2025-03-05 07:04

Key takeaways Global geopolitics drives economic uncertainty, adding to fiscal woes. UK economic growth has disappointed and expectations for 2025 have been downgraded. Despite the acceleration in inflation, interest rate cuts should continue over the next year. Source: HSBC Global geopolitics has taken centre stage over the last month, from US tariff announcements, to the possibility of a Ukraine-Russia peace deal, a new German Chancellor, and an increase in UK defence spending. Positively, Prime Minister Starmer appeared to have a constructive meeting with President Trump, perhaps lessening the likelihood of direct tariffs on UK goods exports. That said, the UK remains exposed to broader global trade disruption, notably across Europe. The increase in UK defence spending that brought forward plans to reach 2.5% by 2030 will be fiscally neutral due to a reallocation of overseas development aid funding (chart 1). However, further increases, such as ambitions to increase defence expenditure to 2.65% and then to 3% after the next election would, at this juncture, prove a challenge and likely require further spending trade-offs and/or accounting adjustments, such that defence spending is classified as investment spend and wouldn’t fall under the Chancellor’s fiscal mandate to balance current spending with revenues. Indeed, the UK may also participate in multilateral bond-financed funding programmes. Undoubtedly, further increases in defence spending requirements would add to an already complicated fiscal landscape for the Chancellor further down the line. For the looming fiscal statement on 26 March, disappointing economic data since the October Budget and financial market volatility have raised the prospect that the fiscal ‘headroom’ afforded to Chancellor Reeves a few months ago may have been wholly or partially eroded. One response option would be to impose further ‘efficiency savings’ to unprotected departments, in addition to the 2% already announced. Growth and inflation woes resurfaced UK economic data has been mixed, while GDP data showed growth of 0.9% for 2024 overall, yet the private sector is reported to be in recession. Meanwhile, surveys have continued to point to a subdued start to the year, albeit appear to have stabilised. We recently revised down our UK GDP growth forecast for 2025 to 0.9% from 1.4% previously. For inflation, we have revisited our 2025 outlook and now see headline CPI peaking at 3.8% in September. However, the acceleration in price growth is largely externally driven via higher energy prices, water bills, and indexed linked services (chart 3). In contrast, services inflation – the proportion of inflation of most concern to the Bank of England (BoE) – should continue to moderate. As such the BoE continues to signal a gradual path for interest rate cuts as it looks through the “hump” in inflation. The BoE has judged that the risk of second-round inflationary effects is lower than in the last couple of years. However, uncertainty in labour market data continues to be a headache for policymakers in judging the degree to which structural factors have – and could continue to – influence domestic inflationary pressures. At the most recent monetary policy meeting (6 February 2025), the committee seemed to place greater weight on that scenario and a need to be “careful” in cutting Bank Rate. From our perspective, labour market slack is likely to continue to build over 2025, pay growth settlements should ease, while business investment and consumption growth will be modest as global uncertainty and inflationary pressures drag on activity. Source: Macrobond, NATO Source: Macrobond, ONS, HSBC forecasts Source: Macrobond, ONS, HSBC forecasts https://www.hsbc.com.my/wealth/insights/market-outlook/uk-in-focus/global-developments-could-add-to-uk-fiscal-troubles/

2025-03-04 07:05

Key takeaways We think the US equity YTD underperformance is not a reflection of worsening fundamentals but a sign of improved prospects beyond the US and tech. Thanks to AI-led innovation and pro-growth policies, earnings growth is broadening across Communications, Financials, Industrials and Healthcare outside of the Mag-7 stocks. The rapid AI development in China led by DeepSeek’s breakthrough, and the supportive stance of the government towards private enterprises and tech innovation, warrant our recent upgrade of Chinese equities, and subsequently, Asia ex-Japan equities, to overweight. AI monetisation, cloud expansion and semiconductor growth are key catalysts for the tech sector. In addition to an improved economic and political outlook for Germany and France, we upgrade Europe ex-UK equities to neutral on increased defence and infrastructural spending in Europe, which also benefits European Industrials. Attractive valuations and underestimates of the number of rate cuts by the Bank of England support our upgrade of UK gilts to overweight. In EMEA, the UAE looks attractive due to its strong financial sector growth, AI-driven infrastructure investments and growing activities outside of oil. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-monthly/ai-revolution-broadening-exposure-beyond-the-us-and-tech/

