2026-06-01 12:01

Key takeaways The USD is likely to remain range-bound over the near term amid geopolitics. The EUR appears to lack a clear directional path. The RBNZ’s hawkish hold has buoyed the NZD, while global risk sentiment dominates. The US and Iran have reached a tentative deal to extend a ceasefire by 60 days, pending President Trump’s signoff; the deal would require Iran to remove all mines from the Strait of Hormuz within 30 days (Bloomberg, 29 May). But, unless there is a clear resolution to the Middle East stalemate, the USD is likely to extend its recent sideways trend and remain range-bound over the near term. The geopolitical impasse is allowing other factors, alongside energy prices, to play a larger role in FX. Key theme: Interest rate differentials Over the coming weeks, interest rate differentials are likely to be the primary market focus. The Federal Reserve (Fed) is still shifting from dovish to more hawkish, whereas this transition is already largely priced in for Europe. This should help underpin the USD (Chart 1) but may not be sufficient on its own to trigger a sustained USD rally. EUR: Limited scope for a standalone move With a steady USD as the backdrop, there appears to be limited scope for a sizeable, EUR-specific move. Markets are pricing in around 60bp of the European Central Bank (ECB) hikes by year-end (Bloomberg, 28 May). However, with growing signs of weaker activity (Chart 2), it may be difficult for the ECB to deliver a path that is materially more hawkish than current expectations. The EUR reaction to a less hawkish ECB is uncertain − markets may favour growth support or reprice lower on carry considerations, but the balance of risks is to the downside for now. Source: Bloomberg, HSBC Source: Bloomberg, HSBC NZD: Policy expectations and risk sentiment The NZD is now in focus after the Reserve Bank of New Zealand (RBNZ) held rates at 2.25% on 27 May in a finely balanced decision, with a hawkish signal via a higher projected rate path (including a 25bp hike in 3Q26, at least one in 4Q26, and a gradual rise towards 3.3% by 4Q28). Our economists expect RBNZ tightening to begin in 3Q26, followed by another hike in 4Q26, and three additional increases, taking the policy rate to 3.50% by 3Q27. Market pricing is more hawkish, with around three hikes fully priced in by end-2026 (Bloomberg, 28 May). Beyond rates, the NZD should remain highly sensitive to global risk sentiment over the near term. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/usd-eur-and-nzd-geopolitics-and-rates/

2026-06-01 07:03

Key takeaways We expect the market rebound in April to continue as significant investments in AI, security and energy independence should keep activity going, supporting margins and earnings. However, the lagged impact of the Middle East conflict may create short-term volatility. To build portfolio resilience, we employ a multi-asset strategy and add alternative assets to enhance diversification. As high energy prices have raised inflation expectations, we favour the US and mainland China over oil-importing markets and prefer energy stocks to consumer staples stocks across regions. In addition to higher inflation and lower growth risks, political uncertainty over the UK government leadership and fiscal concerns weigh on UK gilts. As a result, we downgrade gilts to neutral and expect two 0.25% rate hikes by the Bank of England this year. The US-China summit concluded with a potential tariff reduction in “non-critical and non-strategic" areas, along with China’s purchases of aircraft, energy products and agricultural goods, as well as the establishment of a Board of Investment to boost China’s overseas direct investment in the US. The summit has helped restore some degree of business confidence and is aligned with China’s pro-growth stance. The improved bilateral relations further reinforce our overweight position on Chinese equities. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-monthly/differentiation-matters-as-the-market-rally-continues/

2026-05-29 07:02

Key takeaways ^DXY = US Dollar Index, is an index (or measure) of the value of the USD against major global currencies, including the EUR, JPY, GBP, CAD, SEK and CHF. Source: HSBC https://www.hsbc.com.my/wealth/insights/fx-insights/fx-navigator/awaiting-catalysts/

