Weekly View - 25 years on

Last week, China celebrated 25 years since the 1997 Hong Kong handover from the UK. In the same week, Chinese purchasing manager indexes (PMI) for June improved as the country reopens and economic activity resumes while one of the troubled Chinese property developers, Shimao, missed a USD1 bn bond payment. Elsewhere in emerging markets (EM), Sri Lanka’s consumer inflation reached an annual 54.6% in June on rising fuel and food prices and shares in Russia’s Gazprom fell 25% after its management decided not to pay a dividend. We are positive Chinese equities but favour selectivity in broader EM and are negative on high-yield bonds.

In Europe, this month marks the 10-year anniversary of Mario Draghi’s famous “whatever it takes” speech. Last week, European inflation surprised to the upside and we expect it will peak in Q3 2022. Italy remains a concern for the European Central Bank (ECB) as it issued 10- and five-year bonds last week at the highest rates level of the last five years in contrast to German two-year Bund yields, which swung the most ever in one week. We expect more detail around the ECB’s stability tool later this month. Meanwhile, Russian foreign minister Sergei Lavrov discussed the return of the ‘Iron Curtain’ with reference to Nato, as the territorial defence alliance met in Madrid to discuss expansion via Finland and Sweden, while Japan, South Korea, Australia and New Zealand agreed to cooperate with Nato on cyber defence and maritime security. Nato member Poland completed the construction of a steel wall on its border with Belarus to prevent massive inflows of refugees from its neighbour and Russia consolidated its control of the Luhansk region after capturing Lysychansk. We expect geopolitics to continue to dominate headlines.

Now behind us, the first half of 2022 was the worst for US equities in the last 50 years. Equities suffered another negative week but were somewhat cushioned by the compression in bond yields, which supported valuations. Discouragingly, US PMI and consumption numbers came in lower last week. At the corporate level, US-based Micron Technology revised down its earnings forecast, indicating that chips demand is slowing. The consolidation process in cryptocurrencies started, with one platform filing for bankruptcy after it failed to pay out USD80 mn to its customers. Bond yields across all maturities declined rapidly. We are neutral on US duration. This week we await US employment numbers released on Friday and wish all a Happy Fourth of July.