2025-07-29 07:05

Key takeaways The European Union (EU) and the US reached a trade deal on 27 July, agreeing on a 15% tariff rate to be imposed on EU goods sold to the US, starting 1 August. However, details of sectoral tariffs, namely pharmaceuticals and semiconductors may not be fully clear. Other key terms of the deal include a USD750 billion purchase of US energy products and chips and USD600 billion of additional US investments from the EU. Although the Eurozone is ultimately left with a higher baseline tariff of 15% compared to the 10% level it was hoping to achieve, the incremental downside risks to growth should be manageable given that “certainty” may pave the way for stabilisation in sentiment or a bottoming out in tariff-exposed sectors. We keep our neutral view on Europe ex-UK equities with a preference for Industrials, Financials and Utilities. Our preferred exposure in the fixed income space lies with investment grade bonds of 7-10- year duration. Please refer to the full report for details about the event and our investment view. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/eu-us-deal-eases-near-term-downside-risks/

2025-07-28 08:06

Key takeaways The ECB was on hold in July, as widely expected. The EUR is still much stronger than what its yield differential implies, which assumes a ‘good case’ outcome on tariffs. Risks for the EUR are skewed to the downside if trade tensions intensify and/or evidence of economic weakness emerge. On 24 July, the European Central Bank (ECB) kept its deposit rate steady at 2% for the first time in more than a year, after slashing rates by 2% in total since the beginning of the easing cycle in June 2024. The statement stresses that the environment remains exceptionally uncertain, especially because of trade disputes, with risks to growth remaining tilted to the downside. Having said that, ECB President Lagarde seemed to focus on the positive impact of a possible trade deal lifting uncertainty and also reaffirmed that the central bank is in a very good place to hold and watch how the risks will evolve over the next few months. While plenty of uncertainty remains, our economists think that the ECB is done cutting rates if the EUR stays around the current level. But if EUR-USD were to head towards the 1.25-1.30 range, this could mean a bigger inflation undershooting, pushing the ECB to reconsider cutting rates in December or early next year. Markets have also pared back expectations of further ECB easing, currently pricing in a c20% chance of a rate cut in September (Bloomberg, 24 July 2025). It is worth noting that the EUR still enjoys an unusually large premium relative to the interest rate differential (Chart 1), which assumes a ‘good case’ outcome on tariffs. Media reports suggest that the US and the EU are closing in on a trade deal which would place 15% tariffs on the EU (FT, Bloomberg, 23 July) − higher than the 10% ‘baseline’, but certainly not as impactful as a 30% rate. Source: Bloomberg, HSBC Source: Bloomberg, HSBC Meanwhile, the EUR is returning to its ‘risk on’ persona (Chart 2). Any material escalation in tariffs could see risk aversion, probably weighing on the EUR. Conversely, trade deals with lower tariff levels could support risk appetite, which is likely to be EUR-positive. As such, we look for the EUR to move mostly sideways in the weeks ahead; but risks are skewed to the downside, especially if trade tensions intensify or evidence of Eurozone economic weakness emerges. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/eur-return-to-risk-on-persona/

2025-07-28 07:04

Key takeaways Japan’s ruling coalition lost its majority in the Upper House election, with market focus moving to US tariffs. The post-election drop in USD-JPY appears to be a little unconvincing. Unless there is a breakthrough in trade talks, the JPY is likely to underperform the USD over the near term. In Japan’s upper house election on 20 July, the Liberal Democratic Party (LDP) and its junior coalition partner, Komeito, failed to secure enough seats (at least 50 out of the 124 seats up for re-election) to hold on to their majority (Chart 1). This marks the second consecutive defeat for the LDP under Prime Minister Shigeru Ishiba’s leadership following last October’s lower house election. Despite the electoral setback which deprived the LDP of a majority in both legislative houses for the first time since 1955, Prime Minister (PM) Ishiba has publicly vowed to stay on as Japan’s leader. Source: Media reports, HSBC Source: Bloomberg, HSBC We are not convinced that the post-election dip in USD-JPY will be sustained (Chart 2). Perhaps, there is some relief in the FX market that things did not come out even worse for the ruling coalition, with the announcement by PM Ishiba removing some political uncertainty. However, without a majority in either parliamentary house, the ruling coalition will likely have to compromise with opposition parties to pass legislation. This could see looser fiscal policy and complicate the Bank of Japan's (BoJ) path to monetary policy normalisation, while our economists still expect a BoJ hike in 4Q25. The immediate focus may now move to whether a US-Japan trade deal can be struck before 1 August. Markets may still see challenges for Japan to get a favourable trade deal. Any failure to secure a deal could see the JPY weaken, more so if other nations are successful in their negotiations. That being said, the likely extent of any USD-JPY bounce could be curtailed by the possibility of FX intervention by Japan’s Ministry of Finance (MoF), with rhetoric already more evident ahead of key levels around 150 and 152. There were already some verbal comments from Finance Minister, Katsunobu Kato, and Deputy Chief Cabinet Secretary, Kazuhiko Aoki (Bloomberg, 17 July 2025). https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/jpy-ruling-coalition-loses-upper-house-majority/

