2024-11-11 07:05
Key takeaways Chinese stocks rallied in September on news of further policy support, and they’ve largely held those gains. Momentum picked up in early November, and the Shanghai Composite is still up 20%+ since the new measures were announced. President-elect Trump’s victory in the US election, together with a strengthening dollar, has reinforced negative sentiment towards emerging market (EM) currencies and local-currency assets. A concern for investors ahead of the US election was the potential impact on global trade from aggressive US tariffs. Chart of the week – US stocks and bonds decouple The S&P 500 hit fresh all-time highs last week with the decisive outcome of the US presidential election removing one form of uncertainty for investment markets. US stocks also found a fresh catalyst via the potential for lower corporate tax rates and deregulation, boosting the profits outlook. The recent good run in US stocks has coincided with a period of rising US Treasury yields. Investors are grappling with a likely combination of ongoing fiscal activism, global economic fragmentation, renewed inflationary pressures, and a shallower Fed rate cutting cycle. So far, the stock market has shrugged off the pick-up in yields. But there is no guarantee that higher-for-longer rates won’t damage risk appetite. Investment markets have been “hypersensitive” to economic news this year. The addition of policy uncertainty could intensify market volatility. US stock valuations look stretched and profits expectations are elevated. Positive European and Asian growth in 2025 suggests there is still room for markets outside of the US to perform. But for emerging markets, the dollar outlook is key, as is the next set of policy support measures from China. Market Spotlight Step by step The Fed looked through the noise of the US elections and delivered a 0.25% cut, which it had been expected to do for several weeks. The rationale for the move was that the funds rate is at restrictive levels while inflation is moderating, and the labour market is back in better balance. Looking forward, the Fed is faced with a more uncertain outlook, given potentially large changes in fiscal and trade policy. Medium-term upside inflation risks have likely increased while the growth outlook has become more ambiguous – depending on the ultimate mix of fiscal and trade policies, growth could exceed or disappoint current expectations. Given the more unpredictable outlook, Chair Powell may want to recall the words of former ECB President Mario Draghi, “In a dark room you move with tiny steps”. In other words, the best course of action is likely to be gradually taking the policy rate back towards a more neutral level unless data and events push you strongly to do something else. 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. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. 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 not guaranteed in any way. Diversification does not ensure a profit or protect against loss. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 08 November 2024. Lens on… Chinese momentum Chinese stocks rallied in September on news of further policy support, and they’ve largely held those gains. Momentum picked up in early November, and the Shanghai Composite is still up 20%+ since the new measures were announced. Last week, the China National People’s Congress (NPC) Standing Committee approved an incremental increase of RMB6 trillion in the local government special debt limit to swap hidden debt over three years through the end of 2026. For stocks, the prospect of further policy support could mean strong potential for growth and recovery. Some specialists see Chinese stocks continuing to trade at a wide discount to peers and still lightly-owned by international investors. They favour both quality growth companies and high dividend-paying stocks. That said, Chinese firms remain vulnerable to potential risks, including geopolitical tensions and any weakness in global economic conditions. Emerging FX pressures President-elect Trump’s victory in the US election, together with a strengthening dollar, has reinforced negative sentiment towards emerging market (EM) currencies and local-currency assets. Investors have been nervous about the potential impact of higher US tariffs on global trade, as well as potentially higher bond issuance and a widening of the US fiscal deficit. A repricing of US rate expectations hasn’t helped EM assets either. Weaker EM currencies risk stoking inflation and could prompt a re-assessment of the EM policy outlook. Brazil’s central bank hiked rates by 0.50% in October to quell rising inflation, providing relief for the currency. The Brazilian real has weakened nearly 14% this year – hitting a record low following the US election – maintaining the pressure for further tightening amid rising concerns about the sustainability of fiscal policy. While this is a near-term risk for many EM economies, a number of currencies have long-term valuation buffers. The Fed-driven global easing cycle, albeit possibly slower and shallower, should limit downside risks, as should the policy-stimulus driven cyclical recovery in China. Frontier resilience A concern for investors ahead of the US election was the potential impact on global trade from aggressive US tariffs. One area which