- Equities: Global equities faced pressure as rising bond yields impacted the US market; European stocks declined on economic concerns
- Credit: Though the elections have a limited impact on credit spreads historically, investors should remain in quality with A/BBB credit to manage broader uncertainty post-election
- FX: The “Trump Trade” that lifted USD could lose momentum ahead of US presidential election; JPY weakness amid post-election uncertainties and BOJ policy doubts
- Rates: Fair amount of economic optimism embedded in UST 10Y yields; a miss in upcoming NFP data may trigger significant rally in frontend Treasuries
- The Week Ahead: Keep a lookout for US Change in Nonfarm Payrolls; Japan Industrial Production
Rising Treasury yields and slower rate cut expectations weigh on global equities. In the US market, rising bond yields halted the stock market's six-week winning streak. Stronger-than-expected economic and inflation data shifted Fed rate cut expectations, contributing to bond volatility amid US debt concerns and the upcoming election. The S&P 500 fell about 1%, while Nasdaq rose slightly, buoyed by robust earnings from tech stocks. Meanwhile, the Atlanta Fed's GDP tracker indicated a robust 3.4% growth estimate for the third quarter, fuelled by strong retail sales. Overall, large-cap stocks held up better than small-caps, and growth stocks outperformed value.
The STOXX Europe 600 Index fell 1.18% and FTSE 100 declined 1.31% amid expectations of a slower Fed policy easing while Eurozone PMIs signalled ongoing contraction. Japan’s Nikkei 225 dropped 2.74%, reflecting uncertainties around Bank of Japan (BOJ) policy amid easing inflation. Chinese markets rallied with the Shanghai Composite rising 1.17% after the central bank's 25 bps cut in loan prime rates, although Hang Seng Index fell 1.03%.
Topic in focus: Post-elections’ TOPIX turns to BOJ. In a sweeping loss at Sunday’s national election, Japan's ruling coalition surrendered its parliamentary majority, sparking uncertainty about the future government’s structure and the outlook for the world’s fourth-largest economy. This result may compel parties to enter fragile power-sharing arrangements, potentially heightening political instability as Japan contends with mounting economic challenges.
Japan’s economy, admittedly, has been growing at a sluggish pace and is forecast to grow at 0% this year. Nevertheless, TOPIX has hit a fresh high this year, buoyed by a weak yen and ex-PM Kishida’s “New Capitalism” initiative. While new policies are expected to remain expansionary to bolster the economy, targeted bills such as tax cuts and defence spending could face significant hurdles. Political tensions may also complicate the BOJ agenda as some parties stand firmly against rate normalisation. A weakened government would make it harder for the BOJ to raise interest rates or manage the yen’s depreciation effectively.
We maintain a neutral stance on Japan and recommend that investors focus on export-oriented stocks which stand to gain from the weak yen. Japanese auto stocks are in a good position for hybrid-led growth and localised US manufacturing amid US election and trade war risks.
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