2025-08-04 07:04

Key takeaways The Fed left rates unchanged at its July meeting, but the decision was not unanimous – for the first time in over 30 years, two members dissented, favouring a 0.25% cut. Policy uncertainty and fears over the US fiscal trajectory have prompted global investors to diversify away from US dollar-denominated assets this year. Japanese assets have been in the crosshairs of both domestic and global risks lately. While trade policy uncertainty has receded following a deal with the US, domestic politics are still a source of volatility for Japanese bonds and the yen. Chart of the week – Value in Asia Tech Last week’s deluge of economic data coincided with a peak in Q2 US profits season announcements. The key takeaway is that growth is steady despite uncertainty over policy and tariffs, and that companies are beating relatively low expectations. Another theme dominating attention is the influence of AI on both the market and macro environment. Some of the S&P 500’s Magnificent Seven technology giants have been among those reporting better-than-expected profits – and the message is that they are doubling down on AI investments. After a wobble earlier this year, renewed AI enthusiasm has helped drive a rally in US tech firms, taking the index back to all-time highs. But there are concerns. One is how quickly they can recoup the billions of dollars of capex spent on chips and data centres, even if there is already evidence of AI accelerating earnings. And from a macro perspective, there’s unease about how AI can boost flagging productivity without hurting labour markets longer-term. But this isn’t just a US market narrative. In Asia, there are expectations that AI could eventually partly reverse mainland China’s decade-long productivity decline. Mainland China is strong in AI research, and some analysts believe it could go on to lead globally in engineering optimisation, production, and widespread commercialisation. Regionally, Asian export-led economies like Taiwan and South Korea are already pivotal in global semiconductor manufacturing, and the AI boom could be a further catalyst. Like the US, AI-driven demand is contributing to strong performance in Asian markets this year, with the MSCI Asia Tech index up over 15% year-to-date. But even after this rally, the index trades on a 12m forward PE ratio of 16x, versus 29x for US Tech. As the AI theme develops, global investors should consider the potential for AI profits to broaden out to Asia, unlocking tech valuations in markets across the region. Market Spotlight Power play Recently, mainland China started work on what will eventually be the world’s largest hydropower dam in Tibet. Once complete, the RMB1.2trillion (USD170bn) project could generate up to 300 million megawatt hours of electricity every year. Given recent “anti-involution” policy signals (which aim to cap areas of industrial overcapacity) and the project’s scale, there was a pick-up in equity sectors likely to benefit from both, including energy (+6%, MSCI China, USD), industrials (+5%) and materials (+7%) – with the market up 3% overall. But longer-term, this project – which was first proposed in 2020 in China’s 14th five-year plan – is evidence of the government’s commitment to carbon neutrality. According to the International Energy Agency, China is by far the world’s largest energy investor, and accounts for nearly a third of global clean energy spending. Over time, power security – following significant expansion in power supply capacity and green energy transition – could become a competitive advantage in technological development and high-end manufacturing, where China is already focusing policy support. For instance, the growing adoption of digitalisation and AI technologies will continue to drive increased electricity demand for data storage, computing, and transmission. In the power stakes, China looks well-positioned to surge. 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. HSBC Asset Management accepts no liability for any failure to meet such forecast, projection or target. Source: HSBC Asset Management, Bloomberg. Data as at 7.30am UK time 01 August 2025. Lens on… Fed holds firm The Fed left rates unchanged at its July meeting, but the decision was not unanimous – for the first time in over 30 years, two members dissented, favouring a 0.25% cut. Despite this, Chair Powell did not give any strong signals regarding a rate cut at the September meeting. The market interpreted this as mildly hawkish, reducing the probability of a September cut to less than 50%, although it still expects 3-4 rate cuts over the next 12 months. Ultimately, the Fed is going to be guided by the data and will need to exercise a lot of judgment. Inflation is set to pick up over the summer as the tariff impact feeds through, but growth and the labour market are likely to cool. History shows that periods of slower growth can quickly morph into a sharper downturn. This risk is likely to lead the Fed to cut a couple of times this year, despite rising inflation. Bonds beyond the US Policy uncertainty and fears over the US fiscal trajectory have prompted global investors to diversify away from US dollar-denominated assets this year. Renewed confidence is driving a rebound in eurozone sovereign debt inflows, with EUR120bn entering Italian bonds alone this year. Domestic and foreign investors are responding to falling policy rates, credit spread dynamics, and the ECB’s tools to manage market volatility. Meanwhile, in emerging markets, debt fundamentals have improved significantly over the past 20 years, supported by improving fiscal discipline, lower public debt ratios, and strong demographic trends. This year’s weakness in the US dollar has also been a tailwind. However, the picture across EMs is nuanced. While EM Asia, particularly China, faces widening deficits, Latin America, EM Europe, and MENA show signs of gradual fiscal improvement post-Covid. Japan’s policy tightrope Japanese assets have been in the crosshairs of both domestic and global risks lately. While trade policy uncertainty has receded following a deal with the US, domestic politics are still a source of volatility for Japanese bonds and the yen. PM Ishiba has been under pressure to resign after the defeat of his LDP party in recent Upper House elections. But there are concerns that political turmoil could result in new leadership that takes a more dovish fiscal stance, fanning worries about debt sustainability. Core inflation is running above 3% compared to a policy rate of 0.5%, implying a deeply negative real policy rate. But the path to normalisation is likely to be gradual. While the BoJ raised its inflation forecast at last week’s meeting, getting to inflation that is sustainably averaging the 2% target is fraught with challenges. And debt sustainability may factor into BoJ decision-making even if Japan’s public debt is largely domestically owned and its fiscal balance is not as wide as in global peers. Overall, policy uncertainty could perpetuate volatility in domestic assets, while a constrained BoJ means those betting on a stronger yen could be surprised. 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. HSBC Asset Management accepts no liability for any failure to meet such forecast, projection or target. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 01 August 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 01 August 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. HSBC Asset Management accepts no liability for any failure to meet such forecast, projection or target. Market review Risk sentiment was little changed last week as investors absorbed news on US trade deals ahead of the 1st August deadline, and assessed the global monetary outlook following key central banks’ policy meetings. The US dollar strengthened, while US Treasury yields remained range-bound, and European yields slightly declined. Euro credit spreads tightened, whereas US high-yield spreads widened modestly. In equity markets, US stocks mostly declined: the S&P 500 traded lower, with the small-cap Russell 2000 experiencing sharper losses, but Nasdaq edged up, supported by some tech firms’ positive Q2 results. European stock markets were mixed, with German DAX and French CAC lagging. Japan's Nikkei 225 and other Asian equities broadly fell amid weaker regional currencies. In commodities, oil gained ground amid ongoing geopolitical concerns, while gold and copper prices were lower. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/value-in-asia-tech/

