2025-02-17 12:02

Key takeaways Tariff headlines appear to be less provocative for FX markets. Perhaps, markets assume that some deals could be struck... …which creates an upside risk for the USD. The law of diminishing returns seems to be in play, as tariff-related headlines seem less provocative for FX markets (see the chart below). Source: Bloomberg, HSBC On 1 February, US President Donald Trump announced a 25% tariff on imports from Canada and Mexico (a 10% tariff on Canadian energy) and a 10% additional duty on Chinese products. The US Dollar Index (DXY) jumped briefly following the weekend’s tariff headlines. There is still a great deal of uncertainty about how the situation will unfold, with moves on Mexico and Canada delayed to 4 March (Bloomberg, 4 February 2025). The DXY erased its earlier gain. That being said, the new 10% tariff on all Chinese imports to the US came into effect on 4 February and China’s tit-for-tat import taxes on some US goods came into effect on 10 February. The DXY hovered around the 108 level (Bloomberg, 10 February 2025). The USD was basically unchanged on the day against most other G10 currencies, despite US President Donald Trump’s confirmation on 11 February that the 25% tariffs will be imposed on US steel and aluminium imports without exceptions, and with an indication from Trump that they may go higher (Bloomberg, 11 February). Markets also shrugged off various promises of retaliation, including from politicians in Canada and the EU. Perhaps, FX markets are once again assuming a deal will be struck with key trading partners before they actually go into effect on 4 March. Whether one views the lack of market action as complacency or pragmatism, it creates an upside risk for the USD, should these latest tariffs end up being implemented. It also shows that the risk of a tit-for-tat escalation is prominent, heightening the stagflationary threat for the global economy. It is also worth noting that the prior premium in the USD relative to its rate differential, potentially reflective of a Trump policy uncertainty premium, has been mostly erased. Whether the premium re-emerges may hinge on whether tariff threats transform into tariff reality. FX markets will probably remain tied to headlines about US policies, like reciprocal tariffs. We still believe the USD is likely to strengthen further, amid the divergence in both growth and monetary policy between the US and other economies, among other factors. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/usd-and-tariff-headlines/