could prove resilient to greater trade frictions is frontier markets, where countries have learnt to steer a path between competing third parties. Key to this is that frontiers are a relatively low correlation, low volatility asset class in the equity space, with domestically-driven economies. That can shelter them from global macro events. The shift towards a more multi-polar world has tested this, but frontiers are tending to prioritise neutrality. In Gulf Cooperation Countries, for example, Saudi Arabia has opted to play a mediator role in regional tensions, preferring instead to focus on its domestic economy, social reforms, and diversifying from oil into sectors like tourism and leisure. Another example is Vietnam, which has managed to benefit from ’nearshoring’ but still maintains a positive trade partnership with both China and the US. All in, frontier markets could offer a route through potential tariff tensions. 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. Source: HSBC Asset Management. Macrobond, Bloomberg, Datastream. Data as at 7.30am UK time 08 November 2024. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 08 November 2024. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Market review Risk appetite rose following the presidential election in the US, with the US dollar strengthening on expectations of continued “US exceptionalism” and looser fiscal policy. Core government bonds weakened, with rising US fiscal concerns lifting US Treasury yields, led by the 10yr. The Fed lowered rates by 0.25%, hinting at a more cautious view on inflation, and the BoE lowered rates by 0.25%. In the US, equities saw broad-based gains, with the S&P500 reaching an all-time high. European stocks weakened, led by lower autos. The Nikkei 225 advanced, as the Japanese yen hovered around its 3-month low. In EM, mainland China’s Shanghai composite rallied on encouraging business surveys amid optimism over further fiscal stimulus. Hong Kong’s Hang Seng index and Korea’s Kospi moved higher. In commodities, OPEC+’s decision to delay production cuts supported oil prices. Gold fell, while copper edged higher. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/2024-11-11/
2024-11-08 12:02
Key takeaways As expected, the FOMC cut the Fed funds rate by 0.25% to the 4.5-4.75% range. We continue to expect the Fed will lower policy rates in December by 0.25% and four more times for a total of 1% to a range of 3.25-3.5% in 2025. Economic growth is slowing but still strong as real economic growth slowed from 4.4% q-o-q to 2.8% (seasonally adjusted annual rate) in 3Q24. Inflation remains under control as both the GDP deflator and the quarterly PCE deflator in 3Q24 are below the Fed’s target range of 2%. Payroll growth is slowing but the unemployment rate remains near a 55-year low of 3.4%. Donald Trump is set to become the 47th President of the United States with 295 electoral college votes as of 7 November according to the New York Times. The Republicans have retaken control of the US Senate, after flipping seats in West Virginia, Ohio and Montana. The results guarantee the Republicans at least 52 out of 100 seats. While there’s still some uncertainty around the House race, it currently appears that the House of Representatives will be controlled by the Republicans. If the Republicans win a majority in the House, that will give them a sweep of the executive and legislative branches. As a result, several initiatives like tax policy and tariffs could be passed with a simple majority in Congress. Although the race for the House of Representatives isn’t yet settled, we believe a Trump presidency is likely to offer additional support to US stocks, principally because of the proposed tax cuts and likely deregulation. We add further to our existing US equity overweight. For the bond market, fiscal stimulus, the potential for unusually large Treasury issuance and potential tariff-related upward pressure on inflation may lead to further volatility. We downgrade USD investment grade bonds to neutral. What happened? As expected, the FOMC cut the Fed funds rate by 0.25% to the 4.5-4.75% range. We expect the Fed will lower policy rates in December by 0.25% to a range of 4.25-4.5%. In 2025, we forecast the FOMC will cut policy rates four more times for a total of 1% to a range of 3.25-3.5%. The Fed's confidence that inflation will move sustainably to target argues for a continued gradual policy easing towards neutral. Powell reiterated Fed will support economy: “If the economy remains strong and inflation isn’t sustainably moving toward 2%, we can dial back policy restraint more slowly. If the labour market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can move more quickly.” Consumer inflation enters the Fed’s symmetric target range Source: Bloomberg, HSBC Global Private Banking and Wealth as at 7 November 2024. Economic growth is slowing but still strong. Real GDP has slowed from 4.4% q-o-q to 2.8% (seasonally adjusted annual rate) in 3Q24. Consumer spending has slowed from 4.9% in 1Q23 to 3.7% in 3Q24. The GDP deflator rose 1.8% q-o-q while the quarterly PCE deflator was 1.5% q-o-q in 3Q24. Both are below the Fed’s target range of 2%. Given a slowing economy and coming technology-driven deflation, potential inflation risks seem to be on the downside. Labour markets remain healthy. Payroll growth is