2026-05-25 07:03

Key takeaways The CAD has not capitalised on higher oil prices… …probably because of Canada’s non‑US export constraints. JPY intervention may work if it comes alongside BoJ tightening and lower oil prices. FX puzzle 1: Why hasn’t the CAD gained much even with higher oil prices? Canada should, in theory, benefit from higher oil via improved terms of trade and energy revenues. In practice, Canada’s ability to monetise global price spikes is constrained by limited liquefied natural gas (LNG) and crude export capacity to Europe and Asia. As a result, a large share of Canadian energy exports remains US‑centric and often trades at a discount, reflecting pipeline bottlenecks and limited west‑coast egress. This structurally caps the CAD’s oil sensitivity: in FX, USD-CAD is typically driven more by broad USD (DXY) moves than by oil prices (Chart 1). Moreover, the largest oil spikes are often supply-shock events that coincide with risk aversion and USD strength, which can cap CAD upside. In today’s context, even if a prolonged Strait of Hormuz blockade pushes oil prices sharply higher, the CAD may not benefit much. Source: Bloomberg, HSBC *based on daily changes over last 20 years Source: Bloomberg, HSBC FX puzzle 2: Can intervention keep USD‑JPY below 160? The key lesson from 2024 is that intervention without policy follow‑through tends to lose impact quickly. In practical terms, intervention alone is unlikely to keep USD‑JPY below 160 for a prolonged period of time. It is more effective when supported by broader conditions − such as a Bank of Japan (BoJ) rate hike and lower oil prices − which together could help USD‑JPY grind lower over time. However, fiscal concerns may re-emerge and complicate the near-term outlook. These risks could surface in late May, linked to supplementary budget discussions, and/or in June, when Japan releases its annual medium‑term economic and fiscal policy guidelines, expected to be Prime Minister Takaichi’s first. Such developments could push long‑dated Japanese government bond (JGB) yields higher (Chart 2), reinforcing the view that underlying domestic pressures remain persistent. Overall, even with intervention, USD-JPY may struggle to establish a clear downward trend over the near term unless supportive policy and external conditions align. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/fx-puzzles-cad-and-jpy/

2026-05-21 12:01

The new investment trifecta: AI, energy and defence The first half of the year has been a decidedly bumpy ride, dominated by the devastating conflict in the Middle East, which has driven up energy prices and disrupted supply chains. Yet earnings growth has continued to march higher, led by the US technology sector and the benefits of innovation. In this fastmoving landscape, our multi-asset, diversified approach continues to serve us well. While the full impact of the conflict on the global economy is yet to become clear, ceasefire negotiations have shifted investors’ focus back to the long-term structural trends that are reshaping our future, reinforcing our optimism for Q3 and beyond. What does this mean for investors? We’ve been through many periods of uncertainty in the recent past. A key difference from the COVID-19 pandemic, the Russia-Ukraine war and the shift in US tariff policies is that governments and businesses have taken steps to diversify their trade relationships and build more robust systems. Therefore, while we believe volatility will linger, it should remain manageable. The global economy is more resilient than many people fear. This resilience allows us to look beyond short-term uncertainty and focus on long-term structural opportunities, supported by three strategic investment pillars: AI, energy and defence, which steer our four investment themes for the coming quarter. Clearly, the AI story will continue to fuel earnings expectations across sectors and markets, driven by strong capex trends and productivity gains. The build-out of digital infrastructure and AI development are driving global capital not only into Technology, but also into a number of other sectors and key themes that benefit from it, including Industrials and Materials. The Middle East conflict is adding to the case for diversified energy sources and national defence spending, and we can see some differentiation between winners and losers from elevated energy prices. We therefore maintain our overweight on energy stocks across regions and our underweight on the global consumer discretionary and staples sectors. Some oil-importing markets, such as India and Indonesia, are now less preferred. One thing the three pillars have in common is that they all require substantial funding and government support, creating new jobs and driving capital market activity in both public and private markets. This also helps offset fears of reduced employment caused by automation. Positioning for portfolio resilience and Asia’s growing momentum While we’re positioning to benefit from these three structural pillars, preparing for downside risk is equally important and should become routine in investing. The traditional approach to diversification, relying on low correlations between equities, bonds and gold, didn’t work well during the recent conflict. We see a growing case for adding alternative assets, with infrastructure complementing bonds for income generation, while hedge funds and gold can help dampen market volatility. Meanwhile, with private companies accounting for around 90% of the global corporate universe, the opportunities in private markets are enormous. While the US remains resilient and continues to attract global investment in its technology sector and broader equity and bond markets, Asia remains a strategic focus in our portfolios for geographical diversification. Technology and innovation are the biggest engines of its stock markets, while total shareholder returns are also improving across a number of markets in the region. Lastly, as part of our HSBC Think Wealth series, we’re pleased to share insights on risk management from legendary Wall Street investor Howard Marks, Cochairman and Co-founder of Oaktree Capital Management, in our feature article. We also include an article on Asia’s energy challenge and the case for renewables-led resilience, offering further perspectives to consider. We hope our reflections help you steer a course through today’s turbulence and capture the opportunities that resilience and innovation are already bringing into view. https://www.hsbc.com.my/wealth/insights/market-outlook/investment-outlook/the-new-investment-trifecta-ai-energy-and-defence/

