2024-11-07 12:02

Key takeaways While solid economic and earnings growth data, Fed rate cuts and structural trends are positive for US equities, we believe a Trump presidency is likely to offer additional support due to the proposed tax cuts and deregulation. As fiscal stimulus and potential tariff-related upward pressure on inflation may lead to further volatility in bonds, we downgrade Global, US and Asian investment grade bonds to neutral. The Eurozone faces challenges of slow growth and potential US tariffs, hence warranting our downgrade of Europe ex-UK equities to underweight. The UK is better positioned due to its better macro outlook and lack of a US-UK trade deficit. UK equities are also more defensive in nature and cheap. We continue to see opportunities in European IT, energy and healthcare. While we are waiting for more clarity around the size and the specific details of China’s fiscal stimulus measures, the potential for increased US tariffs adds to the complexity, so we remain neutral on mainland Chinese and Hong Kong stocks. Yet, valuations remain cheap. Within the region, we favour Japan, India and Singapore due to their favourable market conditions and positive growth drivers. South Korean stocks are moved down to neutral due to tariff concerns. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-monthly/2024-11-update/

2024-11-07 12:02

Key takeaways The Associated Press has called the 2024 US presidential election for Donald Trump. The Republican Party will gain control of the Senate, but several key Senate and House races have yet to be called. The US Dollar Index (DXY) surged to a four-month high. The Associated Press (AP) has called the 2024 US presidential election for Donald Trump, having secured more than the 270 required minimum threshold of Electoral College votes. According to the AP, Republicans will hold at least 51 seats in the Senate in 2025 (out of 100 total), therefore ensuring majority control. The margin of Republican control in the Senate is not yet clear, as the AP has yet to make calls for several races. Many of the most competitive races in the House of Representatives remain uncalled, and there is some uncertainty whether Republicans will secure a majority in that chamber. The market reaction to the US election results is all about expectations, and the impact of expectations is already apparent in the strength of the USD (Chart 1). The possibility of a Republican clean sweep bolsters expectations for fiscal stimulus and higher tariffs, both of which may be inflationary and slow the pace of Federal Reserve (Fed) easing in 2025 and support the USD. Thoughts of deregulation and possible corporate tax cuts may foster capital inflows into the US. Should results confirm a clean sweep, the USD could rally further. Source: Bloomberg, HSBC Source: Bloomberg, HSBC The flipside to this USD strength is FX weakness elsewhere (Chart 2). Among G10 currencies, the EUR is the most exposed to tariff concerns, especially when the Eurozone economy is still struggling with weak growth. The JPY is weakening alongside rising US yields and weakness elsewhere in Asia currencies. While the knee-jerk reaction has been supportive of our core view of USD strength, we would caution against extrapolating the move too far. After all, the presidential inauguration day is not until 20 January 2025, and policies requiring congressional approval would take longer still to become reality. Perhaps, the greatest argument, is that market expectations do not always translate into reality. A clean sweep would open the door to fiscal stimulus but does not guarantee it. Fiscal legislation could be vulnerable to different policy priorities within the Republican Party. It is also unclear how warmly the USD would welcome an expansion of the US budget deficit from an already sizeable starting point. Similarly, USD strength built on expectations of higher tariffs could be on porous ground if they are ultimately used only as a bargaining chip in trade negotiations. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/flash-2024-11-07/

2024-11-04 12:02

Key takeaways In the general election on 27 October, Japan’s ruling coalition lost its lower house majority for the first time since 2009. As widely expected, the BoJ kept its policy rate unchanged. USD-JPY is likely to hinge on developments in the US over the near term, but will possibly fall later when the yield gap narrows. As we approach the end of the year, the JPY is still the worst performing currency in the G10 space, losing c7.2% against the USD year-to-date and c5.5% against the USD in October (Bloomberg, 31 October 2024). While the JPY’s underperformance in October was due to continued USD strength on the back of rising US yields and political uncertainty in the US, markets seemed to be concerned about Japan’s political uncertainty amid the lower house election result and potential implications for the Bank of Japan (BoJ). The 27 October snap general election concluded with the ruling coalition (i.e., the Liberal Democratic Party (LDP) and Komeito) securing 215 out of 465 seats, short of the 233 needed for a majority – marking the first defeat for the ruling coalition since 2009. Some of the smaller parties that the ruling coalition would likely work with – namely the Democratic Party for the People (28 seats) and Japan Innovation Party (38 seats) – have earlier spoken out against the BoJ’s recent rate hikes (Reuters, 28 October 2024). Parliament will have to vote on the Prime Minister by 26 November. Meanwhile, the BoJ kept its policy rate unchanged at 0.25% on 31 October, as widely expected. The BoJ noted that the Japanese economy was moving broadly in line with projections which are almost the same as those made in July (see the table below). The JPY was slightly stronger after Governor Kazuo Ueda mentioned that currency moves are having a big impact on the economy and price trends. Our economists still expect the BoJ to raise its policy rate to 0.50% in January 2025, and markets are now pricing in a c60% chance for such a hike. Source: Bloomberg, HSBC Source: Bloomberg, HSBC It is worth noting that the recent rise in USD-JPY has been much faster than the widening of the US-Japan yield differential (Chart 2). The last time a significant gap opened up was in 2Q24, which Japan’s Ministry of Finance (MoF) eventually took action to curb what it deemed as speculation and excessive JPY weakness. While such divergence is likely to be noticed by the MoF, moves in USD-JPY will hinge on US developments over the near term. Looking further out, we still think USD-JPY may fall later with the Federal Reserve (Fed) easing and the BoJ normalising. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/2024-11-04/