slowing but the unemployment rate remains near a 55-year low of 3.4%. Donald Trump is set to become the 47th President of the United States with 295 electoral college votes as of 7 November according to the New York Times. The Republicans have retaken control of the US Senate, after flipping seats in West Virginia, Ohio and Montana. The results guarantee the Republicans at least 52 out of 100 seats. The remaining 27 House of Representatives races haven’t been called. The Republicans currently have 210 seats vs. the Democrats’ 198. The Republicans need 8 more House seats to secure a majority, while the Democrats need 20 (data as at the time of writing). Investment implications Despite uncertainty surrounding domestic politics and a host of other issues, the Fed easing cycle continues. Although the race for the House of Representatives isn’t yet settled at the time of writing, we believe a Trump presidency is likely to offer additional support to US stocks, principally because of the proposed tax cuts and likely deregulation. As a result, we add further to our existing US equity overweight. According to FactSet as of 1 November, earnings are forecast to rise 9.3% in 2024 and 15.1% in 2025. These forecasts were made prior to the election. The potential for lower household and corporate taxes should be further accretive to earnings. Pontential positive impacts on sectors: Financials: Financial deregulation could increase lending capacity, reduce compliance costs, and potentially raise profitability for banks and financial services firms. Potential increase in M&A could lift earnings as well. Consumer Staples and Consumer Discretionary: Lower household taxes may increase disposable income, potentially boosting consumer spending across both staples and discretionary sectors. However, higher tariffs could raise the cost of goods sold. Technology: Reduced regulation on data privacy and tech operations could increase investment. Lower corporate taxes may also benefit tech firms with substantial domestic operations and investment in R&D. Communications Services: Deregulation in data and internet privacy could create a more favorable environment for digital advertising, content creation, and communications platforms, potentially boosting growth in this sector. For the bond market, fiscal stimulus, the potential for unusually large Treasury issuance and potential tariff-related upward pressure on inflation may lead to further volatility. As a result, we downgrade USD investment grade bonds to neutral. We continue to see investment grade bonds as a way to generate income by locking in current yields, but think investment grade bond price appreciation becomes less likely while volatility picks up. We think there will be continued strong demand for gold as a hedge against tail risk, hence, we upgrade gold to an overweight position. Potential macro and policy implications Potential market implications https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/2024-11-08/
2024-11-07 12:02
Key takeaways While solid economic and earnings growth data, Fed rate cuts and structural trends are positive for US equities, we believe a Trump presidency is likely to offer additional support due to the proposed tax cuts and deregulation. As fiscal stimulus and potential tariff-related upward pressure on inflation may lead to further volatility in bonds, we downgrade Global, US and Asian investment grade bonds to neutral. The Eurozone faces challenges of slow growth and potential US tariffs, hence warranting our downgrade of Europe ex-UK equities to underweight. The UK is better positioned due to its better macro outlook and lack of a US-UK trade deficit. UK equities are also more defensive in nature and cheap. We continue to see opportunities in European IT, energy and healthcare. While we are waiting for more clarity around the size and the specific details of China’s fiscal stimulus measures, the potential for increased US tariffs adds to the complexity, so we remain neutral on mainland Chinese and Hong Kong stocks. Yet, valuations remain cheap. Within the region, we favour Japan, India and Singapore due to their favourable market conditions and positive growth drivers. South Korean stocks are moved down to neutral due to tariff concerns. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-monthly/2024-11-update/
2024-11-07 12:02
Key takeaways The Associated Press has called the 2024 US presidential election for Donald Trump. The Republican Party will gain control of the Senate, but several key Senate and House races have yet to be called. The US Dollar Index (DXY) surged to a four-month high. The Associated Press (AP) has called the 2024 US presidential election for Donald Trump, having secured more than the 270 required minimum threshold of Electoral College votes. According to the AP, Republicans will hold at least 51 seats in the Senate in 2025 (out of 100 total), therefore ensuring majority control. The margin of Republican control in the Senate is not yet clear, as the AP has yet to make calls for several races. Many of the most competitive races in the House of Representatives remain uncalled, and there is some uncertainty whether Republicans will secure a majority in that chamber. The market reaction to the US election results is all about expectations, and the impact of expectations is already apparent in