RESEARCH REPORT For April 2018

Transcription

1 RESEARCH REPORT For April 2018

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3 APRIL mostly tumbled through political ups-and-downs but most developed markets still managed to capture rebounds after the Februarysince corrections. Easily, we could see from below that the developed markets had an overall positive performance, namely a 1.02% rise in MSCI World Index. On the contrary, MSCI EM Index lagged behind with a 0.41% decline as the appreciation of USD had a significant impact to EM s capital flow. As a result, there were dramatic sell-offs in the emerging markets in which Vietnam lost over 10% in the month. On the other hand, European stocks benefited from the loose monetary policy and their pleasant earnings figures to have led near 7% increase in France. For now, market corrections have lasted long enough to have deepened the crack in this decade-long bull market and multiple concerns have kept investors on edge. South Korea UK Hong Kong India MSCI ASIA Vietnam MSCI EM Nasdaq Japan MSCI World Taiwan Germany Singapore Indonesia Dow Jones France Malaysia Thailand Shanghai Australia Brazil Russia % -0.41% -1.73% -3.14% -2.48% 3.24% 6.42% 2.38% 6.65% 1.03% 0.04% 6.19% 1.02% 4.26% 5.42% 0.25% 6.84% 0.76% 0.75% 3.88% 0.88% 1.42% 3-12% -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% Heads Up in April after All the Struggles

4 Surge in Crudes was Yet to Stop 12% 8.96% 8% 5.59% 4% 1.36% 0% -0.77% -4% -2.97% Gold Crude Oil Platinum Copper Wheat Let s look at the commodities for the moment. When North Korea agreed on completing denuclearization, gold prices tipped down. To say the least, gold has been trading more as a currency than a commodity as the physical demand is yet to overcome the counter-influence from USD. Thus, we believe the greenback s rebound could set ceiling for gold. Meanwhile, OPEC oil production dropped in Venezuela while the U.S. was planning to exit Iran deal and re-impose sanction on Iran. These together pushed international oil prices upwards to have struck a historical high of $70 in early May. By and large, the bullish impact on crudes would most likely last in the near term as Donald Trump plays on. It s true that the crudes are climbing to heat up the inflation worries, and the U.S. 10- year bond yields soared through 3%. Yet, it s not time to worry still. The upward moves on rates and inflation anticipation are normalizing events which weigh much more on the market sentiment than anything else. Besides, take a closer look at the greenback s rebound trend. Now as it moved further away from the bottom, it became more certain that the market has priced in the impact from the Fed s rate hikes. Lately, as inflation anticipation warms up amid tentative bond yields, the USD shall have strength to continue its appreciation in the short while. In the near term, uncertainties overwhelm among trade wars, the Middle East and more. As fluctuations prolong, we believe that the market would hardly be directional now. As the market runs along under the robust economic fundamentals, the possibility of regaining a market trend shall come to the horizon soon. 4

5 THE THREATENING OIL SURGE Of all deals Trump has backed down from, the latest one certainly brought the least disgrace. As soon as the U.S. decided to leave the 2015 Iran Nuclear Deal and re-imposed sanction to Iran, it would make every sense to see fears overwhelming. To our surprise, the market reacted the other way to have led a rebound shortly after a boost in oil prices. Isn t the delightful peace from the exceptional summit of the Korean peninsulas helping? Or is it just the prelude before another nuisance? What could follow, possibly? Back to oil; let s take into account the facts. Indeed, the U.S. has already exited the Iranian oil market long since the country first imposed sanction on Iran. So, the U.S. is the one to make the call but the ones that are to take actions are those that still deal with this third largest producer in OPEC, saying Europe for the least. Easily, the climbing oil prices could draw a lot pressure to these buyers. One may wonder as it s like the U.S. meant to penalize them for not following the first sanction. Still, the buyers still have every right to refuse to curb imports, literally, but the political consequences might be their necessary sacrifice. In the last resort, IEA, the oil consumers group, could very well request its members to release supply from their strategic reserves as to offset the oil market tightness. 5 Simmering Tensions in Oil Market

6 Despite any able offsets the consumer nations could get on hands, upward pressure is still non-negligible in reflection of higher uncertainty and tensions. Beyond doubt, any increase in crudes prices would send inflationary pressures to the graveyard again and that is nothing the U.S. or the worldwide markets would like to see. So now, what are the true out-of-book intentions of Donald Trump? What Thoughts go on in Trump s Mind, Again? For now, the U.S. made it clear that they are taking immediate actions which say sanctions subject to 90 and 180 wind-down periods. Such strong statements are likely to complicate the diplomatic efforts to further negotiations on the nuclear deal as well. If we never knew the history of Trump s doings, panic could be all on. But as history tells, Trump has always been fond of ensuring massive chaos before giving certain grounds on implementation. The tariff dispute was in fact a wonderful example. Thus, many expect that the White House would dilute or delay the sanctions on Iran. After all, it s Trump s style to pave ways for deals by the end of disarray. Therefore, we are confident that equity markets could most likely withstand the modestly higher oil prices. The harsh remarks from Trump could be a signal of their stance in other negotiations, including but not only the trade talks with NAFTA partners and China. It could also set example for the upcoming conference with North Korea. All of which are market sensitive matters and could create geopolitical risks to shaken the investment climate. 6

