2025-04-09 07:04

Key takeaways Markets are unlikely to get much clarity after the “Liberation Day” tariff announcements on 2 April as countries now consider retaliation or negotiation, which could lead to more tariff changes. Economic uncertainty will last even longer as businesses and consumers try to assess the impact on them and may postpone investment and consumption decisions. We think that US growth and earnings will be more negatively affected than in most other countries, as the broad-based tariffs make almost all imported inputs more expensive for US firms. That either puts more pressure on inflation or on corporate margins. We expect investors to continue their rotation into other markets, but without adding overall exposure till markets stabilise more. We think the sharp fall in valuations and positioning adjustment we have already seen are not enough to put a bottom under markets. So, investors will continue to watch the very busy news flow, reduce concentrated bets, and diversify across asset classes and markets. European and Asian nations will try to increase trade with other trading partners outside of the US and stimulate local consumption. Given lower inflation pressures than in the US, we expect to see easing of monetary policy there, supporting high quality bonds. An active multi-asset strategy with a focus on quality, including bonds and gold, makes sense. What happened? On 2 April, the US government announced the most historic tariff hikes since 1930’s Smoot-Hawley tariffs Act across almost all of its trading partners. Since then, global risk appetite has taken a hit across asset classes and geographies. Various countries are already planning to impose reciprocal tariffs on the US, increasing the risks of a global trade war. Since 2 April, the S&P500 is down by 11%, while FTSE250 and EuroSTOXX have fallen by 7% and 12%, respectively. In Asia, Hang Seng Index has also corrected by 13%, at the time of writing. Risk-off sentiment is fuelling the demand for safe haven with safe haven bond yields falling. While the correction in the early markets has made valuations a bit more attractive, analysts have only made mild downward revisions to their earnings forecasts so far. We expect more downward revisions as businesses provide negative guidance and see little scope for any convincing bounce. The combination of tariffs and heightened uncertainty is expected to further slow down the global economy, and the US, in particular, as businesses and consumers will put a hold on their spending and investment decisions. But while US equity sentiment has fallen, investor positioning has still not been reduced enough to provide a floor for markets. Hence, we expect the rotation out of the US to continue in the near term. We believe the objectives of the tariffs include the creation or protection of US jobs, the wish to bring US borrowing costs down and get better access for US companies to foreign markets. These ambitious objectives suggest that the government is willing to go through a period of uncertainty before there is any substantial easing of the tariffs. The impact of tariffs is expected to be higher in the US than in the rest of the world. This is because the broad-based tariffs on almost all trading partners do not provide US companies with any ‘cheap’ imports. As a result, either their margins will be compressed or inflation will be raised, hurting the consumer. For now, the market expects a ‘transitory’ inflation spike and is happy to price in four Fed cuts this year, potentially starting in May. We think the Fed may choose to prioritise growth and financial stability concerns. As a result, government bond yields should come down further, aided as well by their safe haven appeal. Asian countries are topping the list of the hardest hit by US tariffs. Open economies like Japan, South Korea, Vietnam and Thailand may be more vulnerable than others. Reciprocal plus auto tariffs will hit the earnings for auto markets in Japan and South Korea the most, while stimulus and domestic consumption should support China and India earnings against the tariff headwinds. Inflation expectations have risen while GDP growth forecasts are coming down Source: Bloomberg, HSBC Global Private Banking and Wealth as of 8 April 2025. Past performance is not a reliable indicator of future performance. Investment implications While we see further downside for US stocks in the short term, we hold a neutral view on a 6-month horizon. Globally, our focus in equities is defensive, selective and focused on quality. We prefer services over goods, and companies with strong cash flows and brand names. We maintain our relative preference for Asia, including China, India, Japan and Singapore due to their domestic resilience. Singapore and Inda stand out as safe havens to tariffs. Tech and domestic sectors including banking and consumption remain our pick in Japan, while the financials, healthcare and industrials sectors with a large-cap bias are our favourites in India. Inflation also remains well under control for the region, providing more room for Asian central banks to cut rates further, supporting growth ahead. In China, we await tactical opportunities from mispricing caused by the tariffs to capture structural growth