the strength of the USD (Chart 1). The possibility of a Republican clean sweep bolsters expectations for fiscal stimulus and higher tariffs, both of which may be inflationary and slow the pace of Federal Reserve (Fed) easing in 2025 and support the USD. Thoughts of deregulation and possible corporate tax cuts may foster capital inflows into the US. Should results confirm a clean sweep, the USD could rally further. Source: Bloomberg, HSBC Source: Bloomberg, HSBC The flipside to this USD strength is FX weakness elsewhere (Chart 2). Among G10 currencies, the EUR is the most exposed to tariff concerns, especially when the Eurozone economy is still struggling with weak growth. The JPY is weakening alongside rising US yields and weakness elsewhere in Asia currencies. While the knee-jerk reaction has been supportive of our core view of USD strength, we would caution against extrapolating the move too far. After all, the presidential inauguration day is not until 20 January 2025, and policies requiring congressional approval would take longer still to become reality. Perhaps, the greatest argument, is that market expectations do not always translate into reality. A clean sweep would open the door to fiscal stimulus but does not guarantee it. Fiscal legislation could be vulnerable to different policy priorities within the Republican Party. It is also unclear how warmly the USD would welcome an expansion of the US budget deficit from an already sizeable starting point. Similarly, USD strength built on expectations of higher tariffs could be on porous ground if they are ultimately used only as a bargaining chip in trade negotiations. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/flash-2024-11-07/
2024-11-04 12:02
Key takeaways In the general election on 27 October, Japan’s ruling coalition lost its lower house majority for the first time since 2009. As widely expected, the BoJ kept its policy rate unchanged. USD-JPY is likely to hinge on developments in the US over the near term, but will possibly fall later when the yield gap narrows. As we approach the end of the year, the JPY is still the worst performing currency in the G10 space, losing c7.2% against the USD year-to-date and c5.5% against the USD in October (Bloomberg, 31 October 2024). While the JPY’s underperformance in October was due to continued USD strength on the back of rising US yields and political uncertainty in the US, markets seemed to be concerned about Japan’s political uncertainty amid the lower house election result and potential implications for the Bank of Japan (BoJ). The 27 October snap general election concluded with the ruling coalition (i.e., the Liberal Democratic Party (LDP) and Komeito) securing 215 out of 465 seats, short of the 233 needed for a majority – marking the first defeat for the ruling coalition since 2009. Some of the smaller parties that the ruling coalition would likely work with – namely the Democratic Party for the People (28 seats) and Japan Innovation Party (38 seats) – have earlier spoken out against the BoJ’s recent rate hikes (Reuters, 28 October 2024). Parliament will have to vote on the Prime Minister by 26 November. Meanwhile, the BoJ kept its policy rate unchanged at 0.25% on 31 October, as widely expected. The BoJ noted that the Japanese economy was moving broadly in line with projections which are almost the same as those made in July (see the table below). The JPY was slightly stronger after Governor Kazuo Ueda mentioned that currency moves are having a big impact on the economy and price trends. Our economists still expect the BoJ to raise its policy rate to 0.50% in January 2025, and markets are now pricing in a c60% chance for such a hike. Source: Bloomberg, HSBC Source: Bloomberg, HSBC It is worth noting that the recent rise in USD-JPY has been much faster than the widening of the US-Japan yield differential (Chart 2). The last time a significant gap opened up was in 2Q24, which Japan’s Ministry of Finance (MoF) eventually took action to curb what it deemed as speculation and excessive JPY weakness. While such divergence is likely to be noticed by the MoF, moves in USD-JPY will hinge on US developments over the near term. Looking further out, we still think USD-JPY may fall later with the Federal Reserve (Fed) easing and the BoJ normalising. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/2024-11-04/
2024-11-04 07:04
Key takeaways The stronger dollar and rising US Treasury yields have been driven by a string of better-than-expected US economic data. The Fed’s November meeting will take place after the US elections. While the election could bring with it some market volatility, the Fed is likely to look through this and focus on the recent data. Against a backdrop of decent Q3 earnings and resilient macro data, investors turned even more bullish on US stocks in October. Demand for volatility protection – as measured by the put-to-call ratio – is below average. Chart of the week – US dollar and EM assets The recent strengthening of the US dollar (USD) has put emerging market assets under pressure. Will it continue? The stronger dollar and rising US Treasury yields have been driven by a string of better-than-expected US economic data. The moves also reflect investor uncertainty about how the US policy agenda might impact fiscal deficits and inflation trends. New industrial