2025-03-03 12:01

Key takeaways As widely expected, the RBA started its easing cycle by delivering a 25bp hawkish cut at its first meeting in 2025. The RBNZ delivered the much anticipated third straight cut of 50bp, and is expected to slow its easing pace from here. Rate differential with the US could eventually drag the AUD and the NZD, but external factors are crucial over the near term. External drivers continue to dominate the price action in AUD-USD and NZDUSD. A number of two-sided risks, such as China’s fiscal agenda, various US trade policy deadlines, and developments on the Russia-Ukraine front, are set to unfold over the next few weeks. For example, tariff developments could impact both the AUD and the NZD via risk appetite channel, but targeted US tariffs on China may hurt the AUD more, whereas VAT-related tariffs may weigh on the NZD more. But looking beyond the near-term movements, fundamental factors, especially their terminal rate differentials with the USD, could eventually weigh on the AUD and the NZD over the medium term. Unlike the Federal Reserve (Fed), which held rates unchanged, the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ) both cut rates, as expected, at their first meetings in 2025. On 18 February, the RBA delivered its first interest rate cut after more than four years, lowering its cash rate by 25bp to 4.1% (Chart 1). However, the overall tone was quite hawkish, with the statement saying that “the Board remains cautious on prospects for further policy easing”. Our economists expect the next RBA cut to be in 3Q25, while markets have priced in a c60% chance for this to happen in May (Bloomberg, 27 February 2025), amid softer CPI inflation. Australia’s weakening current account balance could also drag the AUD over the medium term. Source: Bloomberg, HSBC Source: Bloomberg, HSBC A day after the RBA’s announcement, the RBNZ cut its cash rate by 50bp to 3.75%. In the face of a weak domestic economy where GDP has fallen, the unemployment rate has risen significantly, and this has brought inflation back to target (Chart 2). But with a total of 175bp of cuts delivered since August 2024, our economists expect the RBNZ to slow its easing pace from here, with 75bp of further cuts probably being delivered, taking the cash rate to 3.00% by 3Q25. The NZD may also face risks of an underfunded current account deficit, as foreign ownership of New Zealand government bonds remains high. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/aud-and-nzd-after-rate-cuts-in-february/

2025-03-03 07:04

Key takeaways With Q4 2024 earnings season well under way, the broad picture for US stocks is positive, with profits on track to grow by 16% year-on-year – up from a forecast 11% at the start of January. Recent macro data have come in softer than expected, leading investors to question the bullish US growth narrative that had built up since late 2024. Trends in Chinese government bond yields have diverged markedly from other major bond markets in recent years. The low correlation has been driven by China’s domestic economic and policy cycles, as well as relatively low foreign investor participation in the CGB market. Chart of the week – Mini growth scare A mini growth scare has rippled through US markets over the past week or so. Equities are down, so too is the ‘Dixie’ dollar index, and Treasuries have rallied, with the yield curve flattening despite short-term rate expectations declining. Corporate spreads have widened a bit too, but remain tight. Bitcoin – notoriously sensitive to risk sentiment – gapped lower by more than 10% in a matter of days. And the AAII survey confirmed the shift lower in investor confidence. Bullish less bearish sentiment hit its weakest level since September 2022, with the pace of decline over the past four weeks, the quickest since 2013. That move looks excessive relative to market developments and may reflect an additional headwind from much-increased policy uncertainty. What do we make of all this? Recent downside surprises to US macro data and analyst earnings revisions becoming less positive (see Page 2) mean the bullish growth narrative of “US exceptionalism” has been challenged. Investors are understandably nervous given stretched valuations in some parts of the US market. Moderating US growth and frothy valuations in some equity sectors have led to a rotation into markets where expectations still leave room for upside surprises and where valuations are closer to historic norms. This is playing out in the outperformance of Chinese and European stocks relative to the US since the start of 2025. Market Spotlight Sage advice Warren Buffett, the legendary investor and CEO of Berkshire Hathaway, has published his annual shareholder letter recently – a traditional ‘must-read’ for market-watchers. In it, the Sage of Omaha discusses Berkshire’s US Treasury holdings, Japanese investments, and America’s economic “miracle”. Buffett forged his early career as a deep value investor, buying unloved ‘cigar butt’ stocks close to collapse but still capable of delivering pure investment profit. These days he prefers to buy quality – without overpaying for it. But in the current growth-driven market environment, that has made outperformance tricky. Last year, Berkshire stock and the S&P 500 delivered near neck-and-neck returns of around 25%. Against that backdrop, it’s notable that in the past Buffett has advocated for indexing to the S&P 500. But with current high levels of ‘big tech’ concentration and valuation risk in the market cap-weighted S&P, even he might find the index a bit rich. A more value-driven strategy might be to pursue the equal-weight version. Long-term, the S&P e/w has tended to outperform its market-cap-weighted sibling – and could potentially offer more balanced exposure if market performance continues to broaden out. 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. 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. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 28 February 2025. Lens on… Great expectations With Q4 2024 earnings season well under way, the broad picture for US stocks is positive, with profits on track to grow by 16% year-on-year – up from a forecast 11% at the start of January. Last week saw the last – and largest – of the Magnificent Seven tech giants reporting, with sales and profits beating expectations but the market offering a mixed reaction. Despite the upbeat Q4 performance, there are signs that stretched valuations and global policy uncertainty are taking the shine off the 2025 US profits outlook. While analyst earnings revisions are still in positive territory, they have been trending down in recent weeks, especially among the biggest tech stocks in the Nasdaq 100. By contrast, revisions for European and Chinese stocks – while currently still negative – are turning higher. Q424 earnings have been strong in Europe so far, and prices have rallied, helped by expectations that now look too low and the fact that stocks there have been trading at a deep discount to the US. It’s a similar story in China, where technology stocks have led a market rally in February. This could be more evidence of a broadening out of market performance. Room to disappoint Recent macro data have come in softer than expected, leading investors to question the bullish US growth narrative that had built up since late 2024. While growth expectations for many other economies have remained stable or been revised down in recent months, the Bloomberg consensus for US 2025 growth has pushed higher to 2.3% from 1.9% in November. This has left room for disappointment, which is now happening with data such as January retail sales and the February US services PMI and consumer confidence numbers surprising to the downside. The base case has been for the US economy to slow somewhat during 2025, given still-restrictive monetary policy, moderating wage growth and a likely fading of consumers’ willingness to continue running a low savings rate. While analysts do not expect a sharp weakening and would caution against putting too much weight on January data, given large seasonal swings in the underlying numbers, heightened policy uncertainty does create downside risks to growth that may have been overlooked in recent months and requires close monitoring. Chinese bonds outlook Trends in Chinese government bond yields have diverged markedly from other major bond markets in recent years. The low correlation has been driven by China’s domestic economic and policy cycles, as well as relatively low foreign investor participation in the CGB market. CGB yields have also experienced relatively low volatility versus other bond markets, thanks to careful liquidity management by the PBoC. The central bank has managed both upside and downside yield moves in line with macro fundamentals and to safeguard financial stability. In recent weeks, 10-year CGB yields have edged up after hitting record lows in early February and after notable declines in 2024. But yields are likely to trade in a range in the near term, given domestic growth, inflation, and policy outlooks and amid elevated external geopolitical and macro uncertainties. This week’s National People’s Congress (NPC) meeting could be key for further news on fiscal support to revive confidence and consumer demand, and support modest inflation. Any further material rise in China’s rates near-term could present opportunities for investors. Past performance does not predict future returns. 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. Source: HSBC Asset Management. Macrobond, Bloomberg, Datastream. Data as at 7.30am UK time 28 February 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 28 February 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. Market review Rising jitters about a weaker US economy, fuelled by downside surprises in the PMI services and Conference Board’s consumer confidence surveys, weighed on risk appetite. The US dollar index remained largely stable amid ongoing geopolitical uncertainty. US Treasuries rallied, outperforming eurozone government bonds and UK Gilts, driven by lower US rate expectations. US corporate spreads widened modestly, with IG faring better than HY. US equities experienced broad-based weakness, with tech stocks leading losses as investors absorbed the latest Q4-24 earnings. The Euro Stoxx 50 index was little changed, while the German DAX reached a new high. In Asia, the Hang Seng index reversed from earlier gains following rallies in previous weeks, with the Shanghai Composite falling ahead of the National People’s Congress annual meeting. Both Japan’s Nikkei 225 and South Korea’s Kospi tracked US tech stocks markedly lower, as India’s Sensex also weakened. In commodities, oil fell, while gold and copper posted larger losses. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/mini-growth-scare/