2025-02-17 07:04

Key takeaways US core CPI surprised to the upside, rising by 0.4% month-on-month in January. The bond market, having initially sold off in reaction to the CPI, has calmed down and largely reversed its losses. A key attraction of frontier markets is portfolio exposure to smaller, rapidly growing economies. Mexico has found itself at the centre of a rise in global policy uncertainty recently. Chart of the week – China’s household wealth exposure to property It’s been a good start to the year for investors in China’s stock market. The MSCI China index is already up over 9%, outperforming the wider EM index and the US. This follows a very good performance in 2024 as Chinese authorities’ ramp-up of policy support helped reverse a prolonged period of weak sentiment. A big driver of recent gains has been a rally in China’s tech companies. The unveiling of DeepSeek late last month has triggered a reappraisal of the sector’s profits outlook and potential feedthrough to AI innovation and adoption in the country’s vast consumer market. Also, data on Lunar New Year spending has been strong, and is reflected in a higher-than-expected January CPI print. Deep discounts versus global peers imply potential for large upside moves on better-than-expected news. After DeepSeek, there is potential for accelerated AI adoption across many industries. And last year’s late rally in the US dollar and big pick-up in global yields look to have run out of steam, boding well for the overall EM asset complex. Nevertheless, with a big chunk of China’s household wealth tied up in property, the real estate slump remains a major challenge, and with it the threat of sustained deflation. Recent policy measures have helped stabilise the situation, but more demand-boosting stimulus will be required to keep growth on the right track and maintain positive momentum in markets. All eyes will be on next month’s National People’s Congress (NPC) meeting. Market Spotlight Asian credit outlook Elevated all-in yields and tighter spreads helped deliver a strong performance in Asian credit last year. And despite a recent pick-up in global policy uncertainty, macro tailwinds could make 2025 another strong year for the asset class. Asian markets benefit from the twin-drivers of relatively high GDP growth and benign inflation. But there are other key themes, too. One is China’s continuing path to recovery. Its outlook hinges on navigating external headwinds and domestic imbalances with policies to boost domestic demand and cut industrial over-capacity. A clear pro-growth, pro-market policy stance could help – and we’re expecting more details on policy support in March. That ongoing stimulus could have spillover effects for the rest of Asia and provide a cushion from global headwinds. Meanwhile, the region’s credit market also benefits from the strong growth, rising trade flows, and insulated nature of domestically oriented economies like India and parts of ASEAN, including Indonesia and the Philippines. These economies are less sensitive to global trade, making them potentially more resilient to external shocks. 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. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 14 February 2025. Lens on… CPI surprise US core CPI surprised to the upside, rising by 0.4% month-on-month in January. Some of the strength reflected outsized gains in some components – used car prices jumped 2.2% m-o-m, vehicle insurance rose by 2.0% m-o-m and airfares were up 1.2%. Strong demand for new and used cars in recent months – potentially in anticipation of tariffs – may be supporting prices and insurance premiums. Airfares look more like a case of a bit of noise in the data, what some economists have called ‘residual seasonality’. Absent these factors, core CPI would have risen by a more palatable, albeit still robust, 0.3% m-o-m. Luckily for the Fed, it targets PCE. The CPI data, when combined with the produce price release, has led economists to conclude that core PCE is likely to have risen by 0.2-0.3% m-o-m in January, following prints of only 0.1-0.2% in the previous two months. In that sense, while the Fed won’t be overly happy with the January inflation data, it will also want to see whether it follows the same pattern as recent years – a strong start that fades away. The bond market, having initially sold off in reaction to the CPI, has calmed down and largely reversed its losses. Africa as a growth leader A key attraction of frontier markets is portfolio exposure to smaller, rapidly growing economies. According to the IMF, the average GDP growth rate for frontier economies is 4% over the next five years, well above 2.2% for the US, and 1.2% for the big-four eurozone economies. Vietnam – a big weight in the frontier index – has a well-documented structural growth story centred on attracting FDI amid the recent trend of global “friendshoring”. Bangladesh has become a key textiles exporter. But perhaps less talked about is the impressive growth now being seen in many West African nations, with Côte d’Ivoire, Niger, and Benin expected to grow in excess of 6% per annum over the next five years. A big part of this growth will be driven by recent hydrocarbon development, which brings with it a dependence on global energy prices. And regional politics remain difficult. Nonetheless these growth numbers signal a region with growing economic clout – supported by a young and growing population – and with it an emerging consumer base. As these economies mature, investor allocations and market liquidity are likely to increase. Mexican market outlook Mexico has found itself at the centre of a rise in global policy uncertainty recently. After regional political discussions in early February, volatility in the peso subsided, and the currency rebounded. That upbeat reaction spilled into the stock market, where equities saw a pick-up, and in sovereign bonds, where there was a modest fall in both two- and 10-year yields. However, volatility and investment uncertainty are expected to continue. In FX, the peso has room to depreciate to buffer any shock in terms of trade, and if so, financial authorities may intervene to secure orderly trading conditions without targeting any specific FX level. But peso weakness could pose upside risks to inflation and downside risks to economic activity. These factors are likely to shape policy direction from Mexico’s central bank. The base case view is that while Banxico is ready to decouple slightly from the Fed and cut rates by ~1.50% this year, the uncertain outlook could frustrate efforts. 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. 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. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. Source: HSBC Asset Management. Macrobond, Bloomberg, Datastream. Data as at 7.30am UK time 14 February 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 14 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 Global policy uncertainty continued to overhang risk markets, with the US DXY dollar index weakening. US Treasuries ended a volatile week modestly lower, underperforming Eurozone bonds and UK gilts following higher-than-expected US CPI data, as Fed Chair Powell reiterated that there is no urgency to cut rates. US equities rose, with the Russell 2000 lagging both the Nasdaq and S&P 500. The Euro Stoxx 50 index posted strong gains, bolstered by better-than-expected Q4 earnings, while the German DAX reached an all-time high. Japan’s Nikkei 225 performed well amid a weaker yen. Other Asian markets were mixed, with the Hang Seng leading the region amid optimism about the AI/tech sectors, followed by South Korea’s Kospi, and the Shanghai Composite also extended its rallies. However, India’s Sensex index fell. In commodities, gold and copper were on track to close higher, while oil finished a choppy week with moderate gains. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/chinas-household-wealth-exposure-to-property/