2026-05-20 07:03

Key takeaways Average temperatures and food price sensitivity to heat are rising; temperature is outperforming rains in forecasting inflation. In El Niño years specifically, temperature spikes have become more likely than rainfall deficit; and these spikes are intensifying. With twin energy and El Niño shocks, we forecast FY27 inflation at 5.6%, GDP at 6%, and two rate hikes over 4Q26 and 1Q27, taking the repo rate to 5.75% (earlier: hold). A couple of years ago, we pointed out that reservoir levels matter more than rains for India’s food production and inflation. More recently, we took our next leap—from rains and reservoirs, to temperatures. With global warming, average temperatures are rising and have crossed previous thresholds. They now impact food output and inflation much more than even rains and reservoirs do. In fact, tracking surface temperature is enough to get a good sense of where food inflation is headed. This matters a lot more in a likely El Niño year. We find that the probability of high temperatures is stronger than the probability of low rains, and the quantum of rise in temperatures during El Niño years is rising. No crop escapes. Perishables like vegetables and fruits are traditionally more sensitive to heatwaves, and this sensitivity is rising. Durable crops like cereals, pulses, oilseeds and sugar are not too far behind as old temperature thresholds are breached. Even animal protein sources are becoming more sensitive to heat. So what role do rains and reservoirs still play? We test this using our trusted food inflation model. When we include temperatures, reservoir levels lose importance—they get “crowded out”. Keeping temperatures but excluding rains/reservoirs improves the model’s ability to predict food inflation. The message is clear. Temperatures have become far better than rainfall in explaining and forecasting food inflation. Possible reasons: irrigation has improved, reservoir levels and temperatures have a 50% correlation (so information in the reservoir variable gets picked up by temperature), and the relationship between temperatures and inflation is non-linear—as old thresholds are breached, even durable food inflation is affected. With the energy and El Niño shocks coinciding, the FY27 outlook needs attention. Our model suggests the El Niño/temperature channel can add 0.5ppt to inflation over a year. Adding this to our estimates from the energy shock (including local pump price increases), we expect headline inflation to average 5.6% in FY27. On this basis, we expect the RBI to deliver two rate hikes, over 4Q26 and 1Q27, taking the repo rate to 5.75%. The accompanying growth shock will likely stop it from hiking a lot more. Bringing together both the shocks, and factoring in some fiscal slippage, we forecast GDP to grow 6% in FY27, lower than our previous year’s forecast of 7.4%. We expect the brunt of the shock to be felt by the informal sector—rural households and small firms—marking a change in India’s drivers of growth. Forget the raindrops… We have been steadily refining our views on inflation drivers over the last decade. And our latest findings suggest that it’s time to get prepared for rising inflation. A couple of years ago, we pointed out that reservoir levels matter more than rains for India’s food production and inflation (as they capture underground water as well). Later we pointed out that trends in reservoir levels have been changing too. More recently, we took our next leap, from rains and reservoirs to temperatures. With global warming, average temperatures have crossed previous thresholds (see exhibit 1). They now impact food output and inflation much more than even rains and reservoirs do. In fact, we find that tracking surface temperature is enough to get a good sense of where food inflation is headed. We don’t even need to track rains in most parts (details later)! In this report, we extend our work on surface temperatures mattering more than before. We analyse what it means for a year when the chances of an El Niño developing around mid-year are high. As is well known, an El Niño is associated with low rains, high temperatures, higher food inflation, and lower growth. We go episode-by-episode, and crop-by-crop, and we think the results are too significant to ignore. …bring out your thermometers We have an extensive database of average surface temperatures across India since the 1950s, which shows that surface temperatures have been rising over time, as is the volatility in food