2025-06-04 12:02

Key takeaways Labour market weakness continued at pace in April, but perhaps a tentative sign of improvement in May. Retail sales demand has picked up, but is yet to see a translation into broader consumption. Higher than expected inflation complicates both monetary and fiscal policy. Source: HSBC Finding signals through the fog It’s been a period of conflicting economic data releases for the UK economy, in part a reflection of the data being for the months either side and including April, which saw a lot of volatility and could prove a key inflection point for the UK economy. On the one hand, labour market indicators for April continued to show weakness in labour demand. PAYE employment fell 33k and, while that number will likely be revised, nearly every sector has reported a decline in vacancies since the start of the year (chart 1). Moreover, surveys pointed to a faster pace of headcount reductions and weaker demand for labour. And, although the labour market has been softening since 2022, the higher unit labour costs associated with a sharp rise in the national living wage and employer national insurance contributions hike provided further impetus. However, those factors came into effect in April and the PMI employment index was marginally improved in May, so labour market sentiment may, at least, be stabilising. Despite weaker employment prospects, retail sales reported a fourth consecutive month of growth in April and a 5.0% rise y-o-y, its strongest pace of growth in three years. Some caution is needed in taking strong signals from retail sales as overall household consumption growth has struggled to find a footing amid continued rate pass through and cost of living increases. However, the upward trend in retail sales demand is in full swing (chart 2), forward-looking components of consumer confidence saw decent gains in May, and net household deposit growth has continued to slow to more historically normal rates. Inflation surprises make for policy conundrum A plethora of known price rises in April and some surprise underlying price growth saw headline inflation accelerate to 3.5% y-o-y. More concerningly, services price inflation jumped to 5.4% y-o-y, higher than the BoE had forecast. Combined with still elevated wage growth, initial estimates from PAYE data point to wage growth of 6.4% y-o-y in April, which means greater uncertainty over the future path for rate cuts. Indeed, financial markets have pulled back expectations on rate cuts this year (chart 3). Longer-dated government bond yields have also continued to rise amid global uncertainty and a large risk premium associated with fiscal policy. That raises the risk of lower fiscal headroom in the autumn and a ‘doom loop’ for fiscal policy. Source: Macrobond, ONS, HSBC Source: Macrobond, ONS, HSBC Source: Bloomberg, HSBC forecasts https://www.hsbc.com.my/wealth/insights/market-outlook/uk-in-focus/finding-signals-through-the-fog/

2025-06-03 12:02

Key takeaways Artificial Intelligence (AI) is transforming the way we live. It links to our potential to deliver a speedy net-zero transition through several channels. The emissions associated with energy used help in catalysing funding for the transition. Using technology for monitoring, policing and predicting disruptions to livelihoods are all relevant. Taking all of these influences into account, we think the growth of AI is beneficial for delivering and managing net zero positive outcomes. Artificial intelligence (AI) offers many positives to help speed up the transition to a net zero world. Our main questions are whether it will speed up or slow down emissions control, whether it can help channel capital for low-carbon financing, and how it can help monitor and predict the consequences of warmer temperatures. As we discuss in this report, on balance, we think the growth of AI is a positive for net zero delivery and provides governments with a toolkit to progress net zero ambitions. Did you know? 10x more energy is consumed for AI powered search versus standard keyword search AI consumes 1.2% of total power demand, which is additive to the electricity, and therefore emissions, picture Data centres use c4.4% of total US electricity, equivalent to the average annual consumption of 14m US households China’s power consumption from AI could be c5x higher by 2030 than now, an annual growth rate of c32% Global data centre spending is expected to reach over USD1trn by 2029, with half of this attributable to AI AI can improve the efficiency of installed wind turbines by up to 20%, their lifespan by up to 10% and reduce costs by up to 15% Source: de Vries, Alex, The growing energy footprint of artificial intelligence, Joule, 18 October 2023; Powering Intelligence: Analysing Artificial Intelligence and Data Centre Energy Consumption, EPRI, 28 May 2024; ‘Next-Gen Wind Farms: Dell’Oro Group, 2025; Wind Turbine Optimisation with AI’, Datategy, 17 January 2024 Speeding up the net zero transition AI is experiencing unprecedented traction and is reshaping various industries. It’s enabling smart decision-making by leveraging advances in machine learning, natural language processing and generative modelling. There are several ways in which the growth of AI has read-across for the speed of delivering a net zero economy. 