Weekly View, 4 October 2021
The world’s second largest economy continues to hold market participants’ attention. Most recently, Chinese electricity power shortages have prompted downward revisions to China’s economic growth estimates. Chinese Premier, Li Keqiang, asked power companies to produce energy at “any cost” in response. This will inevitably lead to increased demand for coal and oil, putting further upward pressure to commodities prices. The official Chinese manufacturing purchasing manager indices (PMIs) fell into contraction territory in September, while services PMIs were better than expected. At the same time, the Chinese government is putting pressure on its state-owned enterprises to participate in purchasing the assets of the troubled debtor Evergrande. This has helped alleviate some of the short-term headwinds in the Chinese high-yield credit market and limits the contamination to other segments of Chinese credit markets. Nonetheless, we are underweight emerging markets. Elsewhere in Asia, Japan has a new prime minister, Fumio Kishida, the newly elected leader of Japan’s Liberal Democratic Party. His appointment indicates no imminent change in Japanese policy is likely.
Last week’s European inflation numbers came out higher than expected on the back of strong energy prices. Italian president Mario Draghi called current EU fiscal rules “obsolete”, which is worth noting now that he could be stepping into a bigger European leadership position in the wake of German chancellor Angela Merkel’s departure. Across the Atlantic, Federal Reserve chairman Jerome Powell said that the current supply chain problems are lasting longer than expected. In view of supply inflation pressures, we are short duration. However, some alleviation of supply issues could follow Vietnam’s abandonment of its zero-Covid strategy and accompanying economic shutdown measures.
In other Covid news, Merck’s claim that its Covid antiviral pill halves the risk of hospitalisation and death could be a gamechanger, especially for emerging markets. The US pharmaceuticals company has asked the US regulator to approve the first such pill for emergency use, which would add another tool to the global arsenal to fight the pandemic. Our 2021 M&A theme was further reinforced by a group of private-equity companies’ acquisition of medical-supply company, Medline, in the largest leveraged buyout since 2008. There is also growing investor pressure for troubled Japanese conglomerate Toshiba to put itself for sale. This week, we will be watching for the outcomes of OPEC meeting, September PMI numbers and and Friday’s US employment report.