3 May 2024
Weekly Market View
A hopeful Fed
Global markets are starting to see a rotation of flows away from the US into Asia, partly amid concerns about relatively high US valuations and rising inflation.
The Fed, having turned dovish in Q4 23, which now seems premature, appears hopeful that the rebound in inflation will be ‘transitory’.
US data remains inconclusive. On the negative side, inflation is rising, the job market is slowing and the manufacturing sector is contracting again. However, US corporate earnings have beaten expectations again in Q1.
Weighing the still-constructive earnings outlook with the inflation risks, we believe a modestly pro-risk foundation allocation, weighted towards US and Japan equities, remains prudent.
In the short-term (1-3 months), we see further upside in some Asian regional equity markets.
How has the US Q1 earnings season fared so far?
What are the near-term prospects for Chinese equities?
Is JPY weakness likely to extend in the near term? What is the impact on Japan’s equities?
Charts of the week: Hot or cold?
US inflation and wage pressures have rebounded lately; we expect a cooling job market to ease wage pressures in H2 24
US employment cost index, core PCE inflation, job vacancy rate

US, Euro area and China economic surprises indices

Source: Bloomberg, Standard Chartered
Editorial
A hopeful Fed
Global and US stocks have pared back 3-4% from their record highs, while Hong Kong’s Hang Seng index has now entered a bull market. Global markets are starting to see a rotation of flows away from the US and into Asia, partly amid concerns about relatively high US valuations and rising inflation. The Fed, having turned dovish in Q4 23, which now seems premature, appears hopeful that the rebound in inflation will be ‘transitory’.
US data remains inconclusive. On the negative side, inflation is rising, the job market is slowing and the manufacturing sector is contracting again. However, US corporate earnings have beaten expectations again in Q1. Weighing the still-constructive earnings outlook with the inflation risks, we believe a modestly pro-risk foundation allocation, weighted towards US and Japan equities, remains prudent. In the short-term (1-3 months), we see further upside in some Asian regional equity markets.
Strong earnings: US corporate earnings remain robust, with growth broadening out beyond the technology-related sectors. Almost four-fifths of the S&P500 index companies which have reported Q1 earnings have beaten estimates (vs 66% long-term average). As a result, earnings growth estimates for full-year 2024 and 2025 have been revised higher to 10.3% and 14%.
Conflicting US data: US inflation concerns are rising. A 1.1% q/q upturn in Q1 in a measure of US wage growth (Employment Cost Index) mirrored an ongoing rebound in the Fed’s core inflation gauge (core PCE) and ‘prices paid’ components of business confidence indices. However, the US job market continues to slow, as seen from the sustained downtrend in the job vacancy rate, which fell to a three-year low in March (April’s non-farm payrolls data due tonight; consensus: 250,000 net new jobs). The US manufacturing sector, including the new orders and new export orders components, returned to contraction in April, based on ISM Manufacturing PMI data.
The Fed’s dilemma: The Fed expects growth to slow in the coming quarters as two-decade high interest rates impact the economy, helping cool the job market and lower inflation later. This explains why Fed Chair Powell, after keeping rates steady at the 1 May policy meeting, reiterated his base case that the Fed is more likely to cut rates later this year than hike.
We broadly agree with this macroeconomic outlook. The rise in corporate bankruptcies and credit card and auto delinquencies indicate weaker parts of the economy are hurting from high rates. The slowing job vacancy rate and quits rate are leading indicators for wage growth. A burst of immigration over the past year is helping ease labour shortages. This in turn is sustaining the US job market and consumption even as household excess savings dwindle. The new entrants to the job market should also help ease wage pressures, thus enabling the Fed to cut rates. However, managing the soft-landing will take deft management of monetary policy and is likely to be challenging. This is likely to cause market volatility.
Investment implications: The above scenario leaves us pro-risk, while hedging inflation risks through inflation-protected bonds and energy sector equities. Within equities, strong US earnings support our Overweight allocation to the market. We expect US earnings to broaden out in the coming quarters.
We expect the JPY to remain weak in the near term, despite the BoJ’s intervention, given Japan’s slowing inflation trend (see page 5). Continued JPY weakness supports our Overweight Japan view. We also see near-term opportunities across Asia ex-Japan. These include select equity sectors in China which are likely benefitting from the nascent investor rotation from the relatively expensive US markets (see page 4). We also see upside in Korean stocks on the back of global technology sector upturn and Korea’s Value up programme. We also like Indian equities and bonds as they stand to gain from likely policy continuity after the ongoing elections.
The weekly macro balance sheet
Our weekly net assessment: On balance, we see the past week’s data and policy as negative for risk assets in the near term
(+) factor: Strong US private payrolls, Dovish BoJ
(-) factor: Stubborn US inflation, weak US manufacturing, job openings