opportunities, focusing on AI enablers and adopters from the internet, ecommerce, software, smartphones, semiconductors, autonomous driving, and robotics. We also favour the consumption, financial and industrial leaders, as well as quality SOEs paying high dividends. Exports to the US account for 25% of European companies’ revenues, but the impact of tariffs is substantially lower as much of this is related to services, and some of the goods sold are produced in the US. Also, we see Europe’s recent response to the tariffs more balanced in an effort to avoid escalations. However, we would be careful not to misread any announcements by the EU. European markets are trading at 65% discount to their US peers. Additionally, stimulus packages for defence and Germany’s infrastructure package have further added to the appeal. The UK is in a relatively good spot with ‘only’ a 10% tariff and is already in close talks with the US to come to a trade agreement. By not retaliating, we think inflation pressures can be contained, helping to cap borrowing costs for the government and boosting gilt performance. At the same time, the UK is also looking at expanding its trade relation with other countries, like India. While we like UK and Eurozone equities, we maintain our neutral stance and are awaiting sentiment to stabilise before adding further. Amid persistent volatility, we think safe haven assets including high quality bonds and gold should benefit. Multi-asset strategies can help us diversify across geographies and assets, while an active approach in fixed income can capture tactical opportunities as they arise. While we keep an eye on how the governments across the world respond to the US tariffs, and how they focus on driving domestic growth through government stimulus and support, we remain optimistic that markets will rebound in the long term as the fundamentals around re-onshoring, AI innovation and energy security remain strong. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/liberation-day-and-market-turmoil-implications-for-investors/

2025-04-08 12:01

Key takeaways UK hit with a 10% tariff from the US, but the impact will depend on how various governments react. Economic activity has been weak, while labour markets have been resilient, at least for now. Although fiscal headroom was restored, vulnerabilities remain. Source: HSBC Less ‘Liberation’ more ‘Amerexit’ The first quarter of 2025 has been tumultuous as financial markets and policymakers have sought to decipher between the noise and signals. That volatility looks set to continue with US tariff announcements on 2 April giving further impetus to an already uncertain outlook. For the UK, its small goods trade deficit with the US meant it faces the baseline 10% tariff. A relatively better outturn compared to those applied to peers – the EU faces a 20% tariff – but a significant jump from the current 0.5% weighted average tariff. Moreover, the steel, aluminium, and automotive sectors are hit with 25%, while other industries, such as pharma, are yet to be the subject of focus. From here, the UK economic impact will depend on the outcome of any retaliatory measures, deal negotiations, their timing, and any support from the government. If the UK opts for retaliation, that would deepen the economic impact and add to inflationary pressures. However, remarks from UK Business Secretary, Jonathan Reynolds, suggest the focus is on deal negotiation rather than retaliation. On that basis, we judge the risks are weighted towards weaker growth and disinflation. Indeed, financial markets have increased their expectations of Bank of England rate cuts this year and are now more in line with our view of a 3.75% base rate by end2025 (Chart 1). Risks to the downside All that said, the outcome is highly uncertain and the risk to that view is to the downside given that other countries have vowed to retaliate. An escalating trade war could see the UK caught in the economic crosshairs. Such an environment only adds to the picture of economic unease painted by surveys in recent months. Now, official data has confirmed the weak start to the year, with the UK economy contracting 0.1% m-o-m in January. Of the three broad sectors, services was the only positive contributor, while output in both the construction and manufacturing sectors reported sharp declines. That divergence may continue, the PMI survey points to some signs of life in the services sector, but further weakness across production sectors will be a drag on overall growth. Global economic uncertainty, particularly pertaining to tariffs, has weighed on manufacturers. And while European peers appeared to have front loaded activity ahead of tariff announcements, manufacturers in the UK reported a sharp decline across output and new orders in March. There was slightly better news on the inflation front. Headline CPI moderated to 2.8% from 3.0% in the month prior, largely driven by an unusually sharp fall in clothing prices. Retailers have noted softer demand – retail sales volumes rose 0.3% in the three months to February – and the need to offer discounts. Indeed, household consumption rose just 0.1% in 4Q24, while the savings rate rose to 12.0%, its highest on record, excluding the pandemic. It’s possible that a shift in the