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May 2021 Monthly Market Commentary: Biden’s massive new spending plan to fuel the reflationary trend

07 June 2021

MARKET CONTEXT: Biden’s massive new spending plan to fuel the reflationary trend

Global Macro: In May, the market’s risk-on sentiment was supported by the gradual global economic recovery – country by country – as well as better-than-expected corporate earnings. Meanwhile, central banks confirmed their near-zero short-term interest rate policy, a key factor to maintaining the high price level of stock markets in the West. In the US, The New York Times announced that President Biden will propose a USD 6 trillion budget, which would represent the country’s largest federal spending since World War II. Although the final budget remains subject to approval by the US Congress, we believe Biden’s economic policy will worsen the US’ commercial deficit, thus weakening the US dollar and resulting in imported inflation from exporting nations, particularly in Asia. In China, the Caixin General Manufacturing PMI (Purchasing Managers’ Index) reached a five-month high in May, underpinned by the country’s steady post-pandemic economic recovery. We note growing investor concerns about rising inflation around the world and the fact that central banks may start scaling down their monetary stimulus sooner rather than later. However, given world leaders’ shared objective to curb energy consumption and increase cost efficiency, as witnessed by the uberization of the economy, we believe the rise in inflation will be transitory and fade by 2022 as GDP growth numbers return to levels reflecting countries’ post-pandemic economic development, i.e. around 3% in the US, 1.5% in Europe, and 6% in China.

Financial Markets: Rising inflation expectations facilitated sector rotations in May, favoring cyclical sectors, such as financials, manufacturing, and energy, over growth sectors like technology. Higher inflation expectations also supported gold, which rallied 7.8% in May, with Gold ETFs attracting about USD 2bn of inflows. On the currency front, the US’ massive dollar printing is creating a downside risk for the greenback. Meanwhile, Russia announced it will remove the US dollar from its oil fund to reduce vulnerability to US sanctions, shifting the US dollar holdings to euros, yuan, and gold. This move is in line with the ongoing global de-dollarization trend. As a result, we anticipate further support for the EUR and RMB in the coming months. Historically, the USDRMB exchange rate (now at 6.40) was as low as 1.50 in the early 1980s while the EURUSD (now at 1.21) touched 1.60 in 2008, giving us an idea of how far currencies can move when the world’s geopolitical equilibrium changes.

Equity: Month to date the S&P 500 gained 0.5%; Euro Stoxx 50 +2.2%, Hang Seng Index +1.5%. Fixed Income: The 10-year US yield contracted 5bps in May to 1.58%, which contributed to the rise in Emerging Market government bonds (+0.9% in USD and +2.2% in local currencies). High-yield corporate bonds edged up 0.4% in EUR but decreased 2.0% in USD. Currencies: The US dollar further weakened amid Biden’s massive spending plans: EUR +1.4%, CNY +1.6%, AUD +0.2%; safe-haven JPY -0.3%, CHF +1.4%. Commodities: Both oil and gold prices continued to rally in May amid the global reflationary environment: WTI Oil +5.8%, Gold +7.8%.