2024-11-04 07:04

Key takeaways The stronger dollar and rising US Treasury yields have been driven by a string of better-than-expected US economic data. The Fed’s November meeting will take place after the US elections. While the election could bring with it some market volatility, the Fed is likely to look through this and focus on the recent data. Against a backdrop of decent Q3 earnings and resilient macro data, investors turned even more bullish on US stocks in October. Demand for volatility protection – as measured by the put-to-call ratio – is below average. Chart of the week – US dollar and EM assets The recent strengthening of the US dollar (USD) has put emerging market assets under pressure. Will it continue? The stronger dollar and rising US Treasury yields have been driven by a string of better-than-expected US economic data. The moves also reflect investor uncertainty about how the US policy agenda might impact fiscal deficits and inflation trends. New industrial policies, for example, could leave the Fed with less room to cut rates, boosting the USD further. However, the dollar outlook isn’t straightforward. The BRICS summit highlighted an ongoing trend for de-dollarisation; the reduced use of the USD in world trade and financial transactions. It’s notable that in emerging market FX reserves, the dollar is becoming less dominant. But this process is very gradual and seems likely to take decades. Back to today, the central scenario is one of ongoing disinflation, Fed cuts, and softer US growth. And these forces are consistent with lower US bond yields and a weaker USD. Market Spotlight Capital markets outlook Three things about the capital markets stand out. First, a medium-term economic regime of more volatile inflation and a new fiscal/monetary policy mix raises the assumption for interest rates. And that reinforces the appeal of core fixed income and the ‘all-in’ yields from ‘senior’ credit asset classes like infrastructure debt, asset-backed securities, and global investment grade. Second, the most compelling valuation anomaly today is in emerging markets. EM fixed income and equity returns look higher than in most of the G7. Opportunities in India, North Asia, and frontier markets stand out, as do themes in local currency EM bonds. Third, as the economic environment becomes more uncertain, there needs to be a larger role for private markets and other alternatives. That means focusing on diversifiers like hedge funds or commodities, the double-digit yields in private credit and infrastructure equity, and the emerging value in real estate and private equity. 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. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. 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. Diversification does not ensure a profit or protect against loss. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 04 November 2024. Lens on… Fed takes it slow The Fed’s November meeting will take place after the US elections. While the election could bring with it some market volatility, the Fed is likely to look through this and focus on the recent data. On that front, it is in a more comfortable position than in September, when it opted to cut rates by 0.5%. On average, activity data have surprised to the upside, after a run of softer readings over the summer. Labour data have been mixed – employment measures have remained robust, despite depressed new hiring and layoffs picking up in September. Overall, the Fed is likely to be relaxed about growth and labour developments. And while core PCE inflation picked up on a month-on-month basis in September, the six-month annualised pace of change – something Powell has mentioned the Fed looks at – is running only marginally above target, at 2.3%. We see a 0.25% cut being delivered this month, which is in line with market pricing. To maximise the chances of a soft landing, the Fed is expected to opt for a further steady stream of cuts at subsequent meetings to bring the funds rate down to a more ‘neutral’ level by mid-2025. US stocks as a haven Against a backdrop of decent Q3 earnings and resilient macro data, investors turned even more bullish on US stocks in October. Demand for volatility protection – as measured by the put-to-call ratio – is below average. ‘Bulls’ still outweigh ‘bears’ in the AAII investor sentiment survey, and defensive sectors like Staples have lagged. Faced with uncertainty over potential economic policy changes in the months ahead, investors have so far opted for the perceived safety of US stocks. Emerging market equities have been weaker, notably in India, ASEAN, and China. Eurozone stocks have also been out of favour. Amid some reasonable Q3 earnings reports from Magnificent 7 stocks last week, US technology remains in demand – despite average price-to-book valuations at an all-time high of 23x and high overseas exposure, with 60% of sector sales going abroad. But Financials and even US small-caps have outperformed versus the rest of the world. Yet, US stocks could be vulnerable to a shift in mood once the details of any changes to US trade policies are clearer. 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. Source: HSBC Asset Management. Macrobond, Bloomberg, Datastream. Data as at 7.30am UK time 04 November 2024. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 04 November 2024. 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 Risk markets are on the defensive ahead of the US presidential election, with the US DXY dollar index consolidating after recent gains. Core government bonds weakened on upward US and Eurozone data surprises. Gilts lagged US Treasuries as investors fretted about the medium-term outlook for government borrowing, led by a rise in 2-year yields. In the US, the Nasdaq fell on disappointing outlooks from some tech heavyweights. Weaker tech stocks pressured the Euro Stoxx index. The Nikkei 225 pared most of its gains amid a firmer yen following hawkish comments from BoJ Governor Ueda. In EM, the Shanghai Composite Index and Hang Seng slipped ahead of the key National People’s Congress Standing Committee meeting. India’s Sensex index traded sideways. In commodities, easing geopolitical tensions pushed down oil prices. Gold prices reached a new high. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/2024-11-04/

