2025-03-10 08:05

Key takeaways The EUR has outperformed many other currencies so far in March… …supported by the prospect of Germany’s fiscal boost and higher European bond yields. The ECB cut rates again in March, but the path for future easing is still in doubt; the risk of US tariffs looms ever larger. Following Germany’s moves towards looser fiscal policy, the EUR has become the second best performing G10 currency so far this month (Chart 1) and EUR-USD climbed to a 4-month high (Bloomberg, 6 March 2025). On 4 March, Germany's incoming coalition partners, CDU/CSU and SPD, announced a massive fiscal programme of infrastructure and defence spending, involving constitutional changes. The government aims to table the package in parliament before 25 March. The changes will require two-thirds majority in the lower and the upper house, which seems likely, in our economists’ view. The EU has potentially created EUR650bn of fiscal space for defence by the activation of the escape clause from fiscal rules and could provide EUR150bn of loans for defence investment. Allocating funds is one thing, but governments may find it difficult to spend it within the expected timeframe. It is worth remembering that Germany’s 2022 EUR100bn defence fund has almost all been allocated, but less than 25% had been spent by January 2025. Looser fiscal policy will support growth but by how much and over what period remains uncertain. Meanwhile, the risk of US tariffs looms ever larger. A White House announcement imposing trade tariffs on the EU is expected by 2 April. While the FX market is being dominated by big picture topics, like US trade policy and German fiscal policy, EUR-USD has been basically following what its 2-year yield differential has implied (Chart 2). This means the key to the EUR remains the policy outlook for the European Central Bank (ECB). Source: Bloomberg, HSBC Source: Bloomberg, HSBC On 6 March, the ECB cut its rate by 25bp, taking the key deposit rate and the main refinancing rate down to 2.50% and 2.65%, respectively. The decision came as expected, bringing the total easing since June 2024 to 150bp. The ECB said, “monetary policy is becoming meaningfully less restrictive”, and “especially in current conditions of rising uncertainty, it will follow a data-dependent and meetingby-meeting approach". Over the past few days, markets have focussed on the upside growth and inflation risks from the fiscal boost and now see the ECB policy rate ending 2025 at c2.0%, up from c1.80% (Bloomberg, 6 March 2025). https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/eur-usd-hits-4-month-high/