2025-02-14 07:04

Key takeaways Biomimicry is a field that emulates designs and processes in nature to create new technologies and a greener future. Turbine blades incorporate features from humpback whales for efficiencies and a new clothing fabric mimics lotus leaves. As a fast-growing field with research and patents growing rapidly with supportive policies – this is nature investing with a twist. Biomimicry is a field that emulates designs and processes in nature to create new technologies and a greener future. Examples include adhesives inspired by gecko feet, metal detectors influenced by sharks, and night vision goggles drawn from snakes that can detect warm-blooded prey in complete darkness. As a fast-growing field with research and patents increasing rapidly, and supported by policy, this is nature investing with a twist. Did you know? A Zimbabwe shopping centre uses termite mound-inspired ventilation to lower its reliance on air conditioning by 90% Engineers increased electricity generation by 10% after incorporating designs similar to bumps found on humpback whales into wind turbine blades 3% of biomimetics publications in 2016 related to sustainability, but rose to 7% by 2020, indicating an increasing focus on sustainability in the field Research articles and conference papers focused on biomimicry research increased by 60x from 1995 to 2020 28% of biomimicry sustainability research publications from 2004 to 2021 were focused on resource efficiency, the largest by category 20% of ‘biometric sustainable design’ publications from 2004 to 2021 were published in China, the largest by country Inspired by nature Biomimicry observes how things work in nature by studying the forms (shapes & structures), processes (behaviours & methods) and systems (interdependence & ecosystems) of plants, animals and ecosystems, translating them into innovative and sustainable solutions. The field seeks to improve human-derived processes in areas including energy efficiency, sustainable materials and strength and durability. Mimicking nature’s forms – more efficient turbines with tubercles By incorporating into wind turbine blades, a design similar to tubercles (bumps the size of golf balls) found on humpback whales, engineers can reduce drag as it allows the blades to spin faster with less resistance, generating 10% more electricity. Whale-fin inspired wind turbine blades Mimicking nature’s processes – butterfly wings inspire more efficient solar cells Researchers studied the light-absorbing black wings of a certain butterfly, finding tiny, random holes that scatter sunlight for better absorption. By mimicking this design, researchers created thin silicon solar cells with similar holes which can absorb light regardless of the angle. Butterfly wings inspired solar cells Source: HSBC (based on Siddique et al., 2017 Mimicking nature’s systems – lotus-leaf inspired clothes Scientists are developing fabrics that mimic the lotus leaf’s self-cleaning properties, which helps to reduce water usage for washing, and ultimately reduces the fabric’s footprint. Lotus leaf inspired fabrics Source: HSBC (based on Becky Poole, 2007) A rapid evolution Biomimicry research has seen a surge in interest over the past three decades, as evidenced by a 60x increase (1995-2020) in research publications across a wide range of scientific disciplines such as materials science, chemicals and engineering. This shows the power of bio-inspiration, and the applicability of biomimicry in helping to advance science and technology. Proactively fitting in with sustainability However, not all biomimicry research is considered as sustainable. A 2023 study by Jatsch et al. finds “an urgent need to ramp up sustainable design within biomimetic research”. The study found that only 3% of biomimetics publications in 2016 related to sustainability, but this portion rose to 7% by 2020, indicating an increasing focus on sustainability in the field. Of the research papers that do explicitly contribute to sustainability, many different areas are being explored with efficiency a key focus. Jatsch et al. also note that the largest contributors to carbon emissions globally (China, US, India, Europe) are also the lead contributors to biomimetics research that actively includes sustainability. Classification of research publications (2004-21) into different sustainability aspects Source: Jatsch et al., 2023 The race to be inspired There has also been a substantial increase in biomimicry patents since 2000. A 2023 study by Haejin Bae finds that “biomimicry technology is in a growth phase that is expected to continue in the future and that South Korea and the United States are leading the development of this technology”. Bright future Artificial Intelligence AI could accelerate progress in biomimicry and enable more accurate and complex analysis through data processing, simulation, modelling and pattern recognition. For instance, researchers at Arizona State University are turning their attention to social insects like ants and bees. By studying their behaviour – how these insects communicate, solve problems and adapt to their environment – researchers are designing robots that can work together in factories and other situations such as aiding in disaster areas. Policy landscape The future for biomimicry appears positive as more policies are aimed at fostering innovation and sustainable development. More governments are now recognising the potential for biomimicry and are implementing national-level policy initiatives to support research and development in biomimicry. Working with nature We think policy support for biomimicry will grow as biodiversity continues to rise up the global agenda. For example, some emerging economies are exploring how to leverage their local biodiversity for innovation, to create supportive ecosystems for biomimicry R&D, and to facilitate international research collaboration. One important angle is the integration of benefit-sharing frameworks that ensure the economic benefits derived from biomimicry are aligned with biodiversity conservation. This involves creating legal frameworks that protect biodiversity hotspots, ensuring that biomimicry practices don’t harm natural ecosystems. Conclusion As we continue to discover the vast potential of biomimicry, its impact will undoubtedly continue to grow, pushing advancements across diverse sectors and technologies. The Biomimicry Institute has a Ray of Hope Prize Accelerator offering support for “high-impact nature-inspired startups”. Companies and investors that embrace these technologies can become frontrunners in shaping a more sustainable future. With consumers increasingly looking for more sustainable solutions, biomimicry presents a natural investment opportunity. By investing in bio-inspired technologies, investors and corporates can not only achieve potential financial gains but also become catalysts for positive change as they help to drive the transition towards a greener economy and a healthier planet. https://www.hsbc.com.my/wealth/insights/esg/why-esg-matters/biomimicry-learning-from-nature/