price level for various non-discretionary items in April will further drag on activity and limit the ability of firms to pass higher unit labour costs on. In our view, the headline inflation rate will resume its acceleration and peak in September. However, wage growth should moderate sharply in the second half of the year, placing a lid on persistent price pressures and enable a gradual – one 0.25ppt cut per quarter – decline in interest rates. Labour market data remains an uncertainty. While the unemployment rate, for now, has remained stable, supported by still decent employment growth, survey measures point to a further weakening in the demand for workers. In our view, the flurry of headwinds facing employers that hit from April will see a continued loosening in the labour market and a rise in the rate of unemployment (Chart 2); although the UK may just avoid outright falls in overall employment. Nonetheless, concerns over job losses alongside still elevated interest rates and another jump in the cost of living will weigh on consumption and consequently GDP growth in 2025. Fiscal buffer restored, but at a cost (cutting) Lack of clarity in official data has worsened and in addition to labour market data issues, the Office for National Statistics has raised concerns about trade, producer prices, retail sales, and possible revision to average wage growth. That carries significant implications for the Bank of England in determining the risk of persistent inflationary pressures and for the government. In that, their low margin for error leaves the Chancellor exposed to small changes in the Office for Budget Responsibility’s economic forecasts (Chart 3). In fact, economic developments since the Autumn Budget did not go the Chancellor’s way. And in the end, the public finances faced a GBP4.1bn shortfall against the fiscal target, Chancellor Reeves went a step further and opted to restore the fiscal margin to exactly where it was in October; a miracle, in our view. Despite its restoration, fiscal policy is in the same, if not a worse, position than a few months ago. Downside risks to growth and considerable uncertainty ahead mean the public finances are not on such a firm footing, and the Chancellor may find herself in the same position in a few months’ time. But with less public spending fat to cut. Source: Macrobond, HSBC forecasts Source: Macrobond, ONS, KPMG/REC Source: OBR https://www.hsbc.com.my/wealth/insights/market-outlook/uk-in-focus/tariffs-adding-to-an-uncertain-outlook/

2025-04-07 12:02

Key takeaways Global trade tensions sharply escalated after the “Liberation Day” announcement and China’s announcement of retaliatory actions. Key US trading partners in Asia are seeking negotiations or exemptions in trade deals with Washington. We believe reciprocal and auto tariffs will increase earnings risks for Japan and South Korea while domestically-driven markets such as China and India will stay relatively resilient in their earnings outlook. As the markets are quickly repricing for increased US recession risks, we expect further rotation out of the US equity market into Asia and Europe. Within our neutral positioning in global equities, we favour Asia ex-Japan markets with strong domestic growth drivers and policy stimulus, including China, India and Singapore, preferring the consumer discretionary, communications services, financials and industrials sectors. Global trade uncertainty and continued disinflation also underpin a more accommodative Asian central bank policy stance, supporting our preference for high quality Asian credit. What happened? Risk assets sold off sharply around the world after US President Donald Trump announced far-reaching and steeper-than-expected reciprocal tariffs that triggered market fears of an escalation of global trade war and recession risks. On 4 April, China announced 34% retaliatory tariffs on all imports from the US, matching a 34% reciprocal tariff on Chinese imports announced by the White House. China’s retaliatory tariffs will be effective on 10 April, one day after the US reciprocal tariffs will be implemented. The newly announced 10% baseline tariffs already came into effect on 5 April. China further announced a series of “countermeasures”, including export restrictions of seven types of rare earth minerals to the US, export controls on 16 American enterprises, an addition of 11 American enterprises to the unreliable entry list, and launching of an anti-dumping probe into medical CT tubes from the US. Asia stands out in the epicenter of the US tariff tantrum with the highest reciprocal tariff rates hitting key US trading partners in the region – 46% on Vietnam, 36% on Thailand, 34% on mainland China, 32% on Taiwan, 25% on South Korea, and 24% on Japan. According to the Cato Institute report, China’s 2023 trade-weighted average tariff rate was only 3% based on WTO trade data, which is much lower than the 67% “foreign tariff rate” calculated by the Trump administration. The formula disclosed by the Office of the US Trade Representative (USTR) was based on countries’ trade surpluses with the US, divided by the value of their total exports to the US, and ten dividend in half. This implies that individual reciprocal tariff rates are determined by the size of countries’ trade surplus with the US rather than absolute levels of their import tariff rates. The ASEAN countries face the highest reciprocal tariff rates due to their large trade surpluses with the US. On 5 April, Vietnam proposed to cut tariffs on US imports to zero from the current 9.4% while Singapore stated it would not retaliate against the 10% minimum US tariff rate imposed on the country. Indonesia has pledged to ease trade rules and Cambodia also promised to cut its own tariffs on US goods and import more American products. We believe reciprocal tariffs will bring substantial earnings impact on North Asia – Japan, South Korea and Taiwan, which have sizeable export sales and trade surpluses with the US. Although mainland China faces a hefty total effective US tariff rate of 74%, the actual revenue and earnings impact on the Chinese equity market may be less significant than expected due to MSCI China’s limited export goods sales exposure to the US at only 2%. Since the US-China trade war in 2028, Beijing has substantially reduced its trade dependence on the US market. Asian exports to the US as percentage of GDP Source: CEIC, HSBC Global Private Banking and Wealth as of 7 April 2025. The additional tariffs on automobiles and auto parts are expected to hit the sales of Japanese and South Korean automakers. Automotive exports to the US account for nearly 7% of Japan’s total exports of all products to the world. Senior Japanese government officials said they would continue to request for exception from the reciprocal tariffs and are ready to offer funding or other support for the local economy. We think Taiwan is better positioned than Japan and South Korea to withstand the tariff shocks because semiconductor products are exempt from reciprocal tariffs. With stronger pricing power, some of the most advanced and competitive chip exporters may be able to pass on the additional costs to their customers. Investment implications As the markets are quickly repricing for increased US recession risks in the wake of the tariff tantrum, we expect further rotation out of the US equity market into Asia and Europe. We attach an even stronger emphasis on domestic resilience in positioning in the Asian equity and credit markets. We remain overweight on Asia ex-Japan equities and favour markets with strong domestic growth drivers and policy stimulus, including China, India and Singapore. Both India and Singapore stand out as relative safe havens amid global tariff escalation. The exemption of pharmaceuticals, a key Indian export to the US, should help mitigate the tariff impact on the Indian economy. We expect severe tariff headwinds will prompt the Chinese government to further ramp up fiscal and monetary stimulus to strive for the government’s 2025 GDP growth target of “around 5%”. The DeepSeek-driven AI innovation and investment boom should offer an important domestic growth engine. The newly announced 30 special initiatives are on the right track to boost the demand side of private consumption. We recently upgraded the domestically-driven sectors of consumer discretionary and financials in Asia to overweight to mitigate tariff risks. China’s AI-led investment boom and more forceful consumption-focused stimulus should bode well for the outlook of the Asian consumer discretionary and communications services sectors. We cut Asian IT to neutral given that technology hardware companies are significantly exposed to US tariff and growth risks. The chances of significant policy easing in Asia have gone up amid global trade uncertainty and continued disinflation in the region. A more accommodative Asian central bank policy stance reinforces our preference for high quality Asian credit. We stay focused on Asian USD investment grade bonds, favouring Asian financials, Indian local currency debt, Chinese hard currency bonds in technology, financials and SOEs. Outside of Asia, as we worry that the tariffs on China and retaliation will start to weigh on analyst sentiment towards the technology sector, while inflation concerns will also lead to weaker demand for consumption, we have downgraded Technology to neutral and Consumer Discretionary to underweight globally, and in the US and Europe. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/seeking-haven-in-asias-domestic-resilience-amid-tariff-tantrum/

2025-04-07 07:04

Key takeaways In a number of EM bond markets, valuations are attractive with real yields considerably above historical medians, and with positive term premia. Following a volatile start to the year for stocks, the upcoming Q1 US earnings season has the potential to have a big impact on markets. Among the themes to watch will be how softening growth and weakening confidence are affecting profits. For those celebrating Easter this year, the ritual of hard-boiling and decorating eggs and gifting chocolate Easter eggs will be a significantly more expensive affair than in 2024. Chart of the week – Reciprocal tariffs Investors had been steeling themselves for “liberation day”. But after last week’s tariff announcement, what happens next in investment markets? Overall, the tariffs, any policy retaliation, and the economic consequences could significantly impact market dynamics. Policy uncertainty is now structurally