- Equities: US stocks posted modest gains and European markets rebounded on policy easing hopes, while Asian markets were mixed
- Credit: The risk-reward in extending duration is now more favourable. We advocate a barbell duration strategy to lengthen portfolio duration and capture yields via a combination of both short duration (1-3Y) and long-duration (7-10Y) IG credit
- FX: EUR/USD faces downside pressure in the lower half of this quarter’s 1.06-1.09 range; USD/JPY looks toppish on a year-to date basis
- Rates: Sharp widening of 10Y OAT-Bund spreads amid rising concerns over French election; US yields should be much lower in the flight to safety if not for firm ISM data
- The Week Ahead: Keep a lookout for Initial Jobless Claims; Japan Industrial Production Number
Related insights
Mixed performance across global equity markets. In the US market, the S&P 500 gained 0.6% for the week, recording its third consecutive weekly gain. Some weaker-than-expected data like employment and housing permits earlier in the week raised hopes of a potential interest rate cut by the Federal Reserve. The soft data points have sent the US Economic Surprise Index to the lowest since Aug 2022.
European stocks performed well, with the STOXX Europe 600 Index ending the week 0.8% higher, as political uncertainty concerns eased, and the outlook for monetary policy easing hopes brightened. Major stock indexes in Germany, France, Italy, and the UK (FTSE added 1.1% during the week) all posted gains. Meanwhile, Japanese markets declined, with the Nikkei 225 falling 0.6%, as uncertainty over the Bank of Japan's monetary policy trajectory weighed on sentiment. The China market is waiting for clearer signs of economic recovery and policy support. With mixed economic data, SHCOMP dipped 1.1% and the Hang Seng Index rose 0.5% for the week.
Topic in focus: Japan equities – reality check. In its 14 Jun meeting, the Bank of Japan (BOJ) announced the scaling back of its JPY6tn (USD38bn) monthly bond-buying programme, a key turning point in unwinding decades of ultra-loose monetary policy. This marks the beginning of quantitative tightening (QT), shrinking its ballooning balance sheet and paving the way for future rate hikes. While this is a positive development, especially for the weak yen, we believe the BOJ will require a few more months to assess wage performance post-Shunto negotiations, the momentum of wage-driven inflation, and the recovery in consumer demand.
Following the fiscal year ended 31 Mar 2024, it is evident that growth is projected to decline from 15% in FY23 to 7% in FY24. Having rerated from 12x earnings (-1 SD) to current levels, there will be a growing need to justify potential earnings upside before a broad-based market trend can be observed. Post-results, corporate guidance remains cautious with companies expected to face margin pressures. In such an environment, we continue to stay neutral on Japan equities. AI adoption will boost the semiconductor and IT services sectors, while financials remain the best investment opportunity because of interest rate normalisation.
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