Weekly View - Tightening times

Weekly View - Tightening times

The CIO’s view of the week ahead.

Major central banks kept markets busy, starting with the European Central Bank (ECB), which failed to add clarity around any future interest rate hikes. This drove the euro to its lowest level since March 2020. In bond markets, the German 10-year Bund yield rose to 0.84%, while 30-year yields reached their highest level in three years. Meanwhile, comments from hawkish Federal Reserve officials alongside a 12.5% rise in import prices pushed US 10-year bond yields to their highest level since 2018 at 2.82%. As a result, the Japanese yen weakened further to its lowest level against the US dollar since 2015. We are positive on Japanese equities. For its part, the People’s Bank of China lowered the reserve requirement ratio by 25 basis points (bps) for large banks and by 50 bps for smaller ones. It also urged lenders to lower their deposit rates—but whether such measures will stimulate the economy remains to be seen, given the continued weakness of domestic loan demand. The Chinese central bank is trying to compensate the negative effects of strict lockdowns in cities like Shanghai. Q1 2022 Chinese GDP growth came in higher than expected at 4.8%, but key components like consumption weakened. Moreover, monthly data showed a notable deterioration towards the end of the quarter, implying a weak start to Q2. We prefer southeast Asian markets over China’s.

As European countries move to phase out Russian oil imports, President Putin threatened to redirect energy flows from the west to Asia. He also mentioned “unpredictable consequences” if the US continues to provide military support to Ukraine. This week, we will be watching the debate between French president Macron and rival candidate Marine Le Pen, which will be crucial to the upcoming presidential run-offs on Sunday. We expect market volatility to continue.

Against this backdrop, the first-quarter earnings seasons started on a positive note. US investment banks’ results were better than estimates on the back of volatile trading. Despite good numbers, investors remain concerned about future increases in provisions when the economy eventually slows. At the same time, the NFIB survey of small business sentiment fell to its lowest level in two years in March. Meanwhile, the world’s richest man, Elon Musk, offered to buy out Twitter at USD54.2 per share, valuing the company at USD43 bn. Twitter will most likely issue new shares to existing shareholders to defend itself against the hostile bid. We are positive on mergers and acquisitions activity and event-driven strategies.

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