elevated, partly because investors can’t be sure where tariffs will finally settle. And while recent hard data on GDP and profits have held up, a difficult mix of policy uncertainty, stagflation-lite news, and lower profits expectations, means that investor confidence could falter. In turn, sticky inflation postpones a pre-emptive easing by the Fed, which could have acted as a stock market shock absorber. There are questions now about whether rest-of-the-world stocks can still outperform. After all, history suggests that when the US economy sneezes, the rest of the world catches a cold. But new domestic policy initiatives, especially in Europe and China, could support stock market performance. Likewise, US dollar weakness could act as a stimulus for the rest-of-the-world stocks. Plus, there could be relative winners from last week’s announcement. The base case of ‘spinning around’ has envisaged policy uncertainty driving volatility this year. But if tariffs are fully implemented, a second scenario where growth and profits ‘topple over’ could come more vividly into play. High policy uncertainty continues to point to an agile approach to managing portfolios, meaning diversification and a selective approach that build resilience across geographies, asset classes and factors. Market Spotlight Credit where it’s due Private credit dealmaking enjoyed a pick-up in momentum in the final quarter of last year, outpacing levels seen in Q3, according to the latest data. Much of the activity was driven by refinancings and add-on financings to support company growth. M&A activity also rose modestly in late 2024, aided by improving equity valuations and record levels of private equity ‘dry powder’ (funds waiting to be deployed), although sponsor-backed M&A was below historical peaks. Spreads remained under pressure but appeared to stabilise during Q4, following a modest tightening earlier in the year. Higher base rates kept all-in yields (in USD) in the low double digits for many direct lending deals. Meanwhile, default rates edged up slightly from Q3 but remain below historical averages. Looking ahead, some private credit investment specialists note that demand remains strong as investors seek higher yields and stable income, even in a ‘higher for longer’ rate environment. And spreads continue to offer a premium over public markets. Overall, they believe that experienced managers with flexible strategies, prudent underwriting and active portfolio monitoring should continue to capture attractive risk-adjusted returns. 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 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. Macrobond, Bloomberg, The White House. Data as at 7.30am UK time 04 April 2025. Lens on… Thin end of the hedge In a number of EM bond markets, valuations are attractive with real yields considerably above historical medians, and with positive term premia. Gradual disinflation should mean many EM central banks can continue to ease policy, with some like India, Colombia, and the Czech Republic easing at a faster pace. Plus, while trade tariffs are often viewed as potentially inflationary in EM, they may actually be disinflationary in some countries by causing a supply glut in goods production. EM currencies, on the other hand, remain a tricky call. In 2024, hedging EM local-currency exposure boosted total returns as the US dollar made gains. Despite this year’s recovery in EM FX, currencies could remain volatile as policy uncertainty persists, with the US dollar playbook looking increasingly unpredictable. Profits still punchy? Following a volatile start to the year for stocks, the upcoming Q1 US earnings season has the potential to have a big impact on markets. Among the themes to watch will be how softening growth and weakening confidence are affecting profits. The impact of tariffs and Chinese tech developments in AI, and EV batteries, could also shape guidance. Among the S&P 500 sectors projected to see the strongest year-on-year Q1 profits growth are healthcare, technology, and utilities. Further out, analysts are expecting year-on-year profit growth of around 11% this year, down from expectations of 14% at the start of 2025 but still above long-run averages. Cooling optimism about the consumer has resulted in the expected share of profit growth from the consumer discretionary and staples sectors halving from their contribution levels last year. But the profit contribution from technology is still going strong – and expected to rise again in 2025. These high expectations could leave both tech stocks and the wider market vulnerable to disappointment. With earnings season arriving amid extreme world policy uncertainty, investors should prepare for surprises. Eggflation For those celebrating Easter this year, the ritual of hard-boiling and decorating eggs and gifting chocolate Easter eggs will be a significantly more expensive affair than in 2024. Both egg and cocoa prices have surged over recent months, as H5 strains of avian influenza have decimated the egg-laying hen population, and cocoa production in Ghana and the Ivory Coast – accounting for around 60% of global supply – has been hit by poor weather conditions. In Ghana, an outbreak of Swollen shoot disease, and mining and smuggling have also weighed on output. Climate change probably explains some of these disruptions. Industry experts have blamed record warm ocean temperatures for contributing to excessive rainfall in West Africa. And some studies have claimed the spread of Avian flu has been exacerbated by new patterns of seasonal bird migrations. Higher egg and chocolate prices are clearly not a big deal for the consumer outlook – eggs account for just 0.2% of the US CPI basket. But they are a stark reminder that we are living in a more volatile inflation regime versus the 2010s, with extreme weather, rising trade protectionism, supply chain rerouting, and active fiscal policy all playing their part in this story. 