2025-08-18 12:01

Key takeaways USD weakness has paused lately, but could resume… …depending on the direction of Fed policy and the coming arrival of its new chair. If markets show concerns over Fed independence, the USD could face headwinds. Throughout most of this year, the relationship of the USD with interest rate differentials has been poor, as US policy uncertainty and structural forces are overshadowing such cyclical drivers of the USD. However, there have been nascent signs of the USD’s cyclical drivers taking on greater importance, with the gap between the US Dollar Index (DXY) and its weighted rate differential narrowing (Chart 1). The fact that heightened US trade policy uncertainty no longer coincides with a lower USD gives room for other factors, such as US yields, to increasingly matter. The USD’s weakness has paused lately, in part due to the likelihood of an improvement in the US current account position amid a narrowing trade deficit (Chart 2). Source: Bloomberg, HSBC Source: Bloomberg, HSBC We can back out why USD weakness has paused, but there are other considerations that could soon start testing the currency again. This largely comes down to the Federal Reserve’s (Fed) stance on monetary policy and who could be the next Chair. As the resumption of the Fed’s easing cycle is coming, the cyclical influence for the USD is likely to become more dominant, and gradual Fed easing would still see the USD as a higher yielding currency. There is frequent dialogue about Fed Chair Jerome Powell’s likely departure in May 2026 and who could take over (Reuters, 6 July 2025). Market interpretation of political bias for the Fed can carry different outcomes for the USD. If this is relatively benign in the end and the Fed can cut rates gradually, this supports our central case for the USD to weaken gradually versus many currencies. If, however, markets become concerned about political interference for the Fed, then the USD could behave differently, depending on how cross-asset volatility shifts and long-term US bond yields move. In a problematic situation, the USD would initially weaken versus core currencies like the EUR, JPY, and CHF, but it could be trickier for other currencies that are sensitive to heightened risk aversion, such as the AUD, the NZD, and many other emerging market currencies. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/usd-focus-on-the-fed/