2025-02-11 12:02

Key takeaways In recent weeks, the introduction and threats of US tariffs… …have caused shocks across markets… …and threatens what had been a steadily improving growthinflation mix. Uncertainty is back with a vengeance in the global economy, with the first few weeks of President Trump’s second term leading to tariff announcements and delays, triggering market volatility across currencies, rates, equities, and cryptocurrencies. Tariff impacts Should US tariffs and retaliatory action take effect, the impact could be significant, particularly for Canada and Mexico, given more than 75% of their exports go to the US (Chart 1). For now, US inflation has remained broadly under control (Chart 2), but tariffs risk upsetting that trend, potentially adding to goods inflation, even if US imports of goods are less than 10% of GDP. At the same time, tariffs threaten both global trade and broader growth. The increased level of uncertainty in the global trading system is likely to weigh on investment plans, whilst supply chains are ripe for rejigging around any potential tariff targets. Source: Macrobond, IMF DOTS Source: Macrobond. Note: Estimates are baselines. Activity data have been strong in the US… That said, the US is starting the year from a position of strength after a barnstorming Q4 for consumers that saw consumption rise by 4.2% q-o-q annualised on the back of strong real income growth. Survey data suggest there could be further growth momentum into 2025, even if labour market indicators are a little more mixed. …but generally softer across the globe The rest of the world is vulnerable to this uncertainty – particularly mainland China – where an additional 10% tariff was imposed on 4 February. Growth revived in some areas in Q4 (Chart 3), but uncertainty over the future for exports and still subdued confidence look likely to hold back any significant growth recovery, absent a further substantial fiscal stimulus package. Source: Macrobond Source: Macrobond In Europe, tariff threats further cloud a gloomy outlook, where continued struggles on the industrial front are not being offset by consumers opening their wallets. Despite tight labour markets in most economies and improving real incomes, confidence remains weak and GDP growth has ground to a halt in both the eurozone and the UK. Across the emerging world, the previous growth star of India has shown some wobbles of its own, leading the Reserve Bank of India (RBI) into cutting rates, while in Brazil stronger growth data and a deteriorating inflation outlook have played a role in driving even more tightening from the central bank. Heightened uncertainty It’s a challenging world for central banks weighing up the inflationary and growth consequences of a tariff-related supply shock – at a time when food and gas prices are rising. The job isn’t made any easier as 2025 has started with the level of uncertainty pushed into a new gear. Source: Bloomberg, HSBC ⬆Positive surprise – actual is higher than consensus, ⬇ Negative surprise – actual is lower than consensus, ➡ Actual is in line with consensus Source: LSEG Datastream, HSBC https://www.hsbc.com.my/wealth/insights/market-outlook/macro-monthly/tariff-threats/