US consumer confidence and manufacturing sector confidence both underwhelmed in April
US consumer confidence, ISM Manufacturing and ISM New Orders PMI

We expect the ECB to start cutting rates from June as Euro area core inflation continues to slow
Euro area headline and core inflation

China’s manufacturing and services sectors both weakened in April
China’s manufacturing and non-manufacturing PMI

Top client questions
How has the Q1 24 US earnings season fared so far?
A total of 75% of companies in the S&P 500 have reported earnings so far, with 77% of them beating consensus earnings estimates as per LSEG I/B/E/S. This is better than the historical average of 66% of companies “beating” expectations. The earnings surprise has been broad, with all sectors delivering a positive earnings surprise. Q1 24 earnings are now expected to grow by 6.9% y/y, up from 5.1% expected on 1-Apr-24. More positively, 2024 and 2025 earnings have both been revised up as well. 2024 earnings are now expected to grow by 10.3% (from 9.9%) and 2025 by 14.0% (from 13.7%).
The sectors with the greatest percentage point improvement in 2024 growth are communication services (to 22.1% currently from 17.0%) and energy (to -2.9% from -6.3%). This ties in with our preferred view on these two sectors. Communication services is seeing strong growth momentum in digital advertising, while the oil price gains this year are paring back expectations for a decline in energy sector earnings. Six of the seven ‘Magnificent 7’ stocks have reported so far, with a combined 37% y/y earnings growth and 8.8% earnings surprise, though guidance has been mixed. This is in line with the 8.8% earnings surprise in the S&P 500 so far. US equities are consolidating in the near term, but we expect earnings strength to drive its outperformance over 6-12 months.
— Fook Hien Yap, Senior Investment Strategist
US earnings growth for Q1 and for 2024 full year and 2025 full year have been revised up since 1-Apr-24
Consensus earnings growth estimates for S&P 500 for Q1 24, 2024 and 2025 on 1-Apr-2024 and today

What are the near-term prospects for Chinese equities?
Chinese equities have been benefitting from a regional rotation. Rising concerns regarding US inflation and the room it leaves for the Fed to cut rates likely imply a potential increase in US equity volatility. This has likely led some investors to reconsider their allocation to US equities relative to other major regions.
Against these macro uncertainties, we view Chinese equities as being a relative “safe haven” because the bad news in China has been well publicised and arguably priced in. Chinese equities continue to trade at a heavy valuation discount of 45% (offshore) and 27% (onshore) relative to global equities. Investor positioning is also light. The rally has been broadening out – from the high-dividend SOEs to the higher-beta internet and technology stocks.
We expect the Hang Seng index to consolidate in the near term due to its sharp rebound from the 16,000 level, especially when it approaches the key resistance at 18,840. We believe it is attractive to accumulate between the 17,300 to 17,800 area, especially if the macro uncertainties in the US persist.
— Daniel Lam, Head, Equity Strategy
Hang Seng Index has positive short-term momentum
Key technical support and resistance levels in the Hang Seng Index

Top client questions (cont’d)
Is JPY weakness likely to extend in the near term? What is its impact on Japan’s equities?
The JPY faced downward pressure through April amid hawkish US data, which resulted in US yields and the USD surging. Meanwhile, the BoJ left rates unchanged and offered no indication that it was in a hurry to halt the currency pair’s ascent with higher borrowing costs.
Although likely policy intervention helped USD/JPY avoid a break above 160, the risk remains tilted towards further upside in the short term (our 3m view: 156), given a still-strong USD and a patient BoJ. The real rate differential between the US and Japan still favours the USD. For now, markets continue to expect the Fed to cut rates in H2 24 (total of 35bps by year-end). We see the pair retreating to 150 in this scenario (our base case). However, if the Fed postpones easing to 2025 amid sticky inflation, USD/JPY could surge to 165-166.
JPY weakness is favourable for Japanese equities, as it supports the earnings outlook for exporters via greater competitiveness relative to other Asian exporters. However, one risk we would keep a close watch on is whether a scenario of extended JPY weakness raises expectations of similar weakness in other Asian currencies.
— Iris Yuen, Investment Strategist
Real interest rate differential between the US and Japan point to upside risk for the USD/JPY
US-Japan real rate differential and USD/JPY