2024-11-01 07:05

Key takeaways US equities continue to surprise on the upside despite election uncertainty, supported by solid economic and earnings growth data, Fed rate cuts, and long-term structural trends. These factors should bode well for IT, communications, industrials, financials and healthcare, although some may benefit more or less from the election outcome. We prefer investment grade with 5-7 year maturities, where yield levels remain attractive. We prefer UK over Eurozone stocks due to the UK’s more favourable macro outlook, a lack of trade deficit with the US and heightened geopolitical risks. Moreover, UK equities tend to be more defensive in nature and remain cheap, supporting our overweight stance, but we also see opportunities in European IT, energy and healthcare. While we are waiting for more clarity around the size and the specific details of China’s fiscal stimulus measures, the potential for increased US tariffs adds to the complexity, so we remain neutral on mainland Chinese and Hong Kong stocks. Yet, valuations remain cheap. Within the region, we are more bullish in Japan, India, South Korea and Singapore due to their favourable market conditions and positive growth drivers. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-monthly/2024-11/

2024-10-28 12:02

Key takeaways The BoC cut rates by 50bp in October, with 125bp of easing delivered year-to-date, getting ahead of other G10 peers. Beyond the knee-jerk reaction, USD-CAD could drift higher in the run-up to the 5 November US elections… …but this momentum may not extend into 2025 when other factors supersede political forces as the key FX drivers. On 23 October, the Bank of Canada (BoC) quickened its easing pace by cutting its policy rate by 50bp to 3.75%. This was the fourth consecutive cut this year. With 125bp of easing delivered year-to-date, the BoC has become the most dovish G10 central bank. The BoC has now turned cautious of inflation undershooting the 2% target, with core inflation below 2.5% and headline inflation of 1.6% in September (Chart 1). Meanwhile, business sentiment remains weak and GDP on a per capita basis continues to decline. Our economists expect another 50bp cut in December, followed by 75bp of easing in 1H25. With the 50bp move fully priced in by markets, the knee-jerk pop higher in USD-CAD did not last. Looking beyond the BoC’s announcement, we expect moves in USDCAD to be driven mostly by USD sentiment over the near term. With the recent derisking ahead of the 5 November US elections, USD-CAD could drift higher. Source: Bloomberg, HSBC Source: Bloomberg, HSBC Nevertheless, once the election result is known, the next response in the FX market, may persist for days, weeks or months. A Republican presidency could see the USD strengthening, which could weigh on the CAD, while a Democrat presidency could see USD-CAD reversing lower. But this post-result reaction may not set the tone into 2025 especially when other factors supersede political forces as the key FX drivers. USD-CAD has been closely following its yield differential (Chart 2), and this will probably continue to be the case in 2025. In general, oil prices tend to influence the CAD only when interest rate markets are quiet. But this may not be the case, as the easing cycles continue, with the possibility of market recalibration. The other remaining driver to the CAD tends to be risk appetite. But unless there is a US recession (and associated risk aversion) or a global ‘Goldilocks’ story, i.e., the global economy shows signs of resilient growth with slowing inflation, (and associated risk appetite), there is little reason to assume that USD-CAD is about to get exciting. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/2024-10-28/