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, Datastream. Data as at 7.30am UK time 04 April 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 04 April 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 Heightened global trade uncertainty weighed on risk markets, with the US DXY dollar index on the defensive. Oil prices declined on rising global demand concerns, and gold consolidated after recent gains. Core government bonds rallied, led by US Treasuries. The front-end of the US yield curve is factoring in 3-4 Fed rate cuts over the next 12 months. New data showed more weakness in US consumer confidence. US credit spreads widened, with IG outperforming HY. US equities saw broad-based falls amid weakening 2025 earnings expectations. The Euro Stoxx 50 index declined on rising eurozone growth concerns. Japan’s Nikkei 225 dropped markedly, with lower JGB yields weighing on financials. EM Asia stock markets posted losses, led by South Korea’s tech-dominant Kospi index. The Hang Seng, Shanghai Composite and India’s Sensex indices all declined. Latin American equities were resilient. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/reciprocal-tariffs/

2025-04-03 12:02

Key takeaways The US has announced a 10% baseline tariff along with individual reciprocal tariffs of up to 49% on some economies. Uncertainty will remain elevated as trade partners respond. The tariffs are generally towards the higher end of expectations (though Mexico and Canada are not subject to new duties) and hence a negative for risk appetite, earnings prospects, and global growth. However, they were not completely unexpected. Liberation Day will probably not represent the short-term bottom for US equities or USD. Much uncertainty remains about the breadth and depth of tariffs and the impact on US growth and inflation. We continue to be selective in consumer-related stocks, preferring services over goods, large cap over small cap and focusing on strong cash flow generators. We believe longer-dated safe-haven bonds will benefit as markets worry about more growth than about inflation and continue to overweight gold as a diversifier. What happened? The US has announced a 10% baseline tariff effective 5 April, along with additional individual reciprocal tariffs of up to 49% on some economies beginning 9 April. The previously announced 25% tariff on autos is expected to take effect from 3 April. For the US, tariffs remain a key tool for negotiations. If maintained, the announced tariffs could cut expectations for global economic growth and corporate profits, and lift fears of supply chain disruptions and result in higher finished goods prices. Mexico and Canada are exempt from any new tariffs as they continue to negotiate with the Trump administration on immigration, border security and the drug wars. Many of the US trading partners should have sufficient time to at least start negotiating with the Trump Administration, and the hope is that they hold back on any retaliatory measures, which could otherwise further escalate this tension into a broader trade war. Individual reciprocal US tariff rates for key markets Source: The White House, HSBC Global Private Banking and Wealth as at 3 April 2025. Key highlights of the announcements: Baseline tariff: President Trump will levy a baseline 10% tariff on all imports beginning 5 April under the International Emergency Economic Powers Act (IEEPA). Individual reciprocal tariffs: From 9 April, the US will impose higher individual (bilateral) ‘reciprocal’ tariffs on imports from economies with which it has the largest trade deficits, while other trading partners will continue to face the original 10% baseline tariff. Some products will be excluded, such as steel, aluminium and autos that are already subject to Section 232 tariffs; copper, pharmaceuticals, chips and wood; other goods that may become subject to future Section 232 duties, and bullion, energy and other critical minerals that are not available in the US. For vehicles that qualify for USMCA preferences, tariffs will only apply to the non-US content, but importers will need to submit the amount of US content in each model. It is also not clear whether this US administration will honour the USMCA Section 232 side letters with Canada and Mexico - which provides for a 60-day delay on Section 232 tariffs and annual duty-free import quotas for vehicles and auto parts from these markets. We are not making further revisions to our global growth forecasts which were already lowered to 2.5% in March, due to the tariffs already announced. President Trump has