Cast your minds back to the US stock market performance this year, and you might feel a sense of bewilderment. Is it not that only a handful of stocks are experiencing gains, while the ones you own have seen only modest increases or even lagging behind the broad market? Well, your observation is spot on, and you can find the answers in this week's foresight.

Summary

• The United States’ inflation indicatorshave slowed down, while the labour market remains resilient. The Fed raisedinterest rates by 25 basis points last month, and as we've previously shared,we expect the US economy to achieve a soft landing.
• Chinese markets continued to falter inJuly. Although the central government announced stimulus policies at the end ofJuly, the specific measures for various industries need time to roll out, andthe policy strength and implementation intensity remain to be seen.
• The European Central Bank raisedinterest rates by 25 basis points in July, and with inflation cooling down, itis expected to hold steady in September. The Bank of Japan also subtly raisedinterest rates, suggesting a potential shift in its ultra-loose monetarypolicy.

‍US economy soft landing expected

As we had predicted, the Fed last week raised interest rates by 25 basis points, landing in the range of 5.25%-5.50%. Latest data showed that price and wage pressures have cooled. The inflation indicators favoured by the Fed – the PCE price index and the core PCE price index – both slowed in June. This marked the slowest growth rate since March 2021 for PCE and the slowest yoy growth rate of 4.1% for core PCE since September 2021. Additionally, the labour cost index for the second quarter grew 1% qoq, marking the lowest growth innearly two years. Furthermore, the preliminary value of the GDP growth rate for the second quarter was 2.4%, faster than expected, thanks to the resilience of the labour market boosting consumer spending, coupled with increased corporate equipment investments and more factories being built. All these positive datasignals are allaying fears of a possible economic downturn and fortifying expectations for a "soft landing" of the US economy.

Looking at the stock market, large tech companies continue to drive the S&P index to this year's highs. The FANNG+ index (comprising Meta, Nvidia, Google, Apple, Amazon, Tesla, Microsoft, Netflix, Snowflake, and AMD) has risen 92% from its low point since the beginning of the year. In comparison, the S&P index has risen 20% during the same period, highlighting the significant impact of large tech companies on the US stock market. This answers the question at the beginning of the article – why haven't the stocks you own seen much growth? Because you didn't hold large stocks. But, even if you bought these big tech stocks earlier, whether you could hold onto them until now is another question altogether.

We don't expect any rate cuts this year as current high rates are still far from the Fed's target. We still anticipate the US stock market will face the pressure of high interest rates and enter a volatile downward range. In this context, choosing investment targets requires extra caution, and stock research should be even more rigorous. When it comes to sector selection, artificial intelligence is one of the directions, but given the large increase, the risk tolerance needs to be assessed carefully at the current point. Moreover, green energy is another sector to keep an eye on.

As for China, the stimulus policies not be implemented overnight

The second-quarter GDP growth was 6.3%, with a growth of 5.5% in the first half of the year. This suggests that the recovery in the second quarter was weaker than expected, and thus, more economic stimulus policies will gradually be implemented in the future.

Overall, the Chinese market was in a continuous downturn in July due to economic, policy, and market sentiment. The manufacturing PMI index was 49.3 in July, marking four consecutive months below the prosperity threshold of 50. The non-manufacturing PMI was 51.5, lower than the market's expected 53, suggesting the Chinese economy still faces pressure. This has led to a wait-and-see sentiment in the investment market, with no clear trends or directions.

The meeting of the Central Political Bureau at the end of July clarified the overall policy inflection point, effectively "clearing the fog."However, the launch of stimulus policies for real estate, capital markets, and consumption sectors that the market is concerned about is a continuous and gradual process, not an overnight change. The implementation details will have to wait for local governments to issue them based on need, which still takes time. The roll out of stimulus policies may bring some changes to the market, but the actual effect remains to be seen.

The introduction of stimulus policies could kick up a bit of dust in the market, but the actual revving effect? That still needs to be put under the microscope.

1. Is the economy finally getting its groove back? The first half of the year saw the economy in a bit of a sluggish state of recovery. But, with a bevy of new policies making their grand entrance, could they pump up the economic volume? We could very well see the recovery gathering steam.

