2025-09-15 08:06

Key takeaways Downside risks to the GBP look set to build… … with growing market concern on the UK government’s capacity to meet its fiscal target, on top of stagflationary signs. That said, US factors will eventually dominate GBP-USD. The UK Treasury announced that the Autumn Budget will be held on 26 November. There is growing market concern on the UK government’s capacity to meet its fiscal target. In March, the government had to make budgetary adjustments to restore GBP9.9bn of fiscal headroom. But a failure to push through spending cuts has resulted in additional fiscal slippage which the government now faces a much larger fiscal gap to fill in November, with estimates (excluding any headroom) ranging from GBP20bn to 40bn (Bloomberg, 3 September 2025). The Bank of England’s (BoE) Decision Maker Panel survey showed further stagflationary evidence. One-year ahead inflation expectations rose to 3.44% (from 3.18% previously), while three-year ahead expectations rose to 2.99% (from 2.80%). Employment expectations fell, illustrating the conflicting signals emerging from the economy. In his testimony to the Treasury select committee on 3 -September, BoE Governor, Andrew Bailey, reiterated his inflation concerns (Bloomberg, 4 September 2025). With the Autumn Budget creating added near-term uncertainty, the BoE is in no rush to cut rates. The market expects the BoE to keep rates steady at its 19 September meeting, and only see a c20% chance of rate cut in November (Bloomberg, 4 September 2025). The combination of sluggish productivity growth, fiscal pressures and bond yields reaching new highs (Chart 1) is providing a challenging cyclical backdrop for the GBP. In addition, the structural challenges of the UK’s twin fiscal and current account deficits (Chart 2) could also weigh on the GBP, in our view. Source: Bloomberg, HSBC Source: Bloomberg, HSBC However, the UK is not alone in facing challenges. There are growing market concerns about the Federal Reserve’s (Fed) independence, while political risks are rising in France. In our view, the GBP is likely to be sensitive to UK budget news over the near term, probably facing downside risks, but US factors (in particular, discussions around the Fed) will eventually dominate GBP-USD. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/gbp-fiscal-risks/

2025-09-15 08:05

Key takeaways With the combination of the Fed’s cutting cycle seen resuming and questions about its independence… …the USD is likely to weaken in the months ahead. But the ECB’s stance is providing static support to the EUR. With the magnitude of the USD’s descent since the start of the year, it is not surprising that some may make the case that the worst is behind us. But our baseline scenario still sees the USD weakening in the coming months. There has been re-convergence in the US Dollar Index (DXY) with its weighted rate differential (Chart 1), after a clear breakdown in these relationships earlier this year when US policy uncertainty was intensifying, especially in the context of tariffs. With this in mind, the pace and size of the Federal Reserve’s (Fed) expected decision to ease will be crucial to the USD. Our analysis suggests that the DXY performance in the six episodes of rate cuts by the Fed over the past 30 years was mixed. Gradual Fed easing can weigh on the USD, but faster easing may not. While there is a greater focus on the cyclical side of the US, political factors are still relevant, especially when considering market concerns over the Fed’s independence. In our view, the combination of the Fed’s cutting cycle seen resuming and questions about its independence would probably point to two scenarios for the USD to decline. One opens a faster USD decline if the Fed needs to lower interest rates quickly and US policy uncertainty intensifies in the coming months. The other one is slower moving whereby the USD weakens gradually, but suspicions linger as to what lies next around the corner. We believe the latter is the more likely scenario, but the direction of the USD’s travel has not changed. Source: Bloomberg, HSBC Source: Bloomberg, HSBC As for the EUR, the latest announcement from the European Central Bank (ECB) came in line with market expectations. On 11 September, the ECB kept its key deposit rate unchanged at 2.00% and said that risks were "more balanced". Our economists’ central case is that the ECB easing cycle is over, but one more insurance cut cannot be ruled out, as the higher US tariffs, a stronger EUR and French political uncertainty all still suggest downside risks to near-term inflation. With EUR-USD converging with its rate differential (Chart 2), the ECB’s stance has been providing static support to the EUR, leaving US factors as the dynamic driver. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/eur-usd-central-banks-diverge/

