.S. export plant generating liquefied natural gas (LNG), till at least October also weighed on supply. U.S. gasoline prices fell by 8.5% during the month, reflecting weakness in oil prices, the main component of gasoline costs. Copper prices in Shanghai tumbled 7.1% as continued coronavirus lockdowns in China’s major cities and recession risk in Europe due to elevated energy prices undermined investors’ confidence. Wheat prices were corrected by 6.6% as the United States Spring season wheat harvest is forecasted to be a bumper crop in the forthcoming weeks. Bitcoin rallied 27.9% in July, reversing partially its decline in recent months, as the U.S. Federal Reserve indicated the pace of interest rate hikes will slow down eventually and the next FOMC meeting will be held only in the latter part of September.

Macro:

Hiring in the United States slowed sharply in December compared to November, although the jobless rate fell to a new pandemic-era low. Nonfarm payrolls increased by 199,000 compared to the Dow Jones expectation of 422,000. The unemployment rate dropped to 3.9% in December from 4.2% in November, a new pandemic-era low level and close to the 50-year low of 3.5% in February 2020. The U.S. CPI index increased by 7% YoY in December, the fastest rate in 40 years and the third month in a row that inflation topped 6%. The Federal Reserve has ceased referring to inflation as “transitory” and is planning to raise interest rates to combat the high inflation. The market has priced in three rate hikes in 2022, possibly starting as early as March.

China’s PPI grew 10.3% YoY in December down from 12.9% in November, as China's efforts to expand supply and stabilize prices continue to take effect, while US monetary policy tightening impacts on international commodity prices. YoY CPI was 1.5% in December, down from 2.3% in November, thanks to lower prices for vegetables, meat, and non-food consumer goods caused by the pandemic. China's exports maintained a robust growth rate in December from a high base and the trade surplus reached a record high of US$94.5 billion. We expect China’s exports to remain resilient as the Omicron variant may have less of an impact on global supply chains than the Delta variant.

Stocks:

The U.S. stock markets have experienced a significant selloff in expectation of tighter Fed policy in 2022. Many former Fed officials believe the Fed is behind the curve on inflation and will need to raise short-term rates more aggressively in the near term. The blue-chip S&P 500 index fell 2.2% in the first half of January. The tech-heavy Nasdaq Composite index dropped 4.8% and The Dow was down 1.2% in the first half of the month.

The A-share market has dropped for two weeks in a row, as investors’ concern about the speed of stabilization policy implementation and sluggish economic growth, expectations for US monetary policy tightening, and US stock market volatility also weighed on risk appetite. In the first half of January, the CSI 300 fell 4.3%, the SHCOMP declined 3.3% and the ChiNext Index plunged 6.1%. The market turnover remained high, with the daily average being above Rmb1 trillion. Northbound trading has registered net inflows for two consecutive weeks. In our view, we believe the market sentiment would improve with the gradual implementation of stabilization policies and favorable valuation. The impact of U.S. monetary policies and market volatility on the A-share market may be limited.

Rates:

The 10-year U.S. treasury yield increased by 27.4bps in the month as market participants begin to price rate hikes earlier and at a faster pace, with speculation about a 50-basis point moves in March creeping into discussions, according to Bloomberg. The market is expecting the Bank of England (BOE) to raise the base interest rate as soon as February from 0.25% to 0.5%. The People’s Bank of China cut the rate on its one-year policy loans by 10 basis points to 2.85%, the first reduction since April 2020. It also cut the rate on the seven-day reverse repurchase rate by 10 basis point to 2.10% and net injected 200 billion yuan ($31.5 billion) of medium-term cash into the financial system.

Credit:

The Covid-19 recession had spurred the most credit-rating downgrades in the US since the 2008 financial crisis, but corporate balance sheets have improved markedly since then. The amount of investment-grade debt being evaluated for an upgrade has swelled to $203 billion, the most since 2010, as reported by Bank of America. China called on banks to boost real estate lending in the first quarter and eased a key debt restriction for developers, a sign that authorities are becoming increasingly concerned about the industry’s liquidity crisis. The offshore dollar bond market remains effectively shut for refinancing as the record pace of defaults and downgrades for Chinese borrowers have recently sent junk dollar bond yields to a record high.

FX:

The Dollar Index fell by 0.5% to a 2-month low as the dollar came under pressure after the Federal Reserve’s Chairman speech, which investors saw as too cautious. Further disappointment came from December’s CPI numbers coming at the forecasted level although inflation rose to the highest in nearly four decades. The Chinese onshore yuan rallied to a three-year high against the dollar as robust export growth and solid investor flows supported the currency.

Commodities:

Brent and WTI crude oil prices rose by 10.6% and 11.4% as consumption has held up despite the spread of the Omicron variant of the coronavirus and possible supply disruption after attacks in the Mideast Gulf added to an already tight supply outlook. The U.S. Energy Information Administration (EIA) forecasted that oil prices will drop in 2022 and 2023 while OPEC has a different view and expects global oil markets to remain “well-supported” this year by robust demand. US natural gas prices rose by 14.7% as the market is predicting a cold snap over the next 2 weeks. US Gasoline prices rose by 8.7% as the Omicron variant appears to be milder, keeping gasoline consumption high.

