US equities dropped this week, partly driven by the news that China could restrict the use of Apple’s iPhone by government employees. Owing to the expectation of a longer period of high rate, 10Y treasury yields remain high, weighing on equities.
CPI: All eyes on the consumer price index (CPI) data in the US next week. The current market forecast of headline CPI is 3.6%, which is slightly higher than last month, meaning there is a larger chance of rate hike in the coming meetings. Markets are pricing a 35% chance of a rate hike in November.
Yen: As the US Dollar Index (DXY) reached a 6-month high, Japanese yen weakened to a 10-month low level. The Finance Minister in Japan said that they will respond appropriately to the volatility in the currency market. The main reason for the yen depreciation is the US-Japan interest rate differential, while whether they would take further action about the interest rate remains questionable.
Oil: Oil prices jumped to the highest level since the start of the year this week. The trading sessions have been volatile as the market participants are oscillating between optimism over the soft-landing scenario in the US and fears over the weaker economy in China. Inflation and labor market data in the US are favorable, while the economic and credit data in China are disappointing.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
UBS: The recent drop in Apple due to the ban of iPhone by China has made the risks of the concentrated US stocks more explicit. The gains from this year are dominated by the mega-tech companies, and it is critical to mitigate the risks by shifting the focus to equal-weighted indices, less vulnerable tech stocks and equities in the lagged emerging markets.
Bank of America: While investors are shifting their focus to non-US equities for diversification, they should be aware of the concentration and composition of the indices in other countries. Markets believe that S&P500 is too concentrated, with the top 10 firms accounting for 31% of the index. However, the benchmark indices in other countries are even worse in this aspect, such as Spain (76%), Germany (60%), UK (48%) and Korea (46%).
Barclays: Amid the current backdrop, we expect the ECB to be done, one more Fed rate hike in November and one more BoE rate hike in September. We also expect the end of YCC policy in Japan due to the sustainable inflation outlook.
Standard Chartered: We prefer US government bonds over corporate bonds. The yield premiums of corporate bonds are lower than the long-term average because of the high valuation. Also, we believe that the yield premiums are not sufficient to compensate for the high risk of corporate defaults. Thus, given the corporate bonds’ outperformance, investors are suggested to use this opportunity to decrease their exposure and shift to government bonds.
Goldman Sachs: The likelihood of a US recession has decreased from 45-55% to 30-40%. It is mainly driven by the supportive economic data including the lower initial jobless claims and higher non-manufacturing PMI data.
J.P. Morgan: As the recent job data was weaker than expected, it demonstrated the resiliency in the job market, meaning the risks of recession in this year are low.
Barclays: We predict slow growth in the US (2.1%), China (4.5%) and Europe (0.5%) this year. On the other hand, we could see an acceleration of economic growth in Japan, India and other emerging countries.
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