2025-08-01 12:02

Key takeaways As widely expected, the Fed left policy rates steady, though with two dissenting votes for an immediate cut. The overall guidance from the Fed suggests a patient policy, sending the DXY higher… … but the USD still faces downside from political and structural drivers, and the return of cyclical headwinds. The Federal Open Market Committee (FOMC) kept the federal funds target range steady at 4.25-4.50% for a fifth consecutive meeting in July. This came in line with market expectations. The accompanying statement had one dovish change, with the new observation that “economic activity moderated in the first half of the year”. In addition, there were two dissenting votes from the Federal Reserve (Fed) Governor Christopher Waller and Michelle Bowman who called for an immediate 25bp cut. The market impact of this dissent was modest, however, as the views are still evidently dovish outliers on the FOMC. Fed Chair Powell’s overall comments show that most of the policymakers still support a wait-and-see approach to any future rate cuts. Crucially, Chair Powell talked of the “coming months” when describing the timeframe over which the data would be analysed to decide on next steps. While this does not rule out a cut at the next meeting on 16-17 September, it did not indicate that policymakers were any closer to delivering an easing than they were at the June meeting. Our economists still expect 75bp of cumulative Fed rate cuts through this year and next, delivered in three 25bp steps: September, December, and next March. Following Chair Powell’s press conference, the US Dollar Index (DXY) surged to as high as 99.98 (Bloomberg, 31 July 2025), as markets have pared expectations for a September rate cut. Rates market now views a September cut as a 50:50 call, down from a c66% likelihood attached to this outcome ahead of the July meeting. Source: Bloomberg, HSBC Cyclical headwinds (via narrowing yield differentials) for the USD are easing for now but may return when the Fed resumes its rate-cutting cycle. Questions still remain over US trade policy, the path for the US budget deficit, and the political pressure on the Fed. The USD still faces headwinds from political and, to a lesser extent, structural drivers. All this points to a soft USD in the months ahead. Still, recent USD price action is a challenge to those who argue for persistent currency weakness that would extend into 2026 – a narrative we do not agree. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/usd-the-fed-remains-patient-on-rate-cuts/

2025-08-01 07:04

Key takeaways The higher fiscal deficit concerns caused by the One Big Beautiful Bill, which included significant tax and spending cuts, and broad policy shifts, will likely be offset by expectations of Fed rate cuts and benign inflation. Meanwhile, solid Q2 earnings growth reinforces our US overweight positions in IT, Communications, Industrials and Financials as they benefit from the bill and structural trends. More regulatory clarity (e.g., GENIUS Act) is also a positive. Following the US-Japan trade deal, which lowered Japanese tariffs to 15%, the US and the EU also announced a 15% tariff rate on most EU goods sold to the US, plus additional investments in US energy products and military equipment. These deals have de-escalated global trade tensions substantially. We maintain a risk-on stance and mitigate uncertainty through multi-assets, including quality bonds (e.g., UK gilts) and gold. While China’s 5.2% GDP growth for Q2 has raised hopes of reaching the government’s full-year target of around 5%, economic data remain mixed. The Chinese authority has introduced supply-related measures to address the deflationary pressures caused by overcapacity in the areas of solar, steel, auto, lithium batteries, etc., which boosted market sentiment. In Asia, we remain overweight in China, India and Singapore, and neutral in Japan following the loss of its ruling coalition’s majority in both parliamentary houses. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-monthly/positive-drivers-boost-market-optimism-amid-progress-on-trade-deals/