2025-08-18 07:04

Key takeaways Markets cheered July’s lower-than-expected headline US CPI print, with the reading pushing the probability of a September rate cut to 97%, having been as low as 40% a couple of weeks ago. But scratching below the surface reveals some negative developments. Despite a macro landscape in Asia characterised by tariff-driven uncertainty, it’s been a good year so far for the region’s credit markets, with spreads grinding to historical tights across both IG and HY. The release of ChatGPT-5 has intensified the debate over the labour market consequences of AI adoption. Views span from the expectation that we will see productivity gains without employment losses, to concerns about large-scale displacement with limited output benefits. Chart of the week – An expensive dollar One of the biggest surprises of 2025 so far has been how weak the US dollar has been. Coming into the year, most investors were positioned for USD strength amid the belief that Trump’s policy agenda – centred on tax cuts and deregulation – would provide a boost to growth and thus extend US exceptionalism. Instead, as tariffs dominated the White House’s policy agenda, US growth projections for 2025 have been hit hard. But although US stocks have staged an impressive rebound since April, the dollar remains under pressure, resuming a downward trend in August following a mild recovery last month. What does this tell us? It may suggest US stocks may be somewhat shielded from conventional macro and policy effects given the outsized influence of tech and AI. But also that the dollar looks more vulnerable to a cyclical backdrop of Fed cuts and growth convergence with other major developed economies. Structurally, the story around the dollar remains bearish. The currency is expensive. External deficits are likely to remain big, even with tariffs in place. But perhaps more importantly, US institutional integrity may be slowly eroding as policymaking becomes more erratic, legal frameworks are undermined, and the independence of the Fed is under question. This is unlikely to work in the dollar’s favour over the long-term. So, with US exceptionalism most obviously ending with the dollar, hedging USD-denominated assets should be taken seriously when constructing portfolios. And diversification across regions and currencies will be important, especially in emerging markets which benefit the most from USD weakness. Market Spotlight Concentrated risks This month’s strong performance of US mega-cap tech stocks – propelled by a strong Q2 earnings season and renewed AI enthusiasm – has helped push the S&P 500 index to fresh all-time highs. This is reminiscent of the 2023/2024 playbook of US stock performance being driven by a small group of big players. Stock market concentration – for example measured by the share of the top 10 stocks in the S&P 500 – is now at its highest level since the 1930s. This is not necessarily a problem when those stocks are roaring ahead. But it comes with risks. Concentrated portfolios exposed to the fortunes of a few companies are by construction more idiosyncratic and less diversified (even if the big, listed companies straddle across multiple operations). Plus, if concentration is in the most expensive parts of the stock market – as it is today – it implies weaker medium-term investment 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. 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 18 August 2025. Lens on… All clear on US inflation? Markets cheered July’s lower-than-expected headline US CPI print, with the reading pushing the probability of a September rate cut to 97%, having been as low as 40% a couple of weeks ago. But scratching below the surface reveals some negative developments. Core prices delivered the strongest month-on-month increase since January. And prices of core goods excluding used vehicles are rising at c.2.0% annualised, a clear break from 2024’s trend of gradual decline. Further pass-through across a broad selection of goods seems likely. The Fed’s preferred inflation measure – core PCE – has been stuck in a 2.6-3.0% range since mid-2024 and is now set to rise. While this may be the source of some nerves within the Fed, the good news is a cooling labour market and below-trend growth is helping to cap longer-term inflation expectations and wage growth. This means tariff-induced price rises are less likely to result in enduring inflation, making a couple of rate cuts this year achievable. Arguably, such policy easing would be sensible from a risk management perspective, given the potential for the economy hits its stall speed, triggering a more significant slowdown. Steady fundamentals in Asia credit Despite a macro landscape in Asia characterised by tariff-driven uncertainty, it’s been a good year so far for the region’s credit markets, with spreads grinding to historical tights across both IG and HY. A key driver of this performance has been supportive fundamentals. Credit rating upgrades are outpacing downgrades while default risks remain low and contained within China high-yield property. What’s more, although supply of Asian USD credit is up double digits year-to-date, it remains negative on a net basis. Looking ahead, some analysists think Macau gaming, India commodities and renewables, and selected China and Indonesia industrials could potentially perform in HY. In IG, positive convictions are in bank capital and China tech. More broadly, improved China policy efficacy would have a positive impact on China and Hong Kong names. The good news is reflation appears to have gained importance on the policy agenda, with efforts to address overcapacity, ongoing support to the housing market, and efforts to boost consumption. AI and jobs The release of ChatGPT-5 has intensified the debate over the labour market consequences of AI adoption. Views span from the expectation that we will see productivity gains without employment losses, to concerns about large-scale displacement with limited output benefits. A balanced take implies that while higher productivity can boost economic output, some displacement of workers is inevitable, consistent with past technological shifts. Roles in computing, mathematics, office administration appear most exposed, though workers with highly transferable technical skills (like programmers) may adapt more quickly. Research suggests that highly paid jobs are more exposed but also face fewer barriers to re-employment. Perhaps the greater concern is the potential hollowing out of middle-skilled jobs, as happened in the 2010s following mass adoption of the internet a decade or so earlier. Lower labour costs and higher productivity stemming from AI remain a key feature of upside scenarios for corporate profits and equity market performance over the coming years. But the impact on income and wealth inequality are key uncertainties. 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 18 August 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 18 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. Market review Risk markets rallied on rising optimism of an early Fed cut amid a strong US Q2 earnings season. While US core CPI ticked higher, led by firmer service sector inflation, goods inflation saw limited signs of tariff-related price rises. The US dollar weakened against major currencies and Treasury yield curve steepened modestly, as investors are factoring in 2-3 Fed rate cuts by year-end. Meanwhile, US and eurozone credit spreads narrowed, with eurozone HY outperforming. In equities, the S&P 500 touched an all-time high and the interest rate sensitive Russell 2000 performed strongly. The Euro Stoxx 50 and the Nikkei 225 also moved higher. In other Asian markets, Indonesian stocks led the regional rallies, hitting a record high. Hong Kong’s Hang Seng also rose, followed by India’s Sensex and Mainland China’s Shanghai Composite. In commodities, gold prices fell, while oil prices moved sideways. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/an-expensive-dollar/