2025-02-11 07:04

Key takeaways RBI’s Monetary Policy Committee (MPC) unanimously decided to cut the benchmark repo rate by 0.25% to 6.25%. All six MPC members chose to retain the liquidity stance at “neutral”. Overall, we expect the current rate cut cycle to be a shallow one and expect one more 0.25% rate cut from the RBI in the April MPC meeting. However, we assign a high likelihood of further liquidity support to the financial system between now and the April MPC meeting. The RBI meeting was a positive for the domestic equity markets as the rate cut should lead to marginally lower borrowing cost for companies. The announcement to push back the implementation of more stringent Liquidity Coverage Ratio (LCR) measures to March 2026 is a clear positive for Financials. Hence, we retain our overweight stance on Indian equities, with a preference for the financials, industrials and healthcare sectors. As we expect 10-year yields to edge lower, we remain bullish on INR local currency bonds. What happened? On 7th February, the RBI’s Monetary Policy Committee (MPC) unanimously decided to cut the benchmark repo rate by 0.25% to 6.25%. At the same time, all six MPC members chose to retain the liquidity stance at “neutral”, allowing them the flexibility to move in either direction on rates or liquidity. This was the first meeting under the new RBI Governor Malhotra, with markets looking at RBI guidance on rates, liquidity and regulations. Heading into the meeting, we expected the RBI to cut rates by 0.25%, as we expected the central bank to increasingly focus on balancing both growth and inflation dynamics. Latest projections by RBI MPC Source: RBI, HSBC Global Private Banking and Wealth as of 7 February 2025 On the regulatory front, the central bank pushed back the implementation of more stringent LCR requirements to March 2026, and signalled a gradual implementation. We view this as a near-term positive for the financials sector. In its updated projections, the RBI expects the economy to grow at 6.7% in FY 26 (Apr 2025 – Mar 2026) and expects inflation to average around 4.2% over the same timeframe. The RBI Governor also spoke about using the flexibility embedded in the inflation targeting framework to improve outcomes and highlighted the central bank’s commitment to provide sufficient liquidity to the system. It is worth noting that the RBI has injected INR 2tn of liquidity over the past few weeks, through the use of a variety of instruments, such as OMOs, FX swaps and long-dated VRRs. Overall, we expect the current rate cut cycle to be a shallow one and expect one more 0.25% rate cut from the RBI in the April MPC meeting. However, we assign a high likelihood of further liquidity support to the financial system between now and the April MPC meeting. Investment implications RBI’s FY26 growth and inflation projections indicate that the policymakers remain comfortable with India’s growth trajectory and expect further easing in inflation, broadly in line with our expectations. While the monetary policy stance is still “neutral”, we believe that the RBI is likely to provide further liquidity over the coming months and deliver further rate cuts, which are positive for both equities and bonds. In our assessment, the RBI meeting was a positive for the domestic equity markets from two aspects. First, the 0.25% rate cut and robust growth projections lead to marginally lower borrowing cost for companies - improving their margins - also encouraging them to resume capex. Secondly, the announcement to push back the implementation of more stringent Liquidity Coverage Ratio (LCR) measures is a clear positive for Financials. INR has been amongst the worst-performing Asian currencies in 2025 Source: Bloomberg, HSBC Global Private Banking and Wealth as of 7 February 2025. Past performance is not a reliable indicator of future performance. Hence, we retain our overweight stance on Indian equities, with a preference for the financials, industrials and healthcare sectors. Counter-intuitively, the 10-year Indian government bond yields rose by c.0.05% following the rate cut announcement. It was likely due to a combination of the fact that markets had largely priced in the rate cut prior to the meeting and potentially the disappointment that the RBI kept monetary policy stance unchanged at “neutral”. Nonetheless, we believe that further rate cut in April, along with the lower net supply indicated in FY26 budget and robust demand means that 10-year yields are likely to edge lower. We therefore remain bullish on INR local currency bonds. With real interest rate differentials between the US and India close to flat, our expectation of a 0.25% RBI rate cut in April and Fed pause over the same period may lead to unfavorable dynamics for the INR in the near term. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/rbi-commences-the-rate-cut-cycle/