2025-07-31 12:02

Key takeaways In a move largely anticipated by markets and us, the Federal Reserve left interest rates unchanged at 4.25%–4.50%, but the meeting was still seen as slightly hawkish. The Fed noted that economic activity has “moderated” in recent months, while inflation remains elevated but continues to ease. Fed Chair Jerome Powell reiterated that the “main number you have to look at now is the unemployment rate,” since labour supply and labour demand appear to be slowing in tandem. Mr. Powell emphasised his data-dependent approach and offered no clear timelines for cuts, signalling the Fed’s intent to keep rates high until inflation convincingly moves toward the 2% target. We maintain our overweight on US equities, given the economy’s relative strength to other markets, strong earnings growth, the Fed’s eventual pivot, and the tailwinds from structural themes around technology and AI revolution, the re-industrialisation of the US economy, and reshoring of key industries, which together support a favourable risk-reward outlook. We remain neutral overall on fixed income but continue to tactically add high quality bonds for income and stability, using an active approach to find selective opportunites. We still forecast 0.75% of cumulative Fed rate cuts through this year and next. Please refer to the full report for details about the event and our investment view. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/strong-economy-and-tariff-uncertainty-keep-hawkish-fed-on-hold-again/

2025-07-29 07:05

Key takeaways The European Union (EU) and the US reached a trade deal on 27 July, agreeing on a 15% tariff rate to be imposed on EU goods sold to the US, starting 1 August. However, details of sectoral tariffs, namely pharmaceuticals and semiconductors may not be fully clear. Other key terms of the deal include a USD750 billion purchase of US energy products and chips and USD600 billion of additional US investments from the EU. Although the Eurozone is ultimately left with a higher baseline tariff of 15% compared to the 10% level it was hoping to achieve, the incremental downside risks to growth should be manageable given that “certainty” may pave the way for stabilisation in sentiment or a bottoming out in tariff-exposed sectors. We keep our neutral view on Europe ex-UK equities with a preference for Industrials, Financials and Utilities. Our preferred exposure in the fixed income space lies with investment grade bonds of 7-10- year duration. Please refer to the full report for details about the event and our investment view. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/eu-us-deal-eases-near-term-downside-risks/

2025-07-28 08:06

Key takeaways The ECB was on hold in July, as widely expected. The EUR is still much stronger than what its yield differential implies, which assumes a ‘good case’ outcome on tariffs. Risks for the EUR are skewed to the downside if trade tensions intensify and/or evidence of economic weakness emerge. On 24 July, the European Central Bank (ECB) kept its deposit rate steady at 2% for the first time in more than a year, after slashing rates by 2% in total since the beginning of the easing cycle in June 2024. The statement stresses that the environment remains exceptionally uncertain, especially because of trade disputes, with risks to growth remaining tilted to the downside. Having said that, ECB President Lagarde seemed to focus on the positive impact of a possible trade deal lifting uncertainty and also reaffirmed that the central bank is in a very good place to hold and watch how the risks will evolve over the next few months. While plenty of uncertainty remains, our economists think that the ECB is done cutting rates if the EUR stays around the current level. But if EUR-USD were to head towards the 1.25-1.30 range, this could mean a bigger inflation undershooting, pushing the ECB to reconsider cutting rates in December or early next year. Markets have also pared back expectations of further ECB easing, currently pricing in a c20% chance of a rate cut in September (Bloomberg, 24 July 2025). It is worth noting that the EUR still enjoys an unusually large premium relative to the interest rate differential (Chart 1), which assumes a ‘good case’ outcome on tariffs. Media reports suggest that the US and the EU are closing in on a trade deal which would place 15% tariffs on the EU (FT, Bloomberg, 23 July) − higher than the 10% ‘baseline’, but certainly not as impactful as a 30% rate. Source: Bloomberg, HSBC Source: Bloomberg, HSBC Meanwhile, the EUR is returning to its ‘risk on’ persona (Chart 2). Any material escalation in tariffs could see risk aversion, probably weighing on the EUR. Conversely, trade deals with lower tariff levels could support risk appetite, which is likely to be EUR-positive. As such, we look for the EUR to move mostly sideways in the weeks ahead; but risks are skewed to the downside, especially if trade tensions intensify or evidence of Eurozone economic weakness emerges. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/eur-return-to-risk-on-persona/