2025-09-15 07:05

Key takeaways Mainland Chinese stocks have performed well this year – with the offshore market in Hong Kong rising by more than 30%. But during Q3, some of the biggest moves in mainland China have been in the onshore A-share market – with firms in the growth-oriented ChiNext index doing especially well. A genuine conundrum in investment markets today is that despite still elevated levels of policy uncertainty, equity market volatility – as measured by the VIX index – has been remarkably low over the summer months. Fixed income seems to be in flux, with the usual order of risk premia almost inverted. Fiscal risk premia for government bonds, especially in the US, are rising as government debt burdens balloon. But risk premia in credit markets are shrinking, with high-grade issuers deleveraging, lengthening debt maturities, and building cash buffers. Chart of the week – Stagflation-lite US The US Federal Reserve looks set to cut the funds rate at its 17 September meeting. The main question appears to be whether it will surprise the market with a 0.5% move. This marks a significant shift in expectations relative to those that prevailed immediately after Chair Powell’s July press conference, when the market was pricing only around a 40% chance of a 0.25% rate cut in September. Deteriorating labour data have been key. The July payrolls release was weaker than expected and included substantial downward revisions to May and June. This was followed by another soft reading for August and further large downward revisions for the twelve months to March 2025. The upshot is that total non-farm payrolls fell in June and have risen by an average of only around 30k from June to August. Moreover, once healthcare jobs are excluded, private sector payrolls have edged down since April, indicating a significant cooling. On the inflation front, the latest two core CPI prints have been broadly as expected, showing a gradual pick-up in goods price inflation, driven partly by tariffs, and stickiness in some service sector prices. The worse-than-expected labour data have pulled rates lower across the curve, despite inflation creeping up. The 1.5% of Fed cuts now priced in by end-2026, the decline in 10-year Treasury yields and the steepness of the 2s-10s yield curve suggest the rates market is increasingly concerned about the state of the economy. Fed cuts plus an AI surge are boosting stocks. Market Spotlight Resurgent India Global trade uncertainty and a cyclical economic slowdown crimped the profit growth outlook for Indian firms this year, leaving the country’s stock market a relative underperformer versus global peers. It marks a significant shift in mood after a surging two-year rally that took Indian stock valuations to long-term highs late last year. From here, expectations of a cyclical recovery driven by supportive monetary and fiscal policies are good news for the profits outlook. In terms of policy support, we think the goods & services tax (GST) overhaul and cuts, personal income tax relief, front-loaded rate cuts, and regulatory moves to improve credit availability, should help revive urban consumption. Softer inflation is also helping consumer real purchasing power. It’s worth remembering too, that India’s strong structural tailwinds, including significant infrastructure spending and the “demographic dividend” from its rapidly growing working age population, are also longer-term drivers. While stock valuations remain a little high versus EM peers, the combination of growth in both corporate profits and GDP provide a degree of justification. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management, Bloomberg, Macrobond. Data as at 7.30am UK time 12 September 2025. Lens on… China’s bull run Mainland Chinese stocks have performed well this year – with the offshore market in Hong Kong rising by more than 30%. But during Q3, some of the biggest moves in mainland China have been in the onshore A-share market – with firms in the growth-oriented ChiNext index doing especially well. Several factors have been driving this performance. One is the continuing readiness of policymakers to offer targeted support to the economy and markets. Efforts to tackle over-production and excessive discounting in some sectors is one example. The extension of the US-China tariff truce has also helped build confidence. And mainland China’s fast-growing technology sectors have also been a re-rating catalyst. Where now? The impressive onshore market rally has been driven by higher liquidity and multiple expansion, with Q2 reporting season seeing fairly modest year-on-year profits growth. Given its lower valuations and exposure to high-tech sectors, the mainland Chinese market has the potential to benefit from rising global fund inflows. Desensitised markets A genuine conundrum in investment markets today is that despite still elevated levels of policy uncertainty, equity market volatility – as measured by the VIX index – has been remarkably low over the summer months. What gives? One possible reason is that investors may have been reassured by evidence that disruptive US policy actions are constrained by market sell-offs, especially in the bond market. We saw a taste of that in the aftermath of the early-April Liberation Day announcements. But with uncertainty now a feature, rather than a bug, of the global landscape, could investors – and the media – have lost some sensitivity to developments that once would have triggered major headlines and market ructions? It’s interesting to see that news stories and social media posts mentioning the word “shock” have collapsed in recent months. This could mean the bar for global developments to trigger market volatility is now higher. But the risk now is that sanguine markets encourage extreme policy moves by the US administration. And with significant economic headwinds stemming from a soft labour market and sticky inflation, another burst in volatility this year cannot be ruled out. Credit – a haven for portfolios? Fixed income seems to be in flux, with the usual order of risk premia almost inverted. Fiscal risk premia for government bonds, especially in the US, are rising as government debt burdens balloon. But risk premia in credit markets are shrinking, with high-grade issuers deleveraging, lengthening debt maturities, and building cash buffers. The 2010s saw a protracted period of divergence between US sovereign and US corporate indebtedness. US federal debt-to-GDP is now at all-time highs and rising but corporate debt-to-GDP is below historical highs and falling. This divergence is an important long-term anchor for credit spreads. Equilibrium spreads could remain at current low levels despite higher government bond yields because fundamentals justify a bigger increase in sovereign risk premia than credit risk premia. Over time, investors may well seek safety in the fortress balances sheets of the high-grade corporate sector. Overall, while spreads may appear low, these structural changes imply that current spreads may not necessarily be too tight. 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 12 September 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 12 September 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 Positive risk market sentiment persisted last week, despite rising geopolitical tensions. The US dollar index was range-bound, while gold prices touched a record high. 10-year Treasury yields fell on further signs of labour market softening ahead of this week’s FOMC meeting. Investors are pricing in five to six 0.25% rate cuts over the next 12 months as the latest CPI data largely met consensus. In Europe, the ECB left policy on hold, with growth risks now viewed as “more balanced”. US and eurozone IG and HY credit spreads narrowed. In DM equities, the S&P 500 and Japan’s Nikkei 225 reached all-time highs. The Euro Stoxx 50 advanced, alongside gains in most Asian markets. South Korea’s Kospi and the Hang Seng index saw notable increases, and the Shanghai Composite also rose. Political uncertainties weighed on Indonesian stocks. In commodities, oil prices trimmed earlier gains. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/stagflation-lite-us/

