In July, markets have been sensitive to the European Central Bank’s hawkishness after its president Mario Draghi commented that deflationary forces had receded. The US dollar continued to trend downwards against a basket of currencies amidst economic softness and political woes while the Chicago Board Options Exchange (CBOE) Volatility Index (CBOE Vix) fell to a historical low of 9.04.
China’s foreign exchange reserves rose to a 9-month high of USD 3.08 trillion in July due to tighter controls on capital outflows and a weaker US dollar. However, Beijing is still expected to maintain its stance of stemming capital outflows as the US dollar might reverse its weakening trend should the Federal Reserve sharply reduce the size of its balance sheet. China has also reformed its financial management of overseas investments made by state-owned enterprises in an effort to improve returns and control risks.
In South Korea, President Moon Jae-in plans to raise taxes on big corporations and high-earning individuals to reduce income inequality. The government has also announced a number of measures to cool the local housing market.
We observe investors’ interest switching from US equities, where valuations are high, to European and emerging-markets names.