indicated room for negotiation by asking the trading partners to reduce the barriers they put up to US firms. But the executive order also said tariffs could rise further if there is retaliation or if, for example, trade deficits widen. Going forward, if Trump is able to incorporate a lower corporate tax rate (from 21% to 15%) in the next budget, it could result in an expansion of production in the US by foreign companies who choose to move production to the US. This could result in increased revenues as more production and job opportunities emerge in the US economy and would then lower the trade deficit, which is a positive factor for US financial markets. Investment implications Liberation Day will probably not represent the bottom for US equities. Much uncertainty remains about the breadth and depth of tariffs and the ensuing negotiations that the Trump administration is currently engaging in. It is unlikely that we will see the net alpha shift upward in prices and subsequent resumption of disinflation in time for the Fed to ease in June. Once the market understands that the likelihood of a Fed cut in June is not properly priced in, it could create further volatility for US equities. Currently, the market is attaching a 70% probability of a Fed cut in June, which seems high. We expect to see continued volatility in both US equities and bonds in the short term, driven by the combination of the budget battles, treasury issuance, and tariff and trade policy. From a medium-term perspective, though, negotiations should reverse some of the tariffs, while US innovation and re-onshoring should help. There is also the potential for tax cuts to bring better news. US tariff announcements have cut full year 2025 US earnings projections Source: Bloomberg, US Census Bureau, HSBC Global Private Banking and Wealth as at 3 April 2025. Forecasts are subject to change. Bloomberg’s projected 2025 EPS growth dropped from approximately 13% at the start of the year to around 10% by end of March. The downward trend accelerated in February, coinciding with more frequent and broader tariff measures. Europe’s stock market rally may see a pause as negotiations start. Automotives are vulnerable but the absence of a pharma tariff is good news. The UK got a relatively lower tariff, but its open economy makes it vulnerable – not retaliating could help cap inflation and support gilts. The largest US trade deficit is with China, totalling – USD295 billion, reinforcing China’s central role in the trade policy debate. In China and the rest of Asia, we continue to favour domestically oriented businesses. We also think that regional integration will further accelerate. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/liberation-day-an-opening-salvo-to-negotiate-creates-further-uncertainty/

2025-03-31 12:02

Key takeaways While the BoJ is in a hawkish pause, it is uncertain when the next rate hike will come. The near-term focus for the JPY is likely to be risk appetite around US trade policy. The JPY may outperform ‘risk on’ currencies, but not the USD. The JPY was the best performing G10 currency in the first two months of the year, but its outperformance has not continued into March. Indeed, USD-JPY has been rising since 11 March, as US-Japan yield differentials have stopped narrowing and even widened again recently (Chart 1). While both the Federal Reserve and the Bank of Japan (BoJ) kept their rates steady in March, the BoJ guidance suggests that rates are likely to rise further so long as the domestic economy progresses as expected. But it is still uncertain when the next BoJ’s rate hike will happen. Our economists’ base case is July, while markets are pricing in a c60% chance for this to take place in June (Bloomberg, 27 March 2025). Source: Bloomberg, HSBC Source: Bloomberg, HSBC Meanwhile, some wonder if higher interest rates in Japan (Chart 2) could prompt a domestic pivot by local investors, leading to reduced portfolio outflows, if not outright repatriation inflows. A significant pivot by Japan’s Government Pension Investment Fund (GPIF) to domestic assets for the next five years (if it happens) could see the JPY strengthen. However, Nikkei reported on 11 March that the GPIF will not change its asset allocation targets. At the same time, Japanese Prime Minister Shigeru Ishiba’s government approval rating continued to fall (The Japan Times, 24 March 2025). Over the near term, we think the JPY may not be an entirely ‘clean’ safe haven currency since Japan is also exposed to US tariff risks (e.g. auto tariffs will come into effect at 12:01 am Washington time on 3 April, initially targeting fully assembled vehicles, Bloomberg, 27 March 2025). Nevertheless, the JPY may still outperform other currencies that are even more exposed to US tariff risks (like the EUR and the CAD) or are highly risk-sensitive (like the AUD and the NZD). We are also cognizant of the possibility that the JPY may be called out by the US administration for its undervaluation. All things considered; we see USD-JPY moving sideways over the near term before rising modestly later in the year when the US economy overcomes growth concerns and the BoJ is closer to its neutral rate range. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/jpy-not-a-clean-safe-haven/