prices (see exhibits 1 and 2). Indeed, there is growing evidence now that heatwaves in India are starting earlier, lasting longer, and becoming more intense. What we find next is that the correlation between average temperature and India’s food inflation has been rising consistently over time (see exhibit 3). As the earth is heating up, crop yields are falling. Some of this is fresh in memory. The heatwave of March 2022 lowered the sugar cane crop yield by 30%, while hurting the production of vegetables, as well as oilseeds. In the heatwave of March 2024, temperatures rose to 50.5 degrees Celsius in some areas, leading to heat stress. The sharp rise in vegetable prices was a reflection of the crop damage. Enter El Niño All this matters a lot more in an El Niño year. Just to recall, an El Niño is associated with low rains and high temperatures (see exhibit 4). But beyond the headline, there are some lesserknown consequences of El Niño in India. One, the probability of high temperatures is stronger than the probability of low rains. For instance, in the FY20 and FY25 El Niño years, rains were strong despite being an El Niño year. But for both these years, temperatures shot up compared to the normal. Two, the quantum of rise in temperatures during El Niño years is rising (see exhibit 5). And this is where the worry lies – the impact of surface temperature on food inflation is rising, surface temperatures are rising too, El Niño is associated with higher-than-normal temperatures, and the quantum of spike in temperature in El Niño years is also on the rise. No crop escapes Analysing a decade of data, we find the correlation between average temperature and food inflation has been rising across all the main crops. Perishable crops like vegetables and fruits have traditionally been more sensitive to heatwaves than others, and this sensitivity is rising (see exhibits 6-7). Durable crops like cereal, pulses, oilseeds and sugar are not too far behind. True that they have traditionally been less sensitive to heat, but the sensitivity is rising, as old temperature thresholds are being breached (see exhibits 8-11). Even the price of dairy, poultry and fishery products, which we, on aggregate, call animal protein sources of food, are becoming increasingly more sensitive to rising temperatures (see exhibits 12-13). The rains versus temperature debate This, then, brings us to another important question. If the sensitivity of food production and inflation to temperatures has risen over time, what role do rains and reservoirs play? To answer this carefully, we get a little more technical than just running correlations. We bring out our trusted food inflation OLS model, which can help us parse the role of temperatures on food inflation better, while including other variables that also impact food inflation. First, we re-run our old food inflation model for the 2007-2026 period (see regression 1 in exhibit 14). It includes reservoir levels, the government’s minimum support prices for agriculture, and dummy variables for the government’s food supply-side management steps to lower inflation, and the pandemic period. Each of these variables is economically and statistically significant in explaining food inflation trends. The model has a strong R-squared of 85%. Next, we include temperature in our model (see regression 2 in exhibit 14). And it doesn’t sit too comfortably with the other variables. The temperature variable is clearly statistically significant, but the reservoir variable turns insignificant. This could mean that temperature is crowding out the significance of reservoirs. Perhaps the temperature variable contains all the information which the rainfall variable holds, and more. Because, the fit of the model improves. R-squared increases from 85% to 90%. Finally, we keep the temperature variable in the model but remove the reservoir variable (see regression 3 in exhibit 14). And this drastically improves our model. Each of the explanatory variables is economically and statistically significant. And the model’s R-squared is at an elevated 90%. What’s lowered the importance of rains? Temperatures are far superior than rainfall in explaining and forecasting food inflation. In fact, once temperatures are included, there is no value in analysing rains and reservoir levels. Indeed, over time, the coefficient of reservoir in our regression model has been falling, indicating than its importance has dwindled. There could be several reasons for this: With irrigation facilities