Asian stocks rose in October, with investors remaining focused on rising inflationary pressures and the US Federal Reserve’s tapering plans. The markets’ key concern is China’s economic performance and its impact on the energy and commodity complexes.
The optimist says prices are cheap. The pessimist says prices are expensive. The central banker says inflation is transitory. We remain in the aftermath of a month where the worldview on the future of monetary policy has dramatically changed.
Asian stocks fell in September, with concerns about China’s growth outlook and the US Federal Reserve (Fed)’s taper plan being the key drivers of sentiment. For the month, the MSCI AC Asia ex Japan Index declined by 4.2% in US dollar (USD) terms.
Asian stocks gained in August. While concerns about the spread of the Delta variant weighed on markets at the beginning of the month, the US Federal Reserve (Fed)’s dovish commentary and a rebound in the battered Chinese technology (tech) sector lifted sentiment towards the month-end
The Tokyo summer Olympics have been a welcome distraction over the last few weeks and well done to Japan for hosting the games so successfully in the current environment. In particular it is inspiring to see the years of preparation and planning being showcased by the top competitors in their respective sports.
Asian stocks suffered losses in July, weighed down by the selloff in Chinese equities following Beijing’s regulatory crackdown on the private tutoring and technology-related sectors.
As we roll into the August lull, we cannot help but ask the question: Where has the reflation trade gone? Expectations were for a display of heroism by the Federal Reserve (Fed) with Chair Jerome Powell announcing his grand taper plan at the Jackson Hole symposium, but I guess we will still have to wait for the big reveal.
Asian stocks edged lower in June, partly weighed down by a recent spike in COVID-19 cases in the region. Lingering worries about rising inflation and fears of a faster-than-expected tapering of the US Federal Reserve’s quantitative easing programme also dampened sentiment.
After many years of trying to stimulate inflation, central banks are now facing inflation levels that are far exceeding recent trends. In May, eurozone inflation rose to 2% and in the US core inflation reached 3.8% (almost a 30-year high).
US Treasury (UST) yields traded in a relatively narrow range in May. Inflation fears resurfaced, prompted by rising commodity prices and a marked increase in headline consumer and producer price indices in the US.
US Treasury (UST) yields stabilised in April. Yields came off despite domestic data confirming that the US economy had gained momentum, and inflation numbers that were above market expectations. The Federal Open Market Committee statement announced no new changes to the direction of monetary policy but offered a more upbeat tone on the outlook.
The global credit market saw a positive start into the year in Q12021 as spreads continued to tighten. However, total returns were negatively impacted by the global move toward higher rates. At the beginning of 2021, cyclical sectors came back to the forefront and outperformed. Energy and automotive sectors were among the winners, while utilities lagged the rally.
The UST yield curve steepened further in March as stronger-than-expected domestic economic data prints, passage of the US dollar (USD) 1.9 trillion stimulus package and a ramp-up in the rate of US vaccinations amid slowing daily infection rates prompted investors to increasingly price in accelerating growth in the coming quarters.
Following a tumultuous 2020 marked by the COVID-19 pandemic, global growth in 2021 is expected to improve on the back of positive vaccine developments and continued government measures. However, the pace of recovery is likely to be uneven among economies and fears of a resurgence of COVID-19 linger. It would be presumptuous to say that we are finally out of the woods.
The potential return of long-muted inflation sparked a meaningful jump in US Treasury (UST) yields in February. Fears of rising price pressures were prompted by the combination of robust domestic data, positive development on the COVID-19 vaccine front and an anticipated increase in US federal spending. Overall, 2-year and 10-year yields ended the month at 0.13% and 1.41%, respectively, about 1.9 basis points (bps) and 34 bps higher compared to end-January.
The Australian bond market (as measured by the Bloomberg AusBond Composite 0+ Yr Index) returned -3.58% over the month. The yield curve steepened dramatically as 3-year government bond yields ended the month 1 basis point (bp) higher at 0.12%, while 10-year government bond yields spiked by 79 basis points (bps) to 1.92%. Short-term bank bill rates were marginally higher.
The US Treasury (UST) yield curve steepened in January. The prospect of increased federal spending in the US prompted a sharp upward move in UST yields at the start of the year.
The Australian bond market (as measured by the Bloomberg AusBond Composite 0+ Yr Index) returned -0.42% over the month. The yield curve steepened as 3-year government bond yields ended the month flat at 0.11%, while 10-year government bond yields rose by 16 basis points (bps) to 1.13%. Short-term bank bill rates were unchanged.
The Australian bond market (as measured by the Bloomberg AusBond Composite 0+ Yr Index) returned -0.27% over the month. The yield curve steepened as 3-year government bond yields ended the month flat at 0.11%, while 10-year government bond yields rose by 7 basis points (bps) to 0.97%. Short-term bank bill rates were largely unchanged.
The US Treasury (UST) yield curve steepened slightly in December. The UST 10-year bond yield rose 7.5 basis points (bps) to 0.915%, while the 2-year bond yield fell by 2.7 bps to 0.122%. Concerns in the month revolved around rising COVID-19 cases in Europe, particularly in the UK, and over the uncertainty of fiscal stimulus in the US.
As European Commission President Ursla von der Leyen announced the free trade agreement with the UK and the EU, she quoted T.S. Eliot: “What we call the beginning is often the end. And to make an end is to make a beginning. The end is where we start from.” Well, with the end of 2020 we certainly have a new year to look forward to, but it feels we are more like in the middle of this unsettled time than at an end.
Despite the devastating human and economic toll caused by the COVID-19 pandemic across the globe, and in many emerging economies in particular, emerging market debt investors were rewarded with positive returns in 2020, with local currency, external sovereign and corporate bond indices posting returns in excess of 2.5%, 5% and 7%, respectively.
We can head into 2021 with New Zealand the envy of many. But it remains to be seen how long this euphoria will last. Agriculture and horticulture are both promising, and the technology sector has been touted as the next big thing, but without a new major driver of growth, there’s no guarantee that our economic reality will match our ambition. Leveraging New Zealand’s exposure to fast growing economies such as China remains an important economic recovery strategy. But our greatest hope for emerging successfully from this period of wider “confidence slump” is that the low and plentiful cash stimulates risk taking and stimulates the economy, propelling New Zealand into its next phase of prosperity.
We expect North Asia to continue to lead the region’s recovery (at least in the first half of the year). But we also expect the growth divergence between North Asia and the rest of the region to narrow. Unprecedented fiscal support from governments have been pivotal to the ongoing recovery. We expect fiscal action to continue in the coming year but anticipate renewed private sector confidence as the vaccine becomes broadly available and provides a powerful tailwind to regional growth.
We expect Asian credit spreads will tighten gradually over the coming months, supported by a solid rebound in gross domestic product (GDP) growth for most Asian economies in 2021 and stable to slightly better corporate credit fundamentals.