2025-08-11 12:01

Key takeaways The Bank of England cuts Bank Rate by 0.25ppts in August. GDP growth lacks direction amid ‘temporary’ pressures… …while inflation is expected to stay above 3.5% throughout the rest of 2025. Source: HSBC The ‘stag’ is weak and lacks direction… UK GDP growth fell for a second consecutive month in May, albeit grew 0.5% on a three-month-on-three-month basis, driven by all three broad sectors. However, the degree of uncertainty in the data is elevated and likely distorted by a range of temporary factors including the front-loading ahead of tariff and stamp duty changes, and retail seasonality adjustments. Nonetheless, underlying economic growth is weak and lacks direction. The PMIs point to little momentum in activity amid continued pressures, notably from higher labour costs that are translating into soft employment demand; the unemployment rate rose to 4.7% in the three-months to May. Meanwhile, GfK consumer confidence in July was lower than a year ago. But all is not lost, many of the factors currently weighing on sentiment are one-off ‘shocks’ the effects of which should subside. Indeed, many indicators are off their March/April lows and forward-looking indicators from both consumers and businesses are more positive. Consumers, while pessimistic about the economic outlook (chart 1), are relatively more certain of their own personal financial situations going forward. Perhaps in part a reflection of wage growth and falling interest rates helping to offset the impact of higher prices. A clear risk lies in the upcoming Autumn Budget, not only in terms of possible policies announced, but also the uncertainty in the lead-up to it. …while the ‘flation’ is strong and sticky The headline rate of CPI inflation rose to 3.6% y-o-y in June from 3.4% in May. Some of that acceleration is of little concern; however, there were signs of price stickiness. Although services inflation was unchanged at 4.7%, core services (chart 2) rose 0.3ppts by our estimates. At its August policy decision, the BoE raised their near-term inflation profile – expected to stay above 3.5% through the remainder of 2025 – and pointed to increased risks of second-round effects via inflation expectations, which remain elevated, and the potential translation into wage growth. Nonetheless, wage growth has moderated, and the BoE cut Bank Rate by 0.25ppts to 4.00% in August. But rates setters are divided, and although that is not new, it points to a lack of improvement in clarity over the outlook for the UK economy. The BoE will need to continue to tread a fine line between managing medium-term price stability and unnecessarily damaging growth. We maintain our view that further moderations in wage growth will help to alleviate inflationary concerns and enable Bank Rate to fall further but the risk is on the side of a slower pace of rate cuts. Source: Macrobond, GfK, HSBC Source: Macrobond, HSBC calculations Source: Bloomberg, HSBC forecasts https://www.hsbc.com.my/wealth/insights/market-outlook/uk-in-focus/stagflation-risks/