2025-09-10 08:05

Key takeaways As reciprocal tariffs took effect in August, global data should remain volatile in the coming months. US labour market data have clearly weakened – how will consumers and the Federal Reserve react? Inflationary pressure is building in the US, but less so elsewhere due to lower energy prices. 2025 has been a year of very messy global data. Global trade readings have been distorted by tariffs and frontloading, as have inflation prints in the US. Big moves in the oil price have caused falls in inflation outside the US and we’ve had growth data hold up much better than many had expected. But after all the policy noise, what happens now? Tariff payback The final third of the year is likely to be characterised by how much payback there is now that US tariffs are set at their August rates, the impact on the US economy, and how the Federal Reserve (Fed) reacts given that data. A September rate cut looks locked in, but after that, the trade-off between activity and inflation data will be key. Meanwhile, the US labour market is clearly wobbling after the weak prints (and backward revisions) in July and August (chart 1). On the other side of the equation, the US inflation data continue to show growing evidence of the tariff impact (chart 2) – the detail here will be key in the coming months to see where these effects are being seen. Source: Macrobond Source: BLS Consumer strength Despite all of the uncertainty around tariff and fiscal policy, the US consumer is, for now, still spending (chart 3). Whether that resilience continues despite more worries about job security will play a big role in the global outlook in the coming months. Because of the combination of better exports so far this year and lower inflation (helped by lower oil prices), we’re seeing a better-than-expected set of growth data across much of the rest of the world. Consumers in Europe, Asia and Latin America are seeing a better real wage picture, and while spending has held up (chart 4), caution is clearly limiting how much of that increased income is spent. Source: Macrobond Source: Macrobond The trade picture will also become even more clouded in the next few months. July’s data saw another wave of US imports picking up, and while this should drop back in August after the new tariffs, the path after that is less certain given impending sector tariffs. We still expect a pay back in terms of exports to the US for many economies. Fiscal challenges For policymakers, it’s not an easy mix to digest. We continue to expect the Fed to cut in September, December and March, and while the European Central Bank is most likely finished with its easing cycle, elsewhere central banks are still broadly cutting rates. However, despite lower policy rates, government bond yields remain high, and in some cases are rising – highlighting the scale of the fiscal challenge many governments are facing in these uncertain times. Source: Bloomberg, HSBC ⬆ Positive surprise – actual is higher than consensus, ⬇ Negative surprise – actual is lower than consensus, ➡ Actual is in line with consensus Source: LSEG Eikon, HSBC https://www.hsbc.com.my/wealth/insights/market-outlook/macro-monthly/assessing-the-tariff-fallout/

