Review and Outlook (July 11, 2022)

Fortnight in Review

In the uneventful two weeks, the US equities did not fluctuate much and the S&P 500 Index slightly declined 0.3%. The USD Index rose sharply to 108.23 from 104.11 (+4.0%). The two major counterparty currencies, EUR and JPY, both dropped significantly. Euro dropped as the Euro Zone’s inflation was even higher than that of the US. JPY depreciated as the low interest rate of JPY attracted a flock of interest rate spread traders. RMB declined slightly from 6.68 to 6.69 RMB/USD.

Hang Seng Index has been flat in the past two weeks, and dropped in the first two trading days of this week. Hang Seng Index was down 10.8% year-to-day, compared to 19.1% loss of S&P 500 Index or 27.3% drop of NASDAQ Composite Index.

Outlook

China’s COVID Resurgence: In the past few days, the COVID-19 was bouncing in China. In particular, many COVID cases were reported in Shanghai, which frightened the market. We believe that Shanghai will not be locked down again, given that the lessons have been learned. Disappointingly, no further methods were adopted to promote the universal vaccination in the borrowed time from stringent COVID regulations. That being said, the unexpected coming-back of COVID would be sword of Damocles to the China equities.  

Fed Watch: The market is focusing on the CPI announcement on July 13. Even as the Fed has already raised rates, the CPI would not come down so soon as the problems with supply chain, tariffs, and energy prices due to the war were not addressed. The consensus of CPI inflation is 8.8%; if this comes true, it is almost certain that Fed will raise 75bps or more on July 27. Similar situations happened in June and the equity market plunged. It is unlikely to be different this time.

Hong Kong Stocks: Due to the COVID in China and rate hike in the US, the Hong Kong market was down in this week. We holds the view that this provides the entry point for investors. First, the impact of COVID is probably milder than the market fears; Second, China is pretty much insulated from the US economy. China’s pro-economic, incentive policies will eventually play out and impact the stock market.