2025-07-28 07:04

Key takeaways The US dollar index (DXY) has fallen 10% in 2025, taking it to a three-year low and its worst start to a year since 1973. In part that’s because global investors have cooled on US assets amid policy uncertainty, fiscal worries, and a weaker growth outlook. When rates rose sharply in 2022-2023, flows into money markets soared. But with central banks now cutting rates, the case for switching to fixed income assets is strengthening. Indonesia continues to be a star performer in emerging market local-currency bonds, with IndoGBs generating a total return of more than 5% over the past three months alone. Chart of the week – Is the US economy approaching stall speed? Markets currently see very little chance of a rate cut at this week’s US Fed meeting, with a move not fully-priced until late October. But the discussions between Fed members may be far more interesting, and at least one dissenting vote in favour of a rate cut – Governor Waller – seems likely. While Governor Waller’s recent call for a July rate cut has been viewed as political by some commentators, his arguments should not be dismissed. Essentially, Waller believes tariffs will not produce persistent inflation, because inflation expectations are well-anchored. But he is concerned that the economy is slowing below trend and payrolls growth is near stall speed. While the US’s recent history of above-target inflation means the wider Fed is understandably cautious about cutting rates, Waller has a point regarding the stall speed of the economy. Typically, once growth drops around one percentage point below trend, it goes on to experience a sharper downturn. The current Bloomberg consensus forecast is for growth to drop 1.3 percentage points below the Congressional Budget Office's trend estimate by Q425. Waller’s concerns about downside risks put him at odds not only with most Fed members but also with equity investors, given that the S&P 500 hit another all-time high last week. Investors appear more focussed on positive news on tariffs, such as the US-Japan trade deal, and progress with the US-EU talks. Market Spotlight A new globalisation The 1990s and 2000s period of “hyper-globalisation” was characterised by a major increase in international trade and capital flows. However, global trade growth has stagnated since the financial crisis, hastened by the shock of Covid and rising US protectionism. Investor attention remains centered on the global economic challenges posed by US tariff increases. But less noticed has been how economic interdependency within emerging markets is rapidly growing. China’s flagship Belt and Road initiative (BRI) is a key part of this story. According to a recent study by Australia’s Griffith University and the Green Finance & Development Center in Beijing, China’s investments in BRI members have surged this year, totalling USD124bn in H1, already surpassing last year’s USD122bn total. And unlike the early stages of the BRI, which was primarily state-led, private companies are now taking the lead as they look to seize opportunities in faster growing economies of the Global South. This “new globalisation” could contribute to many emerging and frontier markets experiencing superior rates of economic growth in the coming years. And for investors, this should help unlock valuation opportunities in these regions. 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. HSBC Asset Management, Bloomberg. Data as at 7.30am UK time 25 July 2025. Lens on… Greenback blues The US dollar index (DXY) has fallen 10% in 2025, taking it to a three-year low and its worst start to a year since 1973. In part that’s because global investors have cooled on US assets amid policy uncertainty, fiscal worries, and a weaker growth outlook. In contrast, the euro (+13%) and the British pound (+8%) have strengthened sharply against the dollar this year. That’s been helped by a pick-up in sentiment towards Europe, where major fiscal expansion in Germany boosts the growth outlook. An eye-catching consequence of the greenback weakness is that FX volatility is having a strong influence on stock market index returns. In dollar terms, for instance, the developed market MSCI World index is up by 11% this year. But in euro terms it’s down by 2%. Stock market volatility tends to trump FX volatility, which is a key reason why global investors have historically tended to leave their US exposure unhedged and benefit from the once-dependably strong dollar sweetening their returns. That’s not working this year, and hedging US equity exposure now looks like a potentially preferable option for global investors. Short duration bonds When rates rose sharply in 2022-2023, flows into money markets soared. But with central banks now cutting rates, the case for switching to fixed income assets is strengthening. But with the rate cut path uncertain, and the yield curve still flatter than normal, the return on duration-based investments faces challenges. Indeed, analysis by some Global Fixed Income teams show that, for now, the extra yield on longer-dated bonds may not justify the duration risk (the potential for rates to change over time). In the Global Aggregate bond index, the 1-3 year index currently has a higher yield-to-duration ratio – a key measure of the compensation for taking duration risk – than longer-duration indices. With still-elevated starting yields and potential for capital appreciation as the curve steepens, short duration appears well-positioned. Indonesia in demand Indonesia continues to be a star performer in emerging market local-currency bonds, with IndoGBs generating a total return of more than 5% over the past three months alone. The fundamental story for the country’s bonds remains encouraging. Bank Indonesia is on an easing cycle and cut rates again recently, by more than expected. Core inflation has been ticking lower towards 2%, and GDP growth – stable at around 5% – should be cushioned from external uncertainties as policy eases. Growth should also be buoyed by Indonesia’s recently-agreed US trade deal, which sees exports to the US attract an average tariff of 19%, down from the previously-threatened 32%. It marks a stark shift for a country once badged one of the ‘fragile five’ EMs deemed over-reliant on foreign investment to fund growth. Indeed, Indonesia can afford a growth focus given its low inflation and lack of macro imbalances. Its current account has been roughly in balance since the pandemic and its budget deficit has been well within the statutory 3% limit. Some analysts think it gives real yields space to fall in the coming months, offering further support to bond returns. 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 25 July 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 25 July 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 increased last week amid overall beats in US Q2 earnings and a trade deal announced between US and Japan, and reported progress on a deal between the US and the EU. The US dollar and US Treasury yields fell on the week. European yield moves were mixed and muted overall. US equities saw broad-based gains, with high-beta sectors like technology outperforming. European stock markets saw limited moves, barring the UK which saw solid momentum in the FTSE 100. Japan's Nikkei rose sharply in response to the US trade deal news, with the yen falling. While the Shanghai composite and Hang Seng rose in EM Asia equities, South Korea's Kospi and India's Sensex both lost ground. In commodities, oil was lower and gold rose. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/is-the-us-economy-approaching-stall-speed/