2025-02-10 12:02

Key takeaways The Fed held rates unchanged, while both the ECB and the BoE lowered their key rates by 25bp, as widely expected. The divergence in both monetary policy and growth between the US and other economies should play to the USD’s advantage. Unlike the USD, both the EUR and GBP are facing stagflationary challenges, alongside the tariff risks. The Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of England (BoE) did not surprise markets at their first policy meetings in 2025. The Fed kept the federal funds rate steady at 4.25-4.50% after its 28-29 January meeting. Fed Chair Jerome Powell was basically able to paint a goldilocks picture of a resilient economy and inflation that is well off its highs, even if the last steps towards target are taking longer than anticipated. Our economists still expect 75bp of Fed cuts in 2025, but no longer expect the first cut this year to come in March. Instead, our macro team look for three rate cuts to be delivered in 25bp steps at 17-18 June, 16-17 September, and 9-10 December policy meetings, bringing the federal funds target range to 3.50-3.75% by end-2025. The USD was little changed after the announcement. In the end, uncertainty is likely to remain the key theme, not least with the US tariff news dominating over the near term. Amid the noise of the news flow, we expect the USD to remain strong. A day after the Fed’s announcement, the ECB cut its key policy rates by 25bp, bringing the key deposit rate down to 2.75% and the main refinancing rate down to 2.90%. The ECB remains confident that disinflation is well on track, and our economists think that another 25bp cut is likely at its next meeting on 6 March after which the debate might heat up. Markets expect the ECB rate to finish the year around 1.80% (Bloomberg, 6 February 2025). If the tariff threat materialises in earnest, those expectations may need to drop further. As the Eurozone still faces a challenging growth/inflation mix alongside the tariff risks, the EUR is likely to weaken further this year, in our view. Like the ECB, the BoE also delivered a 25bp rate cut, sending the Bank Rate to 4.50%. But the monetary policy committee’s (MPC) vote was dovish, at 7-2 with two members (Catherine Mann and Swati Dhingra) preferring a larger 50bp move. That being said, the BoE signalled a “gradual and careful approach” to future rate cuts. At the same time, the central bank’s latest forecasts depicted a more stagflationary picture in 2025, cutting its growth forecast to 0.75% (from its November forecast of 1.50%) but raising its inflation forecast to 3.50% (from 2.75%). GBP-USD dropped below 1.24 before recovering some of its earlier losses. We expect the GBP to weaken against the USD, but should the dovish voices grow within the MPC, the risk is that GBP-USD could drop faster and more than expected. Our economists expect the BoE to accelerate its pace of easing, cutting at every meeting from September 2025 to February 2026, taking the Bank Rate down to 3.0% in 1Q26. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/the-fed-pauses-as-both-the-ecb-and-boe-cut-rates/