2025-08-11 12:01

Key takeaways As expected, the BoE delivered a 25bp cut in August… …but dissents and an upward inflation forecast revision made it feel like a hawkish cut, sending the GBP higher. The Autumn Budget is likely to stand as a major risk for the GBP via fiscal, monetary and political channels. On 7 August, the Bank of England (BoE) cut its policy rate by 25bp to 4.0%, which was the fifth cut in the current easing cycle, as widely expected. The overall tone of the BoE meeting was rather hawkish, given the dissents within the Monetary Policy Committee (MPC) and an upward inflation forecast revision. The rate cut decision was made after a second vote, as the first round was a 4-4-1 deadlock, with four members (Catherine Mann and Huw Pill, as in May, plus Megan Greene and Clare Lombardelli) preferring a hold and one member (Alan Taylor) voting for a 50bp reduction. This showed what a tight call the decision proved to be, and there is a risk of a slowdown in the pace of easing from here. Beyond the bullish knee-jerk reaction to the vote split, the GBP should also look towards the medium-term forecast for inflation. The BoE raised its near-term inflation forecast to 4.0% in September (from 3.7% previously) and its two- and three-year ahead inflation forecasts to 2.0% (from 1.9% previously). This may once again indicate that the BoE will not be in a rush to ease policy again soon. Source: Bloomberg, HSBC Source: Bloomberg, HSBC The GBP spiked higher against both the USD and the EUR, as markets have pared expectations for a November rate cut. The rates market now sees only c35% for this to happen, down from a c80% likelihood ahead of the meeting (Bloomberg, 8 August 2025). Nevertheless, our economists’ base case is that more evidence of disinflation against the backdrop of a weakening labour market will come through, allowing the BoE to reduce its policy rate at a continued 25bp-per-quarter pace, until it gets to 3.0% in Q3 2026. Meanwhile, the UK’s public finance situation has deteriorated since March. As the Autumn Budget (around late October or early November) approaches, the GBP is likely to face downside risks. The possibility of tax hikes could alter the outlook for inflation and unemployment and, thereby, the BoE’s easing path. It could also stir up political uncertainty if the Chancellor’s tax and spending decisions deepen divisions within the Labour party. As such, the GBP is likely to weaken against the EUR, but not by much against the USD, which is still weighed down by US policy uncertainty. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/gbp-the-boes-hawkish-cut/