1. Emissions control The increasing adoption and sophistication of AI models are leading to greater power demand and in turn, impacting emissions levels. Indeed, carbon emissions for the training of more recent AI models have increased significantly, with GPT-3 (released in 2020) emitting 588 tons, GPT-4 (2023) emitting 5,184 tons, and Llama 3.1 405B emitting (2024) 8,930 tons. On the positive side, AI can help drive the energy transition if new data centres are in places where clean power is already used or can be scaled up. Alternatively, above-forecast power consumption from data centres in areas with more carbon intensive fuel sources (e.g. coal) will likely add more CO2 than expected from business-as-usual pathway assumptions. Current AI trends would likely add to the emissions picture, given that fossil fuels account for 60% of the global power mix, although this hides the locational aspect of data centres. If the power sector decarbonises faster than the energy demands of advanced AI, this would be a win for the net zero transition. Separately, AI monitoring tools can help manage emissions in the land-use change and forestry sectors, which is a positive for a net zero outcome. Power use is up 28% in the last 10 years; renewables are growing in share Source: 2024 Energy Institute Statistical Review of World Energy. Others*: Based on gross output that includes uncategorised generation, statistical differences and sources not specified elsewhere, e.g. pumped hydro, non-renewable waste and heat from chemical sources. In terms of renewables, AI can help reduce emissions by optimising energy integration, storage, distribution and forecasting production. A significant problem faced by the adoption of renewable energy is intermittency; integrating AI helps manage fluctuations, ensuring a stable and reliable supply. Predictive maintenance also helps reduce downtime and repair costs. 2. Financing a net zero future The Independent High-Level Expert Group on Climate Finance estimates that, by 2030, between USD6.3trn and USD 6.7trn per year will be needed globally to meet climate goals. This includes substantial investments in the clean energy sector, loss and damage, natural capital and just transition. We think there’re three channels through which the growth of AI can help fund the energy transition: i. Catalysing renewable energy investment: Increased interest in data centre hub locations could spark further grid investment and more efficient processes for streamlining projects. Ireland, for example, recently injected EUR750m into developing its electricity grid to cater to increased AI demand. ii. Contributing to GDP: Funding for the low-carbon transition will come from a variety of sources, including country public finances and sovereign wealth funds. As AI grows as a sector, it becomes an increasingly important contributor to GDP. PwC estimates that AI could contribute up to USD15.7trn to the global economy by 2030. iii. Improving access to capital: AI technology can help attract investment into nature-based solutions by providing more robust analysis of projects, such as improving data accuracy, monitoring carbon footprints and optimising project selection, which ensures investments are directed toward impactful initiatives. By 2030, contribution of AI to GDP by region Source: PwC, HSBC *Note: GCC4 includes Bahrain, Kuwait, Oman and Qatar 3. Building resilience to disruptive impacts Inclusive resilience relates to productivity, both in terms of people’s ability to find roles in transition sectors and human activities linked to productivity in their jobs. Additionally, within a country, the levels of social equity impact its ability and willingness to transition. We believe AI can be a powerful tool for managing environmental impacts, alongside enhancing economic productivity. Applications include monitoring and predicting extreme weather events, managing biodiversity conservation, addressing food loss and waste challenges and providing optimal utilisation of resources. This enables labour productivity by minimising work-hour loss due to unforeseen circumstances, such as road closures from flooding that delay employees from getting to and from work. Governance We think a lack of data on the precise scale of AI’s environmental impacts hinders policymakers’ and investors’ ability to fully assess risks. Current regulatory initiatives on data centres focus on optimising energy efficiency and mainly set minimum targets or guidelines for firms. Indeed, the European