César Pérez Ruiz, Chief Investment Officer Pictet Wealth Management.

A big reporting week

Last week, the Chinese central bank cut its prime lending rate by 10 basis points in the latest attempt to support the embattled Chinese property sector. Property developers will also be allowed to access escrow accounts. While the latter decision comes as a relief, its implementation is down to local governments and therefore not likely to be uniform. As China loosens further, major developed-market central banks are poised to move in the opposite direction. We like Asian investment-grade credit. Economic growth in the world’s second-largest economy came in stronger than expected in Q4, and GDP grew 8.1% for the full year. Meanwhile, Chinese authorities continue to apply heavy regulatory pressure as tech giant Alibaba ’s US cloud business comes under investigation.

Elsewhere in Asia, Vietnam announced a major fiscal spending plan amounting to 7.9% of GDP. We like Southeast Asian equities. Last week, the Japanese central bank left interest rates unchanged as the latest consumer price inflation print came in at 0.5%. Inflation worries elsewhere were exacerbated by oil prices, with the WTI price hitting its highest level in five years at USD89 per barrel. Bond yields moved higher as a result, given how markets are expecting the US central bank to react and President Biden’s declaration that fighting inflation is a priority. German Bund yields briefly followed their US counterparts upwards, even drifting briefly into positive territory before retreating. We are short duration and underweight sovereign bonds.

The Q4 2021 reporting season continues with companies beating forecasted numbers but by much less than in previous quarters and more in line with long-term trends. The market response differentiates between companies that surprise on the upside and those that miss expectations. Over one third of S&P 500 companies report this week. We believe 2022 will be a year for active managers who can distinguish the leaders from the laggards. Momentum in corporate mergers and acquisitions continues, with Microsoft announcing its purchase of gaming company Activision.

But not all attempts are successful—see Unilever ’s abandoned takeover of GlaxoSmithKline ’s consumer health business after three failed bids. In the week ahead, the US Federal Reserve meeting will be key to watch. Pointers to the pace of interest rate hikes in the coming months will have a bearing on the direction markets take. In geopolitics, the US’s written response to Russia’s draft security proposals looms this week. We believe the probability of a conflict over Ukraine is quite high.