Macro:

Orders for durable goods in the United States increased faster than expected. Durable goods orders rose 2.5% in November compared to October, owing in part to a 34.1% increase in commercial aircraft orders. Core capital goods orders, a proxy for private investment in equipment excluding aircraft and military gear, dipped 0.1% after rising 0.9% in October, falling short of the consensus projection of 0.7% growth.

China's manufacturing activity edges up in December ahead of economic headwinds. The official manufacturing PMI rose to 50.3 in the month, which is expected to dip in January due to stricter-than-usual anti-pollution measures to ensure clear skies for the forthcoming Winter Olympics, as well as declining demand. The NBS non-manufacturing PMI increased faster than expected to 52.7 in December, even as China battles a COVID-19 epidemic in the key northern city of Xian. Industrial enterprise profit increased 9% YoY in November, down from 24.6% in October. The decline in prices, as well as the fading of contributions from fiscal subsidies and investment income, contributed to the slow industrial profit growth.

Stocks:

Major U.S. indexes ended one of their greatest years ever thanks to accommodating fiscal and monetary policy despite the ongoing Covid pandemic together with new variations outbreaks all year. In 2021, the S&P 500 gained 26.9%, the Dow rose 18.7% and Nasdaq was up 21.4%, respectively. Vietnam stocks were the top winners for 2021, with the benchmark VN-Index rising 35.7% in the year. The trading liquidity has been rising substantially as the stock market becomes an appealing investment option against the backdrop of low bank rates, tighter government control over corporate bonds, a lack of alternatives, and economic recovery in the new normal.

In the meanwhile, A-shares significantly diverged. The ChiNext index increased by 12% in 2021, while the Shanghai Composite Index increased by only 4.8% and the CSI 300 Index decreased by 5.2%. The Central Economic Work Conference sent a positive policy tone and growth stabilization will be a new dominant theme in trading for the coming months. In our view, we believe the A-share market is better positioned to gain from different economic cycles and policies between China and other countries. Industrial and consumer upgrading will continue to boost stock market performance.

Rates:

From March 2020 to November 2021, the Fed bought over US$4 trillion worth of Treasuries and other securities. The U.S. central bank began tapering in November 2021, and decided to double the pace from $15 billion to $30 billion each month. The People’s Bank of China (PBoC) lowered the loan prime rate (LPR) to 3.8% from 3.85% in November, despite the concern over high rising PPI. China was the only major economy to expand in 2020 despite the pandemic, but growth has slowed in 2021 owing to headwinds from a festering debt crisis in its property sector and localized Covid outbreaks. Libor, or the London Interbank Offered Rate, will no longer be used for new derivatives and loans as of 1^st January 2022. The benchmark and reference rate, which had US$265 trillion linked to it globally at the start of 2021, is being scrapped in the biggest shake-up to markets since the introduction of the euro in 1999.

Credit:

Companies funding acquisitions will probably help keep U.S. high-grade bond issuance relatively strong in January, even as financial companies are cutting back on borrowing in 2022. China's property developers have mounting bills to pay in January and shrinking options to raise necessary funds. China’s dollar bond market is expected to continue seeing defaults, especially in the stressed property sector. In the past year, starting from China Evergrande Group’s liquidity crunch in September defaults among developers have accelerated. Fantasia Holdings Group, China Properties Group, and Modern Land have joined China Fortune Land Development and Sichuan Language Development on the list.

FX:

The dollar is expected to remain propped up by the Fed’s intentions to hike rates as soon as the second half of 2022, the persevering elevated inflation, supportive Fed speak, and the solid performance of the US economy. The onshore Chinese Yuan posted its second straight year of gains in 2021 and gained 2.6% against the dollar to become the best-performing major emerging market currency, underpinned by robust exports, a growing trade surplus, steady capital inflows into Chinese assets, and ample dollar liquidity onshore. The Yuan’s rising global influence is yet another sign of China’s deepening connections across the world economy.

Commodities:

US oil ended the year at almost $76 a barrel, up 55.0% in its biggest rise since 2009 when the world was still recovering from the financial crisis. Europe's Brent crude benchmark climbed 50.2% to $78, its best performance in 5 years. US natural gas prices fell by 21.1% as outputs continue to rise while gas prices in Europe drop as well due to the mild weather capping demand. US Gasoline prices rose by 15.4% as gas demands returned faster than refinery productions. Bitcoin fell by 18.9% as worries over the Omicron variant increases.

A wave of selling pressure rippled across the US and China stock markets as investors fled the overheated tech stocks which fueled a historic 5-month rally. The stronger-than-expected activity data in China and vaccine optimism supported investor sentiment, and stocks in both markets claw back strength after two weeks of selloffs. Stocks were on course for a cautious start this week as investors awaited the Federal Reserve policy meeting, on expectations that the Fed would stick with its supportive policy stance. 

Various country's CDS indexes remained relatively stable in September, showing signs of increased confidence in the recovery of the bond market. China's yuan surged to a 16-month high on economic data while the dollar dropped to a two-week low versus the yen on expectations that the Federal Reserve will keep its rate lower for longer.

Oil prices tumbled to their lowest since June earlier this month amid concerns over the future of oil demand before they recovered slightly in the second week of September. WTI crude is down 9.5% and Brent crude fell 9% this month, being the worst performers among commodities. All commodities surged this week on the back of positive data showing China’s economic recovery from the coronavirus crisis is gathering strength.