2. Can market confidence make a comeback? The confidence of investors is a big deal in the world of capital market investments. The stock market took a bit of a tumble in the first half of the year, but it perked up a bit after policy announcements. The big question now is whether this uplift can stay in it for the long haul, or even mark a turning point.

3. As policies gradually roll out, the hot sectors and themes pursued by the market may change their tune. Will sectors such as technology, consumer, real estate, and pharmaceuticals get a leg up from the stimulus? We'll keep our eyes peeled on the market, ready to keep you in the loop about the latest market moves.

Finally, every new policy drive carries risks, including friction between China and the US in the areas of technology, trade, and finance, as well as the progress, intensity, and implementation of policies, among other factors.

Bank of Japan shifts gears, while the ECB keeps its foot on the rate-hike pedal

Change of pace in Japan's policy

The first half of this year saw Japan's long-slumbering stock market begin to rally, with the Nikkei 225 reaching a 30-year high in July. However, as inflation in Japan continues to rise, the possibility of a policy pivot is seen as a potential speed bump on the road of the stock market's trajectory.

Tokyo's consumer price index in July rose 3.2% yoy, making it the 14th consecutive month of inflation rates exceeding the Bank of Japan's 2% target. Last week, the Bank of Japan, in line with our predictions, decided to keep the policy rate at -0.1%, while vowing to maintain its Yield Curve Control (YCC) policy, anchoring the target for 10-year Japanese Government Bonds (JGBs) around 0%.

While on the surface the Bank of Japan still sticks to its YCC (a 10-year rateanchored at 0, with a ceiling of 0.5%), the cap for 10-year JGB yields was effectively blown to reach up to 1%, following this adjustment. This move is somewhat akin to a shadow rate hike, further hinting at the Bank of Japan's intent to gradually dilute its ultra-accommodative monetary policy. We think the aim is to keep some policy flexibility in its back pocket. Should the Yen continue to weaken against the Dollar, the Bank of Japan can prop up the Yen by increasing the yield of government bonds through open market operations.

We anticipate future Japanese interest rate market trading to start marching to a more western beat, with economic data playing a larger role than before. The trading logic is set to change. For overseas investors, the Japanese market may become more comprehensible, reducing the prior local advantage.

European inflation cools, but there's a long road ahead

Germany and France, the two largest economies in the Eurozone, released their CPI data, showing a slight decline in July (French CPI at 4.3%, German CPI at 6.2%). Whether this trend can continue is still up in the air. The European Central Bank hiked rates by 25 basis points in July, with the deposit rate reaching 3.75%, and the refinancing rate hitting 4.25%. 

Under the backdrop of high inflation, high interest rates, and slowing economic growth, UK households and businesses face multiple economic pressures. The cost of living is continually rising, with consumption growth lackluster. The most recent data show that the UK's CPI increased by 6.9% yoy, lower than the expected 8.2%, but still significantly higher than the Bank of England's 2% target. The high-inflation alarm bell hasn't been silenced. Owing to the stronger-than-expected inflation in the service sector due to wage growth, the Bank of England may still hike rates.

As we've previously noted, we expect a moderate recovery for Europe's economy, but overall, it's stuck in neutral. That's because tight monetary policy has replaced inflation as the main roadblock to a stronger recovery, and waning fiscal support is another factor restraining growth below trend.

Investment thoughts

With the European Central Bank's interest rates rising back to levels last seen in 2001, we might be nearing the peak. The market also anticipates the end of the Fed's current rate-hike cycle. It's key to manage liquidity when rates hit their zenith. Many investors are holding more cash than usual due to the expected rate increase. But as policy rates near their peak, reinvestment risks may increase for those with excess cash or time deposits. We recommend investors reassess their cash holdings, ensuring sufficient long-term and diversified investments, and take action to lock in attractive yields before the market starts pricing in future lower rates. In this context, we advise investors to secure enduring income sources, including high-quality bonds, capital-protection products, or risk-hedging products.