improving over time, the low rains problem has been partly circumvented, especially in certain areas like north-western India. With reservoirs and temperatures having a 50% correlation, our sense is that a lot of the meaningful information contained in the reservoir variable gets picked up by temperatures. There is a non-linear relationship between temperatures and food inflation. With temperatures having crossed certain thresholds, the sensitivity of non-perishable food inflation to heat has risen. Outlook for FY27: Inflation and RBI action It’s a season of overlapping shocks – energy, industrial feeds, and a likely El Niño. Quantifying the El Niño shock: Our food inflation model (regression 3 in exhibit 14) quantifies the impact of rising temperatures on food inflation. If the rise in temperature is in line with the last 10-year average, we calculate that inflation could be 0.5ppt higher over a year from the onset of the El Niño. If the El Niño sets in later in 2026, then much of the impact could be felt in 2027. There are two-way risks to our estimate here. A severe El Niño would mean a sharper rise in prices. On the other hand, full up granaries could help ease some of the inflationary pressures. Quantifying the energy shock: In a recent report, we did a detailed analysis of the impact of the energy shock on headline inflation by bringing together domestic pump prices, brent prices, and agricultural and industrial input prices across several oil price scenarios. We assumed a rise in pump petrol and diesel prices by around INR6-7/litre. We also found that the inflation passthrough due to FX depreciation can be broadly offset by an emerging output gap. Bringing it all together, we estimated that if oil averages USD95/bbl in FY27, inflation could rise by 1.3ppt. At the start of the year, our inflation forecast for FY27 was 4%. The two shocks can raise it to 5.6%. We also believe that some of the El Niño pressure could be felt in the winter crop, keeping inflation elevated in the first half of FY28. Depending on when the El Niño sets in, inflation could be higher than 6% for 2-3 quarters as per our forecasts (see exhibit 15). We have assumed a INR6-7/litre rise in petrol and diesel prices in our forecast, as we believe that will address the pain felt by oil PSUs. If that rise were not to happen, average inflation would be closer to 5.3% for FY27. But inflation would still cross 6% for a 2-3 quarter period. On the back of our forecast that inflation will rise to 6% or higher for 2-3 quarters between Sep 2026 and Sep 2027, led by higher oil prices and the impact of rising temperatures in the El Niño, we are now forecasting two repo rate hikes over 4Q 2026 and 1Q2027, taking the repo rate to 5.75% (versus previous forecast of no change in rates). We are not forecasting an immediate rate hike in the upcoming June meeting, because the government is running welfare schemes at a time when the energy crisis is in full swing. The RBI may also want to remain growth supportive. Instead we expect the hikes to begin when we are over the peak of the energy crisis. We are not forecasting a bigger rate hike than 50bp for now because (1) we believe the RBI will look through part of the inflation increase as temporary (given we forecast CPI inflation to asymptote towards 4% by March 2028), and (2) we believe growth will also fall meaningfully due to the twin shocks, and the RBI may have to be mindful of that. Outlook for FY27: Growth and government action The twin shock is likely to take a toll on growth too. We believe the informal sector, comprising rural workers and urban informal workers (for instance those working in MSMEs) get impacted most during supply shocks. Heatwaves will impact farmers directly, and high energy inflation will likely impact both the rural and urban informal workers, who, together make up two-thirds of consumption (see exhibit 16). We estimate that the price and quantity disruptions in energy sources can shave off around 1ppt from growth. An El Niño could shave off a further 0.3ppt from growth. The government will likely step in to support growth with credit guarantee schemes, rural unemployment benefits, and public capex. We expect a fiscal slippage by about 0.3% of GDP (see exhibit 17). Overall, we forecast GDP growth to average 6% in FY27 (versus an estimated 7.4% in FY26, see exhibit 18) and inflation to average 5.6% in FY27 (versus 2% a year ago). https://www.hsbc.com.my/wealth/insights/market-outlook/india-economics/why-rbi-may-need-a-thermometer/