Commission requires data centre operators to report annually on energy and water use, waste heat reuse and renewable energy consumption. In our view, enhanced disclosure requirements and assessment frameworks across AI supply chains are needed to bring more clarity to investors, governments and other stakeholders. The following aspects should be considered: AI compute: The production of, and the end-of-life strategy for, hardware components affect the lifecycle impacts of AI systems Infrastructure (e.g. data centres): The location, electricity sources, materials, water and other resources, as well as how facilities are connected, built and managed at the end of their life, are all relevant considerations Data and algorithms: Approaches to data collection, transmission, storage and management, as well as model design and training choices, can reduce the energy demands of AI models Deployment of AI: The behaviour of end users plays an important role in determining the overall environmental footprint of AI systems. As some markets are currently developing or looking to implement mandatory reporting requirements for climate-related disclosures in line with the International Sustainability Standards Board’s standards, we think there’s an opportunity for policymakers to determine how these reporting requirements should be applied by AI developers and users, data centre operators and hardware manufacturers. Conclusion How emissions are controlled is relevant to investors because country plans and economic rationale define climate goals, which impact the energy system and connect to economic activity. AI is relevant in this context because the increased adoption and sophistication of AI models lead to increased power demand, in turn impacting emissions levels. The emissions associated with energy used and the use cases for process optimisation, help in catalysing funding for the transition, and using the technology for monitoring, policing and predicting disruption to livelihoods are all relevant. Taking all these influences into account, we think the growth of AI is beneficial for delivering and managing net zero positive outcomes. https://www.hsbc.com.my/wealth/insights/esg/why-esg-matters/ai-friend-or-foe-for-net-zero-transition/

2025-06-02 12:02

Key takeaways US trade court ruled that US import tariffs imposed for national emergency reasons are unlawful. With the appeals process having already resulted in a temporary “stay” to keep them in place… …the USD’s initial bounce was short-lived; we still expect the USD to be on softer ground in the months ahead. The US Dollar Index (DXY) rallied past the 100 level after the US Court of International Trade (CIT) unanimously ruled on 28 May that tariffs imposed on the basis of a national emergency (International Emergency Economic Powers ActIEEPA) were unlawful and should be removed within ten days (Bloomberg, 29 May 2025). The judgement blocks the reciprocal tariffs, the baseline 10% tariffs, and the fentanyl-related tariffs on China, Canada, and Mexico. Sector-specific tariffs enacted using different trade legislation (Section 201, 232, and 301) remain in place. The USD’s initial bounce shows that FX markets have retained their reaction function that good news on the trade front (i.e. lower tariffs) is also good news for the USD. It seems the lens through which markets are examining tariffs is whether it reduces or increases US policy uncertainty. FX markets may also reward the USD for lower tariffs because it is seen as reducing the drag on US growth. Source: Bloomberg, HSBC However, the USD bounce was short-lived. The US administration immediately lodged an appeal with the Federal Circuit Court where it won a temporary “stay” on the CIT’s order to remove the IEEPA tariffs. A full appeal could take months. But US President Trump has other options for delivering tariffs, for example, the sector-specific tariffs (which will involve a consultation period before going in place) or universal tariffs of up to 15% for a maximum of 150 days under Section 122. So, FX markets have chosen not to view this CIT decision as a gamechanger, but the ruling does complicate matters. It also removes the threat of swift punitive tariffs from the US administration’s toolkit. Tariff pauses and the CIT decision may create a sense of a return to normality, but tariffs remain elevated, and the threat of a return to even higher tariffs in July looms large. The futures market expects the Federal Reserve (Fed) to adopt a “wait and see” approach, with the next rate cut only fully priced for the 28-29 October meeting (Bloomberg, 29 May 2025). After assessing cyclical, political, and structural factors, we think that the USD should be on softer ground in the months ahead. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/usd-us-trade-tariff-uncertainty-continues/

2025-06-02 07:04

