A Brief on Global & Local Markets, Investment Strategy.

Week in Review | 29 January – 2 February 2018

Markets Enter Correction-Phase

It was bound to happen. After a strong start to the year, global equities were broadly down as a bond rout deepened which lifted US Treasury Yields to a 4-year high of 2.84%. The Dow fell 665.75 points on Friday, or 2.5% — notching its biggest one-day sell-off since June 2016. Whilst, the S&P 500 and Nasdaq 100 futures declined 19 points and 37.75 points, respectively. Markets experienced a similar pullback in November’16, with large profit-taking seen amongst investors amidst some downside seen for tech-shares.

The current pullback is likely an overdue correction, as markets begin to reprice itself and settle to more healthy levels. The US Treasury yield will test the 3% level this week, as bond markets come under pressure from rising optimism over the strength of the economy and expectations that inflationary pressures are mounting, as global central banks also embark on their balance sheet unwinding process and gradually withdraw monetary stimulus.

The US dollar rebounded last week by 0.4% – 0.6% against a basket of major currencies. A stronger payroll report which showed non-farm payrolls (NFP) rising by 200,000 in January aided the rebound, with investors also flocking to the greenback which is seen as a safe haven currency for the time being.

Better Now than Later

Asian markets tumbled, mirroring the sharp pullback seen in US stocks last Friday. Hong Kong’s Hang Seng Index slid 2.2% and the Hang Seng China Enterprises Index lost 2.2%. South Korea’s Kospi index also fell 1.6%.

Stronger than expected growth is making markets reprice, which is driven by the rapid rise in US Treasuries. Given how strong markets have rallied recently, the pullback isn’t that all surprising. Given the pace of the of US Treasury movement, the next key level to watch for Treasuries if it will the 3.0% level, beyond which could impact asset prices significantly.

Given this a liquidity driven pullback, as money becomes tighter and more expensive, the sell-down is across the board.  Technology names, recent winners and securities priced off government papers like REITs and dividend stocks will be more significantly impacted.

On portfolio action, we think it will be an easy strategy to lock in some of the recent gains, especially on those positions still holding up well, to move them into battered positions later.

Ultimately, strong growth is good for equities, but markets need to reprice a higher rate environment in the short term.  Our base case is that this correction will be short lived.

Janet Yellen’s Swan Song

Janet Yellen chaired her last FOMC meeting last week, keeping interest rates unchanged, but said that inflation would likely rise this year. Citing solid gains in employment, household spending and capital investment, the Fed said it expected the economy to expand at a moderate pace and the labour market to remain strong in 2018.

Incoming chief Jerome Powell will take over Yellen’s position and will be sworn in as the new Chair of the US Federal Reserve on Monday in Washington. The non-economist is expected to maintain policy continuity at the Fed, sticking to its dot-plot of three rate hikes for the year.

The futures market are currently priced-in for two-and-a-half hikes, though some are also calling for four rate hikes this year given stronger growth projections and how much markets has already moved.

Not Peak of the Tech Cycle Yet

Apple reported weaker results in its latest quarterly briefing, with lower than expected iPhone unit sales and also lower revenue forecast guidance. This follows broader weakness in the tech sector, as consumers grow fatigued over smartphone models and investors turn wary over earnings and valuations.

It may be the peak of the smartphone cycle, but it’s not the end of the tech cycle yet. We continue to see opportunities in the tech sector including the cloud space, with a long-list of beneficiaries in the supply chain including data centres, as well as hardware server suppliers. Advancement in driverless cars and Artificial Intelligence (AI) will also fuel further requirement needs for sensors, chips and various components that will be a catalyst of growth for the tech sector.

North and South Korea Soothe Tensions

North and South Korea set aside tensions momentarily last weekend as women ice hockey players played in a unified team in a friendly match against Sweden, amidst concerns over advancement in Pyongyang’s nuclear programmes. Tensions were still high ahead of the Winter Olympics which starts this Friday in South Korea, where North Korea had denounced US President Donal Trump’s state of the union address and for attempting to create divisions in the Korean peninsular.

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