Monthly Market Outlook – Sep 2021

China

The Chinese market is becoming more challenging, underperform other economies. CSI Index and HSI Index got -6.6% and -9.8% YTD return as of Sep. A bunch of economic data dropped in few consecutive months, such as both sales of residential building and consumer goods, industrial value-added, and PMI. Worse still, two major concerns emerged in Sep, including the financial stress relating to property developers and power outages across China due to the surge in coal prices. Given the economy slows down, the market expects more supportive monetary and fiscal policy would be implemented in Q4. For instance, issuing more debt to finance economic activities.

Evergrande, a real estate developer who borrowing more than USD300 billion, struggles to meet debt interest payments. Since there is a lot of property projects across China, Evergrande’s problem is serious. The potential impact on China’s financial system should be highlighted. It owed money to around 171 domestic banks and 121 other financial firms. It raised concern that property developers with high leverage do not have sufficient cash flow to fulfill the interest payment of their debt. If it is unable to pay the debt interest, and defaults, banks, and other lenders might force to lend less. The worst case is the credit crunch taking place. Companies, whatever larger or small-to-medium size companies are difficult to borrow money at affordable rates. The postponement of their growth is foreseeable.

Starting from Sep, at least seven provinces in China implemented power cuts, which lead to production suspensions in various sectors, especially energy-intensive and manufacturing industries. The profound impact under power cut applies to various industries if it persists in the rest of the year and afterward. Production disruption from upstream would cause a ripple effect to downstream, ranging from production shortage of materials to Auto, infrastructure, and private consumption. Since China acts as the world factory, the power cut harms consumer goods export, thus affecting shipping sectors as well. According to market estimates, the Q4 GDP growth and the manufacturing PMI are expected to drag down. Though Inner Mongolia might require 72 coal mines to accelerate the release of production capacity and increase annual production capacity by nearly 100 million tons, the news is not confirmed yet, and how it smooths the shortage of coal and impact a power cut is still unknown.

U.S.

The pessimism in US stocks is getting stronger and stronger. Investment Banks and analysts from Wall Street has issued bearish warnings. As economic growth slowdown and consumer confidence declines, the US stocks market might undergo a 10%-20% correction. S&P 500 Index and Nasdaq 100 Index declined from the peak by 5%-7% in Sep. 10-year Treasury yield run hike which might put pressure on the highly valued stock. Its influence on tech giants should not be ignored.

Job creation is unexpectedly at a slower pace. The Non-farm payrolls increased 194,000 jobs in Sep, which was far below the market expectation of 500,000. The unemployment rate in Sep reached 4.8%, performed better than 5.2% in Aug. The inflation has already met Fed’s goal, and the only concern still left for tapering was the labor market. Fed Chair Jerome Powell suggested an at least decent Sep jobs report would support the economic improvement and Fed’s extraordinary monetary support is no longer demand for the market. Though the non-farm payrolls were disappointed, it was still “decent” for Fed to begin tapering its debt purchase next month.

The US and China got a significant step to restart diplomatic relations in Sep. Meng Wanzhou, the Vice Chairman of Huawei reached a conditional deferred prosecution agreement with the US Department of Justice. The release of Meng Wanzhou and her return to China showed a change in the attitude of Joe Biden’s administration relative to Donald Trump towards China. At the beginning of Oct, the US and China have reached an agreement that both of their leaders might hold an online meeting before the end of the year. Though the US-China relation seems to ease, Investors should not be overly optimistic. Substantial progress requires both parties to make concessions on certain issues. Otherwise, it is just a symbolic meaning greater than actual.

Europe

The European markets were volatile in Sep. The STOXX Index recorded the biggest monthly decline this year to -3.46% in Sep. Economic data tends weakly over this few months recently. All PMI in Sep, Industrial production YoY and Consumer Price Index YoY reached weaker performance than the previous month.

Recently, the European and global markets are experiencing energy shortages. The prices of natural gas, electricity, oil, coal, and other energy sources have soared, the price of natural gas has hit a record high in particular. Recent hurricanes disrupting the natural gas supply chain, coupled with the demand run hike due to economic recovery, broke the balance in demand and supply.Some European governments have begun to respond to the high energy prices, such as offering subsidies to electricity prices. It is difficult for Europe to get rid of the energy shortage in the short term. With the advent of winter, Europe is facing continued increases in energy prices. At the same time, rising energy prices are turning into high inflation, affecting consumer confidence.

The European Central Bank (ECB) announced to slow the pace of the Pandemic Emergency Purchase Programme (PEPP) last month. It caused the stock markets to fluctuate. However, a turning point emerged at the beginning of Oct. A new bond-buying program would be considered by ECB to prevent market turmoil when PEPP is phased out in Mar 2022. The new program might help to avoid the bond market undergo a sharp price drop due to sudden weakening buying orders, resulting in bond yields hike, which may impact the economic recovery.

Japan

The economic conditions in Japan tend to weaken in Sep. Consumer Price Index YoY and Industrial Production YoY dropped to -0.4 and 9.3 in Aug respectively. While PMI declined for two consecutive months to 51.5.Either production or consumption performed worsen than the previous month. Due to the shortage of parts, automakers have been under the pressure of production cuts. The market expected that the reduction might continue to Q4.

In late Sep, Fumio Kishida is appointed as the next Prime Minister after winning the LDP presidential election. Though new leadership take over Japan, the markets expect its monetary policy and fiscal policy change would be minor due to the weak economy. For the first proposed, the monetary easing would stay to attain its 2% inflation target at least for the time being. The new administration might flavor toward the reopening of the economy, which co-exist with the pandemic. While the Bank of Japan maintained its 10-years bond yield target at around 0%, and the short-term policy rate at -0.1%. A positive feedback loop of corporate reform and return might foreseeable under the digitalization and governance improvement.