Key takeaways Emerging market local currency debt looks positioned to do well in a backdrop of high real yields, strong fundamentals, and a weakening US dollar. Last week saw the last of the Magnificent Seven mega-caps deliver Q1 profits numbers – which once again beat analyst expectations. Asset market volatility this year has focused investor attention on ways of giving portfolios sufficient ballast. Chart of the week – Bond market vigilantes are back The “bond market vigilantes” have been spotted riding back into town. Yields on long-dated bonds across the G7 have been rising recently, with a marked steepening in 2y-30y spreads since the end of February. The initial pick-up in yields during March coincided with the news of a major fiscal support package in Germany, which boosted Bund yields along with their French and Italian equivalents and likely pushed up yields globally. This element of the move in long-dated rates can be seen as positive – reflecting a reflation of the eurozone economy driven by the country with ample fiscal space to do it. Since early April, the 2y-30y spreads for Germany, France and Italy have moved very little, but those for the US, Japan and the UK have moved higher. This is potentially more worrying. It coincides with a spike in US policy uncertainty, forcing higher bond risk premiums, together with growing concerns about the fiscal position of the US, Japan, and the UK. The US administration’s fiscal plans imply a further widening of the deficit from an already-unsustainable level. Japan’s gross government debt of well over 200% of GDP is sustainable in a low global rate environment, but not when global yields move to pre-GFC levels. As Japanese yields rise, self-reinforcing dynamics can take over – with higher yields raising questions over sustainability, driving risk premiums higher, in turn putting more pressure on sustainability. For investors, developments in the bond market – and the impact on asset prices – is a key focus. With US Treasuries in turmoil, traditional safe assets are less reliable (see page 2), while higher rates could eventually weigh on stocks. With the risk of “deficits forever”, the bond vigilantes won’t be leaving any time soon. Market Spotlight Building new synergies Over the next 25 years, investments totalling an estimated USD150 trillion are going to be needed to achieve global energy transition targets. Key to that will be the development of infrastructure projects in areas like clean energy, transport, and digital. It comes at a time when traditional lending is scaling back in this space – and according to some Infrastructure Debt specialists, it’s leaving a financing gap that is driving strong demand from both companies and investors for private credit in infrastructure funding. Large-scale infrastructure projects often attract financing from major institutions, which is why infrastructure debt has historically been dominated by insurance companies seeking long-term, investment-grade assets. Yet, specialists see mid-market deals (of USD50-250 million) remaining largely underserved. It is an area now attracting pension funds, family offices, and investors seeking higher-yield, shorter-duration opportunities. For investors that allocated heavily to direct lending in recent years, it also offers a potentially lower-risk alternative while still offering attractive returns versus public markets. Overall, the synergy between private credit and infrastructure financing is reshaping how institutional investors approach alternative assets. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management, Bloomberg. Data as at 7.30am UK time 30 May 2025. Lens on… Emerging diversifiers Emerging market local currency debt looks positioned to do well in a backdrop of high real yields, strong fundamentals, and a weakening US dollar. Indeed, strengthening EM currencies, combined with falling inflation, are allowing EM central banks to ease policy, further boosting the appeal of EM local bond markets to global investors. And while US tariffs could drag on growth, the demand shock could be disinflationary for EMs, potentially speeding up their policy easing cycles. Despite broad tailwinds, it makes sense to take a differentiated view of the EM bond universe. EM currencies – especially those backed by large external surpluses, some of them in Asia – are likely to outperform. EMs have built up buffers against external risks at differing speeds, and they have varying exposure to global trade. For Indonesian bonds, historically high real yields, low inflation, manageable external balances, moderate debt levels, and reassurance from the finance minister have alleviated market concerns over fiscal risks. A Q1 profits bang – but 2025 whimper? Last week saw the last of the Magnificent Seven mega-caps deliver Q1 profits numbers – which once again beat analyst expectations. Overall, US Q1 profits have delivered a bang, growing 13% year-on-year versus an