policies, for example, could leave the Fed with less room to cut rates, boosting the USD further. However, the dollar outlook isn’t straightforward. The BRICS summit highlighted an ongoing trend for de-dollarisation; the reduced use of the USD in world trade and financial transactions. It’s notable that in emerging market FX reserves, the dollar is becoming less dominant. But this process is very gradual and seems likely to take decades. Back to today, the central scenario is one of ongoing disinflation, Fed cuts, and softer US growth. And these forces are consistent with lower US bond yields and a weaker USD. Market Spotlight Capital markets outlook Three things about the capital markets stand out. First, a medium-term economic regime of more volatile inflation and a new fiscal/monetary policy mix raises the assumption for interest rates. And that reinforces the appeal of core fixed income and the ‘all-in’ yields from ‘senior’ credit asset classes like infrastructure debt, asset-backed securities, and global investment grade. Second, the most compelling valuation anomaly today is in emerging markets. EM fixed income and equity returns look higher than in most of the G7. Opportunities in India, North Asia, and frontier markets stand out, as do themes in local currency EM bonds. Third, as the economic environment becomes more uncertain, there needs to be a larger role for private markets and other alternatives. That means focusing on diversifiers like hedge funds or commodities, the double-digit yields in private credit and infrastructure equity, and the emerging value in real estate and private equity. 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. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. 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. Diversification does not ensure a profit or protect against loss. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 04 November 2024. Lens on… Fed takes it slow The Fed’s November meeting will take place after the US elections. While the election could bring with it some market volatility, the Fed is likely to look through this and focus on the recent data. On that front, it is in a more comfortable position than in September, when it opted to cut rates by 0.5%. On average, activity data have surprised to the upside, after a run of softer readings over the summer. Labour data have been mixed – employment measures have remained robust, despite depressed new hiring and layoffs picking up in September. Overall, the Fed is likely to be relaxed about growth and labour developments. And while core PCE inflation picked up on a month-on-month basis in September, the six-month annualised pace of change – something Powell has mentioned the Fed looks at – is running only marginally above target, at 2.3%. We see a 0.25% cut being delivered this month, which is in line with market pricing. To maximise the chances of a soft landing, the Fed is expected to opt for a further steady stream of cuts at subsequent meetings to bring the funds rate down to a more ‘neutral’ level by mid-2025. US stocks as a haven Against a backdrop of decent Q3 earnings and resilient macro data, investors turned even more bullish on US stocks in October. Demand for volatility protection – as measured by the put-to-call ratio – is below average. ‘Bulls’ still outweigh ‘bears’ in the AAII investor sentiment survey, and defensive sectors like Staples have lagged. Faced with uncertainty over potential economic policy changes in the months ahead, investors have so far opted for the perceived safety of US stocks. Emerging market equities have been weaker, notably in India, ASEAN, and China. Eurozone stocks have also been out of favour. Amid some reasonable Q3 earnings reports from Magnificent 7 stocks last week, US technology remains in demand – despite average price-to-book valuations at an all-time high of 23x and high overseas exposure, with 60% of sector sales going abroad. But Financials and even US small-caps have outperformed versus the rest of the world. Yet, US stocks could be vulnerable to a shift in mood once the details of any changes to US trade policies are clearer. 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. Source: HSBC Asset Management. Macrobond, Bloomberg, Datastream. Data as at 7.30am UK time 04 November 2024. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 04 November 2024. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Market review Risk markets are on the defensive ahead of the US presidential election, with the US DXY dollar index consolidating after recent gains. Core government bonds weakened on upward US and Eurozone data surprises. Gilts lagged US Treasuries as investors fretted about the medium-term outlook for government borrowing, led by a rise in 2-year yields. In the US, the Nasdaq fell on disappointing outlooks from some tech heavyweights. Weaker tech stocks pressured the Euro Stoxx index. The Nikkei 225 pared most of its gains amid a firmer yen following hawkish comments from BoJ Governor Ueda. In EM, the Shanghai Composite Index and Hang Seng slipped ahead of the key National People’s Congress Standing Committee meeting. India’s Sensex index traded sideways. In commodities, easing geopolitical tensions pushed down oil prices. Gold prices reached a new high. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/2024-11-04/