2025-09-08 07:04

Key takeaways Global small-cap stocks have been out of favour in recent years. But in the market rally that began in April, there have been some eye-catching performances in small-cap stock indices. Emerging markets are not normally viewed as a defensive play. Yet, that has effectively been the experience in bond markets over last three years. It has been a busy year for US utilities, with policy shifts, strong demand growth and infrastructure needs shaping the outlook. Chart of the week – Vigilantes mounting up? UK 30-year Gilt yields hit a post-1998 high of around 5.70% last week, a 4.5%+ increase from their 2021 average seen ahead of the start of the global tightening cycle. This marks a significant underperformance relative to other developed markets and reflects increasing concerns over the UK’s rising government debt and limited ability to rectify the situation. Spending cuts are politically difficult while the tax take is already historically high, with further increases potentially undermining competitiveness and weakening already-soft growth. France faces similar problems but has the advantage that its current account is broadly in balance meaning it’s less dependent on international investors to fund the government deficit. The big question for global markets, however, is whether concerns over fiscal dominance and Fed independence push US long-dated yields significantly higher? At around 5%, they are already at levels that are seen as putting pressure on equities. The US is in a better position than the UK, given the dollar’s status as the world’s reserve currency and the US economy has stronger long-run growth prospects. Its tax take is also low by international standards, offering a route to improving the public finances, albeit a politically unpopular one. But at this stage, worries over fiscal policy and the independence of monetary policy seem likely to persist. Market Spotlight Back to school With summer holidays over, it was “back to school” for markets last week, with three themes and three big questions. #1, is that despite policy uncertainty, many asset classes are trading at year-highs amid low volatility. Double-digit returns are making 2025 a banner year for investors. Some of the most eye-catching moves have been in Europe, China, and emerging markets – which were all unloved at the start of the year. #2, is that bond market vigilantes have been spotted, but fixed income returns are steady. The yield curve has ‘bull steepened’ in the US on the prospect of rate cuts and sticky long-term Treasury yields. But it has ‘bear steepened’ in Europe and Japan on fiscal worries. Investors have turned to private and public IG credits as bond substitutes, as well as gold. #3, the lower US dollar has significantly influenced asset returns in 2025. A weaker dollar can lift emerging market currencies and give EM central bankers space to ease policy. That has been a big reason why EM bonds and stocks are among the best performing assets in 2025. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management, Bloomberg, Macrobond. Data as at 7.30am UK time 05 September 2025. Lens on… Big moves in small caps Global small-cap stocks have been out of favour in recent years. But in the market rally that began in April, there have been some eye-catching performances in small-cap stock indices. In August alone, the Russell 2000 index rose 7%, easily outperforming the S&P 500. That was driven by expectations of Fed rate cuts, supportive government policy in the Big Beautiful Bill, and low volatility which helped boost risk-on sentiment. There have also been some surprisingly strong re-ratings in small-cap valuations outside the US. Moves in Hong Kong and Singapore smaller-caps have been breathtaking (partly due to valuation discounts on offer). At the other extreme, Europe has been more mixed, with mid-cap gains leaving valuations in line with their 10-year PE averages, but small caps barely budging. That’s despite smaller caps in many cases having a superior profit backdrop to large caps in the current cycle. A recent paper shows that European smaller-cap profits have been relatively resilient during this cycle. Bond behaviour Emerging markets are not normally viewed as a defensive play. Yet, that has effectively been the experience in bond markets over last three years. The total return volatility of EM local-currency bonds has been consistently lower than of developed market bonds – and that extends to the volatility of unhedged EM returns in US-dollar terms. This implies that EM-FX volatility has played a part in the performance. One of the main reasons for the divergence is that the fallout from the post-Covid period of global inflation has been especially significant for DM bond yields, which have repriced higher from historically depressed levels. And while EM bonds were also exposed to the inflation spike, EM volatility not only rose by less but has already normalised to pre-pandemic levels – even as DM yield volatility remains elevated. The growing maturity of EM bonds as an asset class, where improved market liquidity, depth and local investor participation have been accompanied by structurally better fundamentals, such as higher policy credibility and much healthier fiscal and external balances. A power play It has been a busy year for US utilities, with policy shifts, strong demand growth and infrastructure needs shaping the outlook. Analysis by some Equity analysts shows that while tariffs have been a focus for markets, companies expect only a modest 2-5% impact on long-term capex plans, helped by diversified supply chains. Crucially, the One Big Beautiful Bill Act has eased concerns by allowing renewable tax credits beyond the legislated deadline and retains those for nuclear and battery storage. This supports utilities’ near-term investment plans, although the eventual loss of credits will raise costs for new renewables. Alongside this, transmission investment has been a key theme. Reforms and permitting changes should speed up projects that connect supply and demand, boost reliability, and integrate renewables. Meanwhile, utilities are benefitting from growing load demand from new data centres, electrification and re-shoring. Overall, there could be attractive long-term growth potential in a sector where infrastructure needs, policy support and regulated returns are well aligned. 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, BofA Research, Oxford Economics. Data as at 7.30am UK time 05 September 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 05 September 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 Investors remained cautious amid growing fiscal concerns, driving the US dollar index modestly higher and gold prices to a record high. 30-year German, Japanese, and UK sovereign bond yields reached multi-year highs before stabilising, while French OATs rebounded ahead of a no-confidence vote for PM Bayrou. An initial fall in 10-year US Treasuries reversed ahead of Friday’s key jobs data, with market currently pricing in at least two 0.25% Fed rate cuts by year-end. High-yield credit spreads in the US and eurozone widened. In equity markets, US stocks were on course to finish the week modestly higher, while European stocks dipped slightly. Japan’s Nikkei 225 advanced, alongside broad gains across in Asian markets. India’s Sensex climbed on optimism for GST rate cuts, but China’s Shanghai Composite paused its recent rally amid worries over potential regulatory measures to cool the market. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/vigilantes-mounting-up/