2025-07-24 12:02

Key takeaways Table of tactical views where a currency pair is referenced (e.g. USD/JPY):An up (⬆) / down (⬇) / sideways (➡) arrow indicates that the first currency quotedin the pair is expected by HSBC Global Research to appreciate/depreciate/track sideways against the second currency quoted over the coming weeks. For example, an up arrow against EUR/USD means that the EUR is expected to appreciate against the USD over the coming weeks. The arrows under the “current” represent our current views, while those under “previous” represent our views in the last month’s report. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-trends/g10-currencies-us-trade-policy-outcomes-in-focus/

2025-07-23 07:05

Key takeaways The USD narrative has been negative so far this year… … and some drivers (like US yields) that should be positive for the currency have not worked. Our framework points to a soft USD in the months ahead, but it is worth tracking whether the USD is about to bottom. The US Dollar Index (DXY) slumped c11% in the first six months of the year, posting its worst 1H performance since 1973. Back then, it lost c15% (Bloomberg, 1 July 2025). While the delay in the US reciprocal tariff deadline to 1 August looked like another de-escalation moment, the announcement of potential tariffs on certain countries, namely Brazil, Canada, the EU and Mexico, and targeted products, such as pharmaceuticals and copper, will keep uncertainty high. That being said, the USD has become the best performing G10 currency so far in July (Bloomberg, 17 July 2025). With the second half of the year underway, we continue to rely on our 3-factor framework, benchmarking the USD versus political, structural, and cyclical factors (Chart 1). To summarise, US policy uncertainty persists and is USD negative, albeit not to the same degree as in April. Cyclical pressures on the USD are neutral, given the US economy faces downside risks but the same is true with other currencies. Structural forces have mattered more when considering greater FX hedging of USD assets and conversion by foreigners and corporates, respectively. We have also focused on the deterioration of the US current account and basic balance as reasons behind a softer USD, but such deterioration may not persist once the impact from US tariffs dissipates. The combination of these factors suggests the USD is likely to remain on a softer path in the coming months. Source: HSBC Source: Bloomberg, HSBC But we should be cognisant of what could mark the end of the USD’s decline. An important development would be if the USD began performing in line with what its policy rate implies. If it were to return to a more conventional framework (i.e. both higher US yields and USD, and vice versa, Chart 2), this could also signal a bottoming of the USD is approaching. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/usd-bottoming-out-yet/