2025-03-10 07:04

Key takeaways The ECB’s delivery of its widely anticipated sixth 0.25% cut of this cycle was overshadowed by German fiscal developments last week. Amid all the recent noise around global trade policy shifts, there has been some positive macro and market developments for the emerging markets universe. Another bout of episodic volatility in global markets last week continued to weigh on US growth stocks. After a rip-roaring run over 2023 and 2024, the S&P 500 Growth index is down 2.5% year-to-date. Chart of the week – China’s policy space China’s annual National People’s Congress got underway in Beijing last week. Against a backdrop of trade tensions and economic headwinds, all eyes were on further policy support. Premier Li Qiang delivered the government work report outlining fiscal targets and policy priorities for 2025. China is once again targeting GDP growth of “around 5%” this year and has lowered the inflation target to 2%, from 3%, reflecting the country’s low inflation reality. The overall tone was growth-supportive and market friendly, with the reiteration of “more proactive” fiscal policy and “moderately accommodative” monetary policy. Rather than new stimulus, the emphasis was on policy execution and clearing implementation hurdles (especially for the property sector and local government debt management). For now, China looks set to take a wait-and-see approach to elevated global economic and trade policy uncertainty. Chinese policymakers have significant policy space to boost domestic demand, if needed. On fiscal targets, the government raised its general budget deficit target to 4.0% of GDP, the widest in decades (up from 3.0% of GDP in 2024). It also plans to issue CNY 1.3trn in ultra-long special treasury bonds (CGBs) this year (up from CNY 1trn in 2024). Local governments will be allowed to issue CNY 4.4trn of new special bonds, up from CNY 3.9trn in 2024. In terms of policy direction, boosting consumption is now a top priority. There is also a focus on technology innovation and upgrading industry, especially through AI and digital tech. The government also pledged more support for the property sector and the stock market. Overall, the plans confirm a Chinese policy put to support growth. In a global context, it comes amid a fiscal sea change in Europe (see next page) and fading US exceptionalism. Market Spotlight Reading the economic tea leaves in Asia Asian manufacturing PMIs have remained in expansionary territory in recent months, partly reflecting export front-loading ahead of potential US tariffs and some seasonal effects. However, recent surveys also reveal some important country differences. In some cases, the latest sentiment indicators are at odds with stock market performance. In India, for instance, a composite PMI of 58.8 in February remained firmly in expansion territory, boosted by services activity. Yet the MSCI India index has been Asia’s worst performer in Q1. Other Asian economies like Taiwan and Indonesia have also posted modestly improving +50 PMIs, and they too have seen their stock markets in retreat. By contrast, PMI data for South Korea showed a shift to contraction territory in February, despite its stock market delivering positive returns this year. While in mainland China, the average January-February manufacturing and composite PMIs, albeit above 50, were marginally lower than their Q4 averages. But mainland Chinese stocks have rallied hard in 2025. Hong Kong equities have also performed well, despite weaker recent PMI readings. So, while PMIs are a useful check on business sentiment, stock markets are driven by more than just macro momentum – sectoral developments, valuations, profits trends, embedded risks, investor sentiment, and even global fund flows all play a part. * Fund transfers include withdrawals from the stabilisation fund, leftover funds carried forward from past year(s), and transfer from state capital budget and government funds. 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 forecast, projection or target where provided is indicative only and not guaranteed in any way. 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 07 March 2025. Lens on… Whatever it takes – German edition The ECB’s delivery of its widely anticipated sixth 0.25% cut of this cycle was overshadowed by German fiscal developments last week. Borrowing a famous line from the former ECB President Draghi, Chancellor-in-waiting Merz vowed to “do whatever it takes” to defend the country. While proposed changes to the German debt brake to allow for more defence spending are part of the package, the potential game changer is a EUR500bn (c. 12% of GDP) special infrastructure fund. This will be spent over 10 years and is not subject to the debt brake. The proposals imply much looser German fiscal policy over the coming years, which should support growth from 2026 (it will take some time for investment projects to get up and running). Bund yields surged by over 0.2% on the announcement, diverging dramatically from the trend in UST yields. Despite this, the Euro Stoxx 50 also jumped by over 2%. Low eurozone growth expectations and eurozone equities trading at a significant discount to the US create a low bar for positive economic and policy surprises to drive further eurozone equity outperformance. Some light relief for emerging markets Amid all the recent noise around global trade policy shifts, there has been some positive macro and market developments for the emerging markets universe. First and foremost, in a reversal of well known “Trump trades”, the US dollar has lost ground since the start of the year and US bond yields fell sharply last month. This eases global financial conditions and dollar-denominated debt burdens, and buoys EM currencies. Increasing speculation of a “Mar-a-Lago accord” to weaken the dollar is a reminder that the direction of the greenback isn’t a one-way bet in 2025. Meanwhile, EM underlying inflation continues to freefall, in contrast to US price trends which are displaying signs of stickiness. EM and US inflation could cross paths later this year. Outside of the covid pandemic, this was last seen in 2006 just before “the age of austerity” in the west contributed to keeping inflation rates depressed. Overall, these factors provide breathing space for EM central banks to enact further rate cuts, providing a bulwark against external shocks, while helping to unlock value in many EM asset classes. But as usual, a one-size-fits-all approach to assessing the outlook for EMs risks over-simplification, and a selective approach will be crucial. The X factor Another bout of episodic volatility in global markets last week continued to weigh on US growth stocks. After a rip-roaring run over 2023 and 2024, the S&P 500 Growth index is down 2.5% year-to-date. Recent Growth weakness is not as extreme as it was in late 2022. Back then, US tech was pummelled by the ramp up in interest rates and the dollar rally that weighed on foreign revenues. The post-pandemic run-up in prices rapidly unwound, with Value proving to be the superior factor, benefiting from higher inflation and rates. So where next for the factors in 2025? While the growth-heavy IT and communication services sectors have seen earnings optimism weaken recently, it could be too early for a material retracement in Growth. AI is likely to remain a significant driver of earnings momentum and interest rates remain on a downward trajectory. But recent trends are a reminder that expensive valuations can be a precursor to market volatility. It may also hint at a potential pick-up for left-behind Value. What’s more, in a complex environment where the only certainty is uncertainty, maybe the more resilient and dependable Quality factor could be the winning style in 2025. 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 07 March 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 07 March 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 Risk markets traded mixed amid ongoing concerns regarding US trade policy, with the US dollar index weakening on questions over US “exceptionalism”. In Europe, the ECB lowered rates by 0.25%, with president Lagarde stating that monetary policy was becoming “meaningfully less restrictive”. While US Treasuries were range-bound, a significant shift in German fiscal policy prompted a surge in 10-year German Bund yields, bear steepening the curve, driven by rising supply worries. Among the stock markets, the US saw widespread weakness and underperformed its global peers. The Euro Stoxx 50 index edged higher, as the German DAX rallied and reached a new high. Japan’s Nikkei 225 edged lower as the Japanese yen strengthened. In emerging markets, Asian equities mostly rose, led by the rallies in Chinese equities as policymakers signalled a pro-growth stance at the 2025 NPC meetings. Major Latin American stock markets were up modestly. In commodities, oil fell on rising supply worries, while gold and copper rose. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/chinas-policy-space/

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/