7 EUROPEAN ECONOMIES BROADLY CALMING GROWTH Things haven t changed much in the Euro Area in April where most sentiment indicators have fallen, bringing up wonders as if the economic upswing would finally grind to a halt. Anyhow, the slowdown in growths is sending out a strong signal, below are more details. First to look at, the upwardly revised Manufacturing PMI stood at 56.2 last month, a little up from the preliminary estimate. In particular, the reading indicated the weakest growth in factory activity since last March. Meanwhile, business confidence of the area dropped from the prior 1.44 to the latest In sense of inflation, the annual consumer prices are expected to grow slower with a 1.2% increase on year. This is to compare with March s 1.3%. Besides, the core CPI is estimated to fall from 1% to 0.7% to be the lowest in a year. In general, the economy showed a trimmed outlook as the GDP growth got weaker. Latest quarterly expansion was 0.4%, largely lower than the constant 0.7% quarterly rise in Normally, the likelihood of weaker demand from China thanks to the trade disputes has been giving some pressure to Europe which capped the growth for now. However, we continue to hold an overall positive outlook in the area s economy. 7

8 It is true that the growth is fading thanks to the earlier strength in Euro but the key is whether the pace ahead would retain. Compared to the U.S., Europe still enjoys an earlier stage of the economic recovery, indicating that the area has the strength to secure a more durable rebound among the developed markets. Brexit, a Gloomy Ride on BoE In digest, we believe that the pullbacks in growth momentum could be temporary and the recent rebound of USD shall shed some more light on the outlook. As so, the Eurozone s economy shall continue to benefit from the ECB s expansionary monetary policy amid the mild inflation while the strong earnings figures could provide further support to the financial markets. Brexit s road has always been bumpy and lately, the uncertainty is leaving the Bank of England on hold. Over some time, the UK unemployment rate has stayed at the lowest levels in 40 years, adding that the inflation is meeting target, the BoE shall have no difficulty in raising the rates in the recent meeting. However, there are signs that Brexit has been shadowing over the country s economy and kept BoE idle. From the graph below, the UK apparently underperformed its largest trading partner, the Eurozone, last year which is the first in a decade. This implies the fact that the UK economy is problematic domestically. Embracing the above factors, in April, Europe was the strongest performer amongst the fairly volatile global environment where Euro STOXX 50 Index secured a 5% return and it is our belief that the rebound could sustain for a while in the near term. 8 One of the highest walls to climb is the political struggles within the country itself. As the pro-soft Brexit stance that PM Theresa May holds isn t welcomed in the Parliament, the talks with EU could only be more challenging ahead.

9 THE UNITED STATES ANY ROOM FOR MORE ECONOMY STIMULUS? Broadly speaking, the country s growth was fairly fine as we saw the GDP expanded 2.3% in the first quarter of The reading was below the previous but beat the market consensus. More details follow. In April, the US Manufacturing PMI stood at 56.5, up from the prior Within, the reading marked the fastest expansion in the sector for 2 years and more. Also, the month s growth was mainly driven by the strong output and new orders growth whereas business confidence pulled back to 57.3 after spiking through a three-year peak last month. Non-Farm Payrolls jumped by 164K which was well below the market expectations of 193K as the month s job openings hit record high. Meanwhile, April s unemployment rate fell further to 3.9%, marking a new trough in the 21st century. At this point, inflation resurfaces in the US as the consumer prices and that less energy and food both edged up, to 2.5% and 2.1% on year respectively. Eventually, the core inflation rate met the Fed s target at 2% that backed the Fed s confident stance and more rate hikes ahead. For now, the economy has warmed up that might tighten room to take in further stimulus like tax cuts in the future. 9

10 Uphill Ahead? Or a Continued Slope Down? As said, April was troubled for the US where the stock market leaned more on the downside than the upside. In S&P 500 Index, two legs were made a little below 2,600 since January s peak and that was a level the market has been testing lately. The market could be more vulnerable to a downturn if the level is touched again in the recent sell-offs. Luckily during the month, the US equity market secured levels above that and went range-trading within the year s downward channel in April. After April s struggles, fortune looks set to come back in the early May. Now, the watch out is whether the US stocks could sustain above the 200-day moving averages and break the downward channel. If so, it would occur to be a strong support for the market rebound and worries could very well back 10 down. Pricey Oil, a Trigger to Speed up Rate Hikes? Despite the political turbulences and differences, the Fed s rate hikes and balance sheet shrinking are always under the spotlight. Recently, while inflation anticipation warms up in the face of surging oil price, the increased inflationary pressures might change minds in the Federal Reserve s office. As a matter of fact, there were some actual changes among all. To look back, only a small fraction of FOMC members agreed on the estimate of over four rate hikes in But now, more than a half of them are looking at 4 or more hikes this year. To say so, the reemergence of inflation will be the crucial key to bring in a faster rate hike cycle. June s FOMC meeting and the decision on interest rates by then would bring much more insights to the market.