2025-08-11 08:04

Key takeaways Investors have been fixated on the US growth over the past decade – and potentially overlooking the power of dividends. There’s currently an abnormally wide dividend yield gap between US and non-US markets. Emerging market stocks have outperformed their developed market peers in 2025 – with the respective MSCI indices delivering net USD returns of 17% versus 11%. The Bank of England delivered a hawkish cut at its August meeting, with four of the nine MPC members voting for unchanged policy. The split highlights the difficulties facing the BoE, but this may prove to be a side-show relative to the decisions facing the government. Chart of the week – Turning tides? There has been a trend in recent years for global stock markets to turn volatile in early August. It happened again recently, with a pick-up in trade policy uncertainty coinciding with weak US labour data, sending stocks lower. But this summer, US markets have rebounded at near-record speeds. Q2 earnings are beating expectations, and technology stocks are driving the market. Prices are within touching distance of all-time highs. But is it really all good news? Well, the undercurrents could point to choppier waters ahead. The previous week’s disappointing payrolls print came with marked downward revisions for previous months, and the latest numbers could be slimmed down too. Meanwhile, the economic activity is slowing. With the tariff deadline passed, imports to the US will now see average tariffs of 19% – far higher than it had been expected. And beneath the surface, corporate profits face headwinds. Higher tariffs mean consumer sectors in particular, face a tricky trade-off between hiking prices and losing customers. Yet, above the surface, it’s calm. Aside from previous week’s brief dip, stock volatility has generally fallen, credit spreads are close to decade lows, and analysts actually nudged up their profit forecasts for S&P 500 firms in July. In part, lower bond yields are helping. Short term US yields have dropped to 3.7% and long bond yields to 4.2%. That lower cost of capital means investors can live with skinny credit spreads and higher PE multiples. Likewise, a weaker dollar also helps – both as a terms-of-trade profits booster for larger companies exporting from the US, and for foreign investors looking to buy in. Market Spotlight Climate control A recent academic paper from some multi-asset analysts explore how asset returns respond to climate risk – both from physical climate events and heightened media attention – and what that means for multi-asset portfolio construction. Using a novel “extreme weather index” (based on temperature, wind, and precipitation data) and a complementary news-based climate concern index, the study quantifies the climate sensitivity – or “beta” – of a broad range of asset classes, from equities and bonds to commodities, real estate, and infrastructure. A key takeaway is that climate risk should be treated as an asset allocation issue, not just a security selection problem. Bonds generally showed low or even negative sensitivity to climate shocks, while equities, commodities, and property had stronger positive betas. Portfolios tilted towards these climate-sensitive assets delivered stronger performance during periods of climate stress – though often at the cost of higher volatility and tracking error. The study demonstrates that diversifying across asset classes and adjusting within them (such as using green bonds or climate-tilted equities), can help investors hedge better against climate-related risks without sacrificing long-term portfolio resilience. 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. Data as at 7.30am UK time 08 August 2025. Lens on… Dividends matter Investors have been fixated on the US growth over the past decade – and potentially overlooking the power of dividends. Dividends matter because they make up a significant portion of longer run returns. A Yale academic study* showed that between 1926 and 2000 dividends made up about 60% of total returns (after inflation). Dividend payments also tend to be more dependable than earnings. While profits can be prone to wild swings, especially in downturns, dividends are relatively more stable. In Europe, for instance, history shows that on average since 1970, falling earnings have only resulted in dividends being cut by one-quarter respectively – that includes the drastic cuts during the Financial Crisis. That’s because company management are wary of changing dividend policies designed to weather setbacks. There is currently an abnormally wide dividend yield gap between US and non-US markets. The US yield is about 1.3% (MSCI), with US tech stocks offering only 0.6%. That compares to 3.1% for Europe ex-UK and 3.5% for the UK. These could provide an opportune entry point for long-term investors. Go your own way Emerging market stocks have outperformed their developed market peers in 2025 – with the respective MSCI indices delivering net USD returns of 17% versus 11%. That’s been driven by a sense of fading US exceptionalism – with a weaker dollar and cooling growth spurring investors to look beyond the US. The appeal of potentially cheaper EM valuations has also helped, as well as signs of stabilisation in China, where a policy put is supporting confidence. But while EMs have outperformed as a whole, local idiosyncrasies mean they shouldn’t be treated as a single bloc. Correlations between EM stock returns show that some key countries don’t tend to perform the same. China and India are a good example. The return correlation between them is only very weakly positive (at just 0.1). That’s reflected in their diverging performance this year, with China leading the EM rally, and India lagging it, further reversing a trend seen between 2021 and 2023. Deficit dilemma The Bank of England delivered a hawkish cut at its August meeting, with four of the nine MPC members voting for unchanged policy. The split highlights the difficulties facing the BoE, but this may prove to be a side-show relative to the decisions facing the government. The UK faces a fiscal “black hole” of GBP50bn, according to the policy wonks at the NIESR think tank. If right, the Chancellor faces some tough choices in the Autumn budget. Poor productivity growth, rising debt interest payments, a burgeoning social benefits bill, and increasing defence spending all present challenges. With political constraints limiting the scope for spending cuts, the onus is on higher taxes to rein in the budget deficit. But tax rises can weigh on already-soft growth, presenting the risk of a “doom loop”. Investors are giving the UK government the benefit of the doubt, but the “kindness of strangers” may have its limits, particularly if the economy is hit by further negative shocks. A weak USD masks some of the UK-related concerns, but GBP/EUR has been under pressure this year despite a more dovish ECB. 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, *Ibbotson, Chen, “Stock Market Returns in the Long Run” (2002). Data as at 7.30am UK time 08 August 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 08 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. 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/turning-tides/

2025-08-07 12:02

Key takeaways President Trump recently announced the decision to impose an additional 25% tariff on Indian goods due to India’s purchase of crude oil from Russia. The additional tariffs, which would take the total tariffs on Indian goods to 50%, would be effective from 28 August, giving both countries time to negotiate. If implemented, the additional tariffs would dent India’s exports and GDP growth. From a policy perspective, India has the ability to use both monetary and fiscal policy to support growth. We expect the Reserve Bank of India (RBI) to cut rates by 0.25% in Q4, but don’t rule out further cuts should headwinds to growth intensify. India’s fiscal consolidation over the past few years should allow the government with room to increase spending to boost growth, if required. We maintain our overweight on Indian equities, supported by robust macro fundamentals, structural reform momentum and resilient domestic demand. However, we acknowledge that the situation remains fluid given recent tariff developments and escalating trade tensions. We are watching for signals across financial conditions, earnings and sentiment. 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/us-doubles-tariffs-on-india-to-50-percent/