expected 7% at the start of the quarter. But while sectors like healthcare and technology have raised guidance for the full year, most sectors are pencilling-in flat to falling growth in 2025. In fact, consensus y-o-y profits growth for 2025 has fallen from 14% in January to just over 9% today. Energy, materials and consumer discretionary have seen the deepest downgrades. Revisions in consumer discretionary follow a stellar run for the sector, which is up by 218% over 10 years. But with a 12-month forward price/earnings valuation of 29x (higher than US Tech on 27x). Industrials, which is not cheap on 23x, has exposure to the US government's focus on infrastructure and re-shoring. Beyond the US, full year consensus for Emerging Markets are better in most sectors. And with EM on a PE of 12.3x versus the US on 21.5x, EM stocks could offer more of a valuation buffer against setbacks. In search of safety Asset market volatility this year has focused investor attention on ways of giving portfolios sufficient ballast. For much of the first two decades of this century, a negative correlation between stocks and bonds meant bonds provided a reliable cushion in equity market downturns – good news for 60/40 portfolios. But since 2021, this dynamic has reversed. Resurgent inflation and shaky public finances led to bonds and equities selling off in tandem. For investors, it removed a comfort blanket they’ve relied on for years. Research by some ETF and Indexing teams shows the current correlation landscape resembles patterns seen in the 1970s, 80s, and early 90s – a time when inflationary pressures drove positive correlations between stocks and bonds. The relationship between inflation and economic growth influences how asset classes behave relative to each other. When inflation dominates, as it has post-pandemic, bonds are a less reliable hedge. That’s compounded by concerns over high deficits keeping bond yields sticky. In sum, it poses a challenge to the 60/40 model and may require a change in how investors think about risk and diversification. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 30 May 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 30 May 2025. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Market review Risk sentiment strengthened last week as the Q1 earnings season neared its end, and investors continued to monitor the trade negotiations and tariff developments. The dollar index rebounded modestly, and Treasury yields pulled back following solid auction results. European yields also declined. US and Euro credit spreads narrowed, with HY outperforming IG. US equities saw broad-based gains, recovering some of the prior week's losses. European markets broadly advanced, as Japan's Nikkei 225 rose amid a weaker yen and a retreat in JGB yields. Other Asian equities lacked clear direction, with South Korea's Kospi leading gains. India's Sensex and China’s Shanghai Composite traded sideways, while Hang Seng fell. In commodities, oil prices declined before an OPEC+ meeting to discuss July output, accompanied by softer gold and copper prices. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/bond-market-vigilantes-are-back/

2025-05-26 12:01

Key takeaways The RBA delivered a dovish 25bp cut in May, and a 50bp move was discussed. The AUD weakened after the decision… …but we continue to see scope for a stronger AUD. On 20 May, the Reserve Bank of Australia (RBA) lowered its key policy rate by 25bp to 3.85%, in line with market expectations. This was the second rate cut in the current easing cycle. The RBA Governor, Michele Bullock said after a short discussion about whether to remain on hold, the conversation moved swiftly to the thought of a 50bp or 25bp cut (Bloomberg, 20 May 2025). There were broad-based negative revisions to the RBA’s quarterly forecasts. The RBA now forecasts GDP growth of 2.1% y-o-y in 4Q25 (previously 2.4%) and 2.2% in 4Q26 (previously 2.3%), an unemployment rate of 4.3% in 4Q25 and 4Q26 (previously 4.2%), and trimmed mean inflation of 2.6% in 4Q25 and 4Q26 (previously 2.7%), assuming two more 25bp cuts by end-2025 and one more cut by mid-2026. Rate markets now see the RBA policy rate to end the year at c3.1%, lower than c3.3% before the decision (Bloomberg, 22 May 2025). The AUD edged lower against the USD after the announcement before recovering its loss. Nevertheless, this is a dent but not an end to our bullish AUD view. Externally, trade tensions are de-escalating. This should alleviate the pressure on the regional growth outlook to a certain extent, improve overall risk sentiment (which we use Vanguard FTSE All World excluding US ETF as a proxy), and benefit the AUD (Chart 1). Domestically, the incumbent centre-left Australian Labor Party, led by Prime Minister Anthony Albanese, won the Federal election on 3 May and a second term, with an increased majority of the vote. The current government has ample room and clear willingness to deliver fiscal support if domestic conditions warrant, as the net national debt is low at 19.9% of GDP in 2024-25 (according to the budget 2025-26 released on 25 March). Source: Bloomberg, HSBC Source: Bloomberg, HSBC Positioning wise, AUD-USD has traded at a discount to its key drivers since the US election, in line with still sizable net short positions (Chart 2). Positioning readjustment, in addition to a potential increase in the FX hedge ratio by Superannuation Funds could also be positive for the AUD. All things considered; the risk-reward balance may move in favour of the AUD in the months ahead. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/aud-beyond-the-rbas-dovish-cut/