11 CHINESE ECONOMY TOUGH GROWTH AMID DELEVERAGING Despite ongoing trade tensions are still underway, the strong foreign demand and healthy domestic consumption shall bode well for the economy. Also, the National People s Congress gave a clear intention to maintain a stable and balanced macroeconomic environment. The outlook could be less cloudy for now. In April, Caixin China Manufacturing PMI was a little up from the previous month. The reading at 51.1 also beat the market expectation of Reviewing the breakdown, output growth rose slightly faster whereas new orders growth headed downwards. Trade balance widened to USD billion, which is to compare with the market consensus of USD 24.7 billion amid Yuan s depreciation last month. Moreover, the estimated GDP grew 6.8% in the first quarter of 2018 which was pretty tough compared to 6.8% in 4Q17 despite the government s shift in policy direction to tackle financial risks. PBoC s Governor Yi Gang believed that China could achieve stronger-than-expected growth in the quarter, meaning to assure that the monetary and liquidity policies carried out have been appropriate. Revolutionary policies are leading the economy its way to the brighter side but during which, sacrifice would be the must forgone. 11

12 April in a nutshell, Shanghai Composite further declined by 2.48% towards 3,082 under the shadow of the continued Sino-US trade wars whereas Renminbi tipped down a little by 0.69% in the face of the greenback s rebound. Looking further, the fundamentals remain supportive and cash flows are improving, there shall be ground for rebound in the equities soon. The MSCI inclusion of China A-shares would be a close watch out for the moment. As for the People s Bank of China, some supportive policies have made appearance as the central bank announced the revised asset management regulations. Banks could now have more time with the new requirements, thereby relieving the near-term credit and capital charges pressures. Trade Wars, the start of Cold War II? Trade wars are not only bringing uncertainties to the country s economic growth, the consequences could go else and far. Bans on suppliers like the major telecom producer ZTE, not only disrupt the domestic trades but have its consequences inevitably extended to the global supply chain. 12 Now that the negotiations aren t going well, the political implications could be huge. Apparently, China s best chance now is to delay any constructive promises or deals as to allow time and await an easier negotiator after the next US election. Normally, any efforts to change the trade balances could not be swift and we shall see trade talks to go on in the few years ahead. It is noteworthy to know another truth. As the financial stimulus in the US continues, the discrepancy between the country s investment and savings would be enlarged. Hence, the national deficit would further increase and Trump would argue for a fairer trade again. Here we could see the possibility of entering a vicious cycle. In the near future, we could stay tuned for the visit Beijing is paying to the United States in May.

13 COMEBACK OF THE GREENBACK Political dismay didn t sideline the USD for the month and made sure it could retain a vital say in the financial markets. Long-awaited, the greenback is finally making a comeback, though probably temporary and merely technical-based, but the look of it is sufficient to cause pain many where. Technically speaking, the rebound is likely to look for support at 92 where the USD Index is trading at currently, which is the Fibonacci 23.6% retracement level from 2017 s downtrend. Nonetheless, the Fed saw inflation over its target level and the US wage growth calmed a little, the rebound could be more subtle lately. Coupled with the Fed s rate hikes, the actual pressures lie far from the US itself and the capital out flux from EM is a prime result of it, in which some are particularly vulnerable like Argentina and Turkey. Both of them have problematic finance with large national deficits amid rising inflation, making them desperate to seek exit by questionable economic policies. In turn, the local markets were upset and Argentina needed to hike the official interest rates to 40% in defense of its currency. The matter isn t a single one as the burden is shared among EM. Thus, we expect a bumpy ride ahead in the region, especially when combined with elevated geopolitical risks and slowing rising inflation. 13 End of Global Liquidity Flood, Emerging Markets the First Hit

14 Asian Markets in the Aftermath Under the era of gradually increasing interest rates, most central banks are chasing hard to follow the rate steps. Within, Hong Kong is particularly attached to the Fed s rate hike cycle thanks to the Linked Exchange Rate system it has with the US. As such, Hong Kong Monetary Authority was forced to inject and buy HKD in defense of its currency. 14 Around the world, bond yields are taking in a gradual uptrend while the US 10-Y bond yield already struck 3% whereas the economy basis is still solid. In this case, we believe that the equity markets shall be ready for retrieving the upside. The momentum of the recent market rebound would be a crucial watch out.

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