2025-09-05 07:04

Key takeaways Strong Q2 GDP growth masks weakness in the private sector. Uncertainty over the upcoming Autumn Budget could weigh on sentiment and activity. A looser labour market could help dampen inflation concerns. Source: HSBC The fastest growing economy in the G7 GDP data published in August, for the second quarter, was a mixed bag. Strength in the government sector was partially offset by weakness in the private sector, where a 0.2% q-o-q contraction was reported. However, taken as a whole, economic growth in the first half of 2025 was robust relative to a backdrop of heightened global uncertainty, a large rise in labour costs, ‘Awful April’ for consumer prices, and a weakening jobs market. Some déjà vu in the third quarter So far data for the third quarter has provided a little optimism on the activity front. UK PMIs point to an improvement in momentum relative to Q2, and consumer confidence ticked higher alongside stronger growth in consumer credit. There is the prospect that the second half of 2025 will look similar to that of 2024 as the UK government finds itself again in the midst of speculation that the Autumn Budget on 26 November will require a combination of higher borrowing, spending cuts, and tax increases. Indeed, markets, business and consumers alike have become more concerned over future growth, and UK borrowing costs have continued to rise. Higher debt servicing costs, alongside reversals in planned spending cuts, and possible downgrades to growth forecasts all contribute to the erosion of fiscal headroom. How the Chancellor chooses to respond is more uncertain; we see a few possible scenarios, but the key decision will be whether the fiscal can is kicked down the road or is there the political courage to reset the public finances onto a more sustainable footing. Looser labour markets are yet to weigh on inflation Fiscal woes have seen yields on government debt, globally, rise sharply in 2025 but for the UK more specifically, sticky inflation is also a concern. Headline CPI rose to 3.8% y-o-y in July, driven by services and food prices. We think that headline CPI will top 4.0%, double the BoE inflation target, in the coming months. If price growth continues to be broad-based, that may warrant a pause in the BoE’s current one-ratecut-per-quarter pace until there is greater certainty that price pressures have abated. That will depend on labour market loosening translating into softer wage growth. The unemployment rate has risen to 4.7%, and we expect slack will continue to emerge. But, while employment intentions are subdued, official data point to continued growth in jobs; the lack of reliable employment data only adds to BoE cautiousness. Source: Macrobond, ONS, HSBC calculations Source: Macrobond, S&P Global Source: Macrobond ONS, HMRC https://www.hsbc.com.my/wealth/insights/market-outlook/uk-in-focus/the-fastest-growing-economy-in-the-g7/