2025-05-26 07:04

Key takeaways US tariffs policy has been front of mind for markets in recent weeks. But with a meaningful softening of the US administration’s position of late, investors’ focus now looks to be shifting to fiscal policy. When Mario Draghi published his blueprint to revive the EU economy last year, he said the bloc needed sharp increases in public and private investment. So, when Germany – with its long record of fiscal prudence – announced plans for massive spending on infrastructure and defence six months later, no wonder Draghi called it a “game changer”. Last week, a major Chinese battery maker pulled off the biggest share sale in the world this year, with a multi-billion dollar secondary listing in Hong Kong. The move could bode well for other China-quoted firms hoping to attract funding from both domestic and foreign investors. Chart of the week – Does the end of US exceptionalism persist? A dominant theme in the minds of investors this year has been the prospect of an end to US exceptionalism. The previous week’s US credit rating downgrade by Moody’s – while not exactly unexpected – provided a reminder that the US fiscal situation has become untenable. But when we talk about an end to exceptionalism, what has really changed? Over the past decade, investors have enjoyed three types of US exceptionalism. The first is the country’s exceptional GDP growth, especially within the context of the G10 (although a lot of that has been more about fiscal spending and immigration, than it has about productivity). Second is its exceptional stocks. Returns have been boosted by super-normal profits, the Magnificent Seven tech mega-caps, and a big re-rating of the market multiple. Thirdly, there has been the exceptional US dollar. The USD has boosted investor returns and sucked up global capital and investor attention. It also provided portfolio hedging services to global investors – offering strength in times of both US economic outperformance and weak global growth (the “dollar smile”). The critical question now is the extent to which these elements survive? For a start, macro growth is cooling amid policy uncertainty, and that could persist as a dampening effect on US activity for a while. Meanwhile, the premium growth rates are in Asia and Frontier economies. In stocks, the US market cap as a percentage of global stock markets looks to have made a top. And profits growth is expected to be as fast in China as in the US over the next 12 months. As for the USD, it remains over-valued versus most currencies, and many global investors are now exploring hedging FX for US stock exposures – which is a material shift in psychology. The forces making the US look less exceptional could stick around for a while. Market Spotlight Retail therapy Rollercoaster US stock market volatility in the early months of 2025 has given way to a pronounced rally in May. But with fund manager surveys pointing to some unusually bearish institutional positioning in US stocks, it seems that something else has been driving recent moves. According to reported flows data, US stock prices since late April have been supported in part by a pick-up in buying among retail investors. In a repeat of a theme that’s been a fixture in markets for the past decade – particularly in the rebound after the Covid crash of 2020 – retail has been acting like a stabilising force and “buying the dip”. The latest leg-up in prices followed the better-than-expected deal in early May between the US and China to cut tariffs for 90 days. But while developments like that help explain the shift in investors’ perception of risk, there’s potential for it to drive a disconnect between market performance and still ultra-high policy uncertainty. While retail investors got the rally started, the momentum could fade quickly if smart money institutions fail to join in – potentially causing further volatility, with markets continuing to spin around. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management, Bloomberg. Data as at 7.30am UK time 23 May 2025. Lens on… Beautiful bill, ugly truths US tariffs policy has been front of mind for markets in recent weeks. But with a meaningful softening of the US administration’s position of late, investors’ focus now looks to be shifting to fiscal policy. Moody’s decision to strip the US of its last remaining “triple A” rating is a timely reminder of the challenges facing President Trump’s fiscal package as it moves through Congress. The one-notch downgrade reflected the well-known rising debt burden and widening deficit, which Moody’s expects to be exacerbated by the extension of the 2017 Tax Cuts and Jobs Act (TCJA), the centrepiece of the administration’s fiscal policy. While the details of the “One, big, beautiful bill” are yet to be finalised, it is likely to include fiscal easing over and above the extension of the TCJA. However, Washington will have one eye on the bond market and the USD – the 30-year yield breached 5% last week while the USD is softening again. Meanwhile, although tax cuts may be seen as positive for the stock market, this may be offset by a renewed rise in yields. So, a key question for investors is do these ugly truths force the White House to pare back its ambitions? Go with the euro income flow When Mario Draghi published his blueprint to revive the EU economy last year, he said the bloc needed sharp increases in public and private investment. So, when Germany – with its long record of fiscal prudence – announced plans for massive spending on infrastructure and defence six months later, no wonder Draghi called it a “game changer”. German fiscal expansion, together with expectations of further ECB rate cuts, have improved the prospects for the eurozone economy. Some credit research teams suggest one spillover effect could be a positive change in sentiment in European credit markets. European corporate credit fundamentals are healthy, with steady gross leverage and resilient profitability. Coverage ratios (measuring the ability of firms to service debts) have dipped, but many have strong cash buffers. The asset class should also be resilient to tariffs, with only a limited proportion of both IG and HY markets made up of US registered companies, while direct sales exposure to tariffs is also limited. One note of caution is that a lot of this good news is in the price – spread valuations remain tight. But high all-in yields are compelling for investors looking for steady income flows. A market catalyst? Last week, a major Chinese battery maker pulled off the biggest share sale in the world this year, with a multi-billion dollar secondary listing in Hong Kong. The move could bode well for other China-quoted firms hoping to attract funding from both domestic and foreign investors. It comes amid signs of continuing positive sentiment towards Chinese stocks this year, especially in technology-related sectors, with investors seeking to broaden their international exposure beyond the US. Growing global appetite for Chinese stocks coincides with a recent pick-up in earnings upgrades. That’s been driven by cooling trade tensions between the US and China, and Q1-2025 profits numbers from Chinese firms that are largely in line with market consensus, delivering decent year-on-year growth. In the offshore market, technology industries are the profit engine, with AI still expanding at a clip. In the onshore market，the strongest growth has been in consumption-sensitive sectors like consumer discretionary and staples, in part because of ongoing policy support and the expectation that policymakers will respond (with a “put”) if headwinds worsen. Put together, these latest developments could be a catalyst for further positive performance in Chinese stocks. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 23 May 2025 Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 23 May 2025. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Market review Risk sentiment pulled back last week amid growing worries about US debt sustainability, following the US House of Representatives’ passage of a bill extending the 2017 tax cuts last week and Moody’s downgrade of the US credit rating the previous week. The US dollar weakened while longer-dated US Treasury yields rose, with the 30-year yields breaching 5.00%. UK gilt yields also rallied, and most European yields rose too, albeit to a lesser extent. US HY credit spreads widened after weeks of narrowing, while IG spreads remained stable. In equities, US markets saw broad-based losses, while the Euro STOXX50 were largely unchanged. The DAX rose, whereas the CAC40 edged lower. Japan's Nikkei 225 declined amid a stronger yen, and other Asian equities were mixed: Hong Kong’s Hang Seng and mainland China’s Shanghai Composite gained, while South Korea's Kospi and India's Sensex fell. In commodities, oil prices dropped amid investor concerns over a potential increase in OPEC+ production. Gold advanced, and Crypto extended their weekly rallies. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/does-the-end-of-us-exceptionalism-persist/