Weekly Market Summary

💡1. European equities dropped and euro zone government bonds sold off as the bloc’s central bank outlined plans to raise interest rates in the face of record-high inflation. The European Central Bank said in a monetary policy statement that it would lift its main deposit rate from minus 0.5 per cent by a quarter points in July and by another unspecified amount in September. The 10-year US Treasury yield, which moves inversely to the price of the benchmark debt security, was steady at just over 3 per cent, reflecting money market bets on the Fed lifting its main interest rate above this level next year. Meanwhile, the World Bank data show that foreign debt in low-income countries rose by $15.5bn to about $166bn in 2020. Foreign debt in middle-income countries rose by $423bn to more than $8.5tn, leaving them especially exposed to sharper than expected interest rate rises. Under the World Bank’s base case scenario, global growth will fall from 5.7 per cent last year to 2.9 per cent this year and 3 per cent in 2023.

💡2. For U.S. Equities to move higher in the second half of this year, U.S. inflation needs to peak, China needs to aggressively reflate, and Europe needs to counterbalance the growth shock from soaring energy costs. On this basis, experts from Merrill see improving conditions in the U.S. and China, with Europe the outlier. Rarely has the world had to deal with three seismic challenges simultaneously, requiring investor patience and focus on high-quality assets as we head into the second half of the year.

High-profile appeals over the past two weeks for a de-escalation of the conflict with Russia and a gradual easing of shutdowns in China fueled a burst of risk-on sentiment, as reflected in narrowing credit spreads, some dollar depreciation, and an equity market bounce. Still, with valuations elevated by historical standards and adversely affected by high inflation, rising interest rates, and weakening revenue growth/profit margin prospects, we can expect downside risks to valuation to persist, and Defensives and Energy to outperform.

💡3. Bonds stabilized in May which helped stock spare back losses too. Bear market news stories circulated as the S&P 500 corrected almost 19% between Jan 3rdand May 19th. The Fed cannot do much to correct supply chain issues resulting from lockdowns and the war in Ukraine, but it can soften demand. Oil and gas is back in vogue, at least on the stock market. Soaring fossil fuel prices, pushed higher by Russia’s invasion of Ukraine, have helped the shares of the world’s biggest energy majors outperform every other sector since the start of the year. Shares in UK-listed Shell, Europe’s biggest oil company, are up 47 per cent since January but the biggest winners are the US super majors.

💡4. PwC has slashed its prediction of full-year IPO forecast for Hong Kong roughly to half due to weakening investor confidence following lacklustre returns from initial public offerings so far. The company now expects Hong Kong IPOs to raise between HK$180 billion (US$22.9 billion) and HK$200 billion this year, compared with its January forecast of between HK$350 billion and HK$400 billion. The predicted number of deals tumbled from 120 to 80. Even at the high end, PWC’s new forecast means IPOs in the city would raise 40 per cent less cash than last year, when 99 deals generated HK$331.7 billion.

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