Review and Outlook (May 3, 2022)

Fortnight in Review

The market expects the Fed to raise fund rate by 50 bps to 75-100 bps. Consequently, the US stocks and bonds were down and the USD Index was up. The S&P 500 Index was down 3.3% last week, registering a 12.8% loss year-to-date. RMB kept depreciation rapidly, dropping from 6.38 RMB/USD to 6.68 RMB/USD in the short 10 trading days.

Hang Seng Index bounced on Friday due to the news of China’s Politico Bureau meeting, achieving a 2.2% gain for the week. YTD, Hang Seng Index was down 9.9%, 3 ppt above S&P 500 Index.


COVID Update: We think Shanghai’s lockdown was unexpected and unusual. Taking the clue of Hong Kong’s Covid time-line, we think the turning point for Shanghai is likely in May. Other cities, including Beijing, would learn from Shanghai’s lessons and control the spread in time. And judging from the government’s comments, we expect more flexibility rather than lockdown of a major city.

RMB Depreciation: We noticed RMB depreciation is not an independent event amid the overall currency market. USD had been exceptionally strong as USD bond yields are higher than those of nearly all major economies, including JPY and EUR. Notice that RMB had been stable till mid-March and suddenly started the round of deprecation, due to a reverted yield spread of China-US bond yields, the deterioration of COVID situation, and thus expectation of export. We expect the RMB’s turning point would coincide with that of Shanghai’s lockdown.

Window of Observation: Financial market might have already priced in Feb’s rate hike. The Chinese Government may try to balance the economic growth and COVID-zero policy. Shanghai’s lockdown may come to the turning point, and Beijing would not duplicate such a lockdown. In short, the market would face with a friendlier environment, which coupled with a historically low valuation (P/E 7.8x of Hang Seng Index), so we think it is opportunity to accumulate stocks.