Why do you prefer subordinated financial bonds over DM HY bonds?
The subordinated financial bonds asset class, which includes Additional Tier-1 bonds (or ‘CoCo bonds’*), are issued by financial institutions to meet regulatory requirements. They are considerably junior in a firm’s capital structure to more traditional senior bonds and usually contain terms that allow the value to be written down to zero or converted to equity based on pre-defined criteria.
We currently favour sub-financial bonds over Developed Market (DM) High Yield (HY) bonds. While their yield premiums are at the slightly tighter end of the historical range, they are not yet very stretched, and we still see their nominal yields as attractive. Moreover, we assess the risk of extension (ie, non-call) as manageable for the majority of outstanding AT1s, especially given the wave of new bond issuance in Q1 24.
While some of these arguments could be made for DM HY bonds as well, we find AT1s more attractive given the underlying fundamentals of the financial institutions are comparatively stronger, in our view, especially given their recent focus on prudence in loan books and capital management. Additionally, amid the looming prospect of a “higher-for-longer” rates environment, we anticipate net interest margins (NIM) of the banks should stay supportive.
— Cedric Lam, Senior Investment Strategist
European Additional Tier-1* capital bonds offer attractive relative value over HY bonds
Yield premium difference for European AT1s and US HY bonds (positive spread = positive AT1, or CoCo, yield premium over US HY bonds)

*Contingent Convertibles (CoCos) are complex financial instruments. Refer to Important Information on page 9 for further details
Market performance summary*

Our 12-month asset class views at a glance

Economic and market calendar

The US 10-year yield has next interim resistance at 4.69%
Technical indicators for key markets as on 2 May close

Investor diversity has normalised across asset classes
Our proprietary market diversity indicators as of 2 May close


Explanatory notes
Contingent Convertibles are complex financial instruments and are not a suitable or appropriate investment for all investors. This document is not an offer to sell or an invitation to buy any securities or any beneficial interests therein. Contingent convertible securities are not intended to be sold and should not be sold to retail clients in the European Economic Area (EEA) (each as defined in the Policy Statement on the Restrictions on the Retail Distribution of Regulatory Capital Instruments (Feedback to CP14/23 and Final Rules) (“Policy Statement”), read together with the Product Intervention (Contingent Convertible Instruments and Mutual Society Shares) Instrument 2015 (“Instrument”, and together with the Policy Statement, the “Permanent Marketing Restrictions”), which were published by the United Kingdom’s Financial Conduct Authority in June 2015), other than in circumstances that do not give rise to a contravention of the Permanent Marketing Restrictions.
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As a Professional Client you will not be given the higher retail client protection and compensation rights and if you use your right to be classified as a Retail Client we will be unable to provide financial services and products to you as we do not hold the required license to undertake such activities. For Islamic transactions, we are acting under the supervision of our Shariah Supervisory Committee. Relevant information on our Shariah Supervisory Committee is currently available on the Standard Chartered Bank website in the Islamic banking section. For residents of the UAE – Standard Chartered UAE (“SC UAE”) is licensed by the Central Bank of the U.A.E. SC UAE is licensed by Securities and Commodities Authority to practice Promotion Activity. SC UAE does not provide financial analysis or consultation services in or into the UAE within the meaning of UAE Securities and Commodities Authority Decision No. 48/r of 2008 concerning financial consultation and financial analysis. Uganda: Our Investment products and services are distributed by Standard Chartered Bank Uganda Limited, which is licensed by the Capital Markets Authority as an investment adviser. United Kingdom: In the UK, Standard Chartered Bank is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. This communication has been approved by Standard Chartered Bank for the purposes of Section 21 (2) (b) of the United Kingdom’s Financial Services and Markets Act 2000 (“FSMA”) as amended in 2010 and 2012 only. Standard Chartered Bank (trading as Standard Chartered Private Bank) is also an authorised financial services provider (license number 45747) in terms of the South African Financial Advisory and Intermediary Services Act, 2002. The Materials have not been prepared in accordance with UK legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research. Vietnam: This document is being distributed in Vietnam by, and is attributable to, Standard Chartered Bank (Vietnam) Limited which is mainly regulated by State Bank of Vietnam (SBV). Recipients in Vietnam should contact Standard Chartered Bank (Vietnam) Limited for any queries regarding any content of this document. Zambia: This document is distributed by Standard Chartered Bank Zambia Plc, a company incorporated in Zambia and registered as a commercial bank and licensed by the Bank of Zambia under the Banking and Financial Services Act Chapter 387 of the Laws of Zambia.