2025-02-26 07:05

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/when-fx-markets-price-little-policy-uncertainty/

2025-02-24 12:02

Key takeaways The USD’s strength has ebbed lately, with the DXY converging with its rate differential… …which suggests little US policy uncertainty in the price of the USD, but we are hesitant to downplay these risks… …and fundamentals still favour the USD. The broad USD has lost steam lately, with the US Dollar Index (DXY) falling below the 107 level. The gap which had emerged between the DXY and that implied by its interest rate differential has also closed (Chart 1). This could be attributed to a reduction of the premium related to the uncertainty regarding the potential measures that could be announced by US President Donald Trump. In other words, there is little Trump policy uncertainty in the price of the USD. Canada and Mexico reached agreements to postpone US tariffs of 25% each on most of their exports until 4 March. The delay has given the CAD some respite, but it ignores the risk that US tariffs could rise, and the Canadian government retaliates. We are hesitant to downplay these risks entirely, as we are in the early stages of US President Donald Trump’s second term. The Trump administration’s current steps would see tariffs rising at their fastest pace since the 1930s but this could accelerate further (Chart 2). The more US tariffs on other countries rise, the greater the likelihood of a strong USD, all things being equal. Source: Bloomberg, HSBC Source: Tax Foundation, US Census Bureau, Historical Statistics of the United States, US International Trade Commission, HSBC The USD now faces asymmetric upside risks related to upcoming tariff deadlines. For example, a further delay in the imposition of tariffs on Canada or Mexico on 4 March might see a slightly weaker USD. But were the broad 25% tariffs to be imposed, the broad USD would likely surge higher. It is also worth monitoring whether the broader rhetoric from the US administration could lean more hawkishly on trade over the coming months, especially if higher US tariffs become an essential component of the fiscal toolkit. From the perspective of currency fundamentals, the USD should remain on a firmer footing, supported by relatively high yields and resilient growth. Unless there is a dramatic shift in the underlying macro picture – for the US and globally – we find it difficult to envisage a large and sustained decline in the USD. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/the-strong-usd-story-isnt-over-yet/