Key takeaways

• Global markets have shown remarkable resilience to the recent energy shock. Following the outbreak of the US-Iran conflict, the S&P 500 didn’t just recover in line with historical norms for geopolitical shocks – it subsequently surged.
• Trade relations took top billing at Presidents Xi and Trump’s meeting in Beijing last week. The talks took place against a backdrop of surging Chinese exports reminiscent of the early 2000s boom – but this time with an increasingly high-tech focus.
• With the Middle East conflict in its third month, the impact on Asia-centric AI supply chains is showing. Asia’s tech imports are in high demand from US firms, given the intensity of the AI buildout. But potential disruption caused by Asia’s high reliance on Hormuz-linked oil and gas flows could begin to feed back into US prices.

Chart of the week – Blissful markets

Analysts are talking about a new investment narrative: “the Bliss Trade”. It’s a world where markets behave as if governments will always step in, spend big, and cushion every shock. In short, it’s BLISS: Big Lasting State Support.

The telltale price action for the Bliss Trade is simple: stocks up, bonds down. Sector leadership is “K shaped” and industrial policy-led, while fiscal pressure pushes up term premia and keeps bond vigilantes alert. So, are markets past the point of maximum bliss? Or heading for euphoria? There are a few signals to watch:

First, profit growth is going gangbusters in the US and North Asia. But much of it is in the technology sector, and investors worry that earnings are too narrow. Yet, order books look full, and the AI boom is spilling into other sectors. The Bliss Trade only holds if profits stay strong and broaden out. Second, ballistic profits mean that forward price/earnings ratios aren’t yet a constraint on the Bliss Trade. But trailing metrics look more stretched: the US price/book is above 5x, and above 8x for the NASDAQ. If profits wobble, valuations could quickly matter again for market direction.

Finally, capex booms normally push up the cost of capital – but not in this cycle, so far. Treasury yields remain in a 4.0%-4.5% range, and credit spreads are near multi-decade lows. But there are other constraints. AI compute costs have almost doubled. Energy prices have spiked. Crowding out can show up in different places and upset the Bliss Trade.

For investors, a market cycle powered by fiscal and industrial policy – not monetary policy – feels unfamiliar. But for now, markets appear BLISSfully confident that state intervention will support valuations and keep price and profits momentum intact.

Market Spotlight

What’s on the menu?

Diversification is famously called “the only free lunch in investing”. But investors need to be picky. That’s because correlations in asset performance have been on the rise, and in recent bouts of stock market volatility, traditional sources of protection haven’t always been reliable. The macro outlook is complicated and recent market gains have been narrow, so thinking more broadly about how to defend against potential volatility makes sense.

At the heart of this is the stock-bond correlation. When that correlation is negative, government bonds can be a hedge against stock volatility. But when inflation risk, rising real rates, or fiscal uncertainty dominate, stocks and bonds can fall in tandem. Post-pandemic, we’ve seen more of this – with market volatility in March being a good example.

In the search for havens, there are other ways to diversify within risk assets. They include defensive sectors (e.g. utilities), equity factors (e.g. value), FX and commodities, and options. But in each case, the macro backdrop has a big influence. Assets that were defensive in one episode have not always played the same role in the next. So, rather than seeking an evergreen hedge for all conditions, investors need to think flexibly about their free lunch.

_{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. 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. 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. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Source: HSBC Asset Management, Factset, Bloomberg, Macrobond. Data as at 7.30am UK time 15 May 2026.} 

Lens on…

What energy shock?

Global markets have shown remarkable resilience to the recent energy shock. Following the outbreak of the US-Iran conflict, the S&P 500 didn’t just recover in line with historical norms for geopolitical shocks – it subsequently surged. This momentum is largely driven by the AI boom, which has provided a massive boost to US earnings performance. Meanwhile, strong gains in tech-heavy markets, such as Taiwan and South Korea, coupled with a stable US dollar, have helped the MSCI EM index outpace developed markets (DM) year-to-date. This is not the 2022 playbook.

Impressive performance in EM assets extends to fixed income markets. EM Bond Index (EMBI) spreads – capturing USD-denominated bonds issued by EM governments and corporates – are back at levels last seen before the global financial crisis, but their DM counterparts have remained elevated.

The EMBI has a much more diversified country mix and lower tech-weighting than the MSCI EM index, and highlights how robust underlying macro and structural fundamentals, policy credibility, and country diversification are helping to keep volatility low and insulate against economic shocks.

Tech-tonic shift

Trade relations took top billing at Presidents Xi and Trump’s meeting in Beijing last week. The talks took place against a backdrop of surging Chinese exports reminiscent of the early 2000s boom – but this time with an increasingly high-tech focus.

Exports remain a key growth driver for China, and the pick-up can be seen in a substantial widening of its trade surplus. A major reason for this has been a structural shift towards high-tech and green energy, moving the focus from low-cost consumer goods to advanced manufacturing. Robust state support, subsidies and low-interest loans have been key catalysts. Given weak domestic demand, manufacturers have opted to redirect overcapacity to foreign markets, particularly in Asia and Europe.

For global investors, the export boom is a major challenge to advanced manufacturers in the West. But it could have the benefit of acting as a significant disinflationary force, offsetting upside inflation risks from the Middle East energy shock. Either way, China’s relentless manufacturing push and strategic focus on high-tech and “new quality productive forces”, will likely continue.

When the chips are down…

With the Middle East conflict in its third month, the impact on Asia-centric AI supply chains is showing. Asia’s tech imports are in high demand from US firms, given the intensity of the AI buildout. But potential disruption caused by Asia’s high reliance on Hormuz-linked oil and gas flows could begin to feed back into US prices.

Energy remains a binding constraint on scaling AI infrastructure. Data centres and chip fabs are power-hungry, and capacity growth is already lagging demand. Qatar is now a dual chokepoint: a major LNG supplier and the source of over a third of global helium, which is critical in silicon wafer production. Reports suggest damage to Qatar’s capacity could mean a repair window of up to five years, signalling a persistent shock.

The semiconductor industry is no stranger to supply disruptions. Some companies have already taken mitigating steps, such as helium recycling. But if bottlenecks persist, dwindling inventories could stymie AI memory and hardware production. That could be a headwind to the AI buildout and weigh on the recent surge in tech profits, potentially leading to a repricing of large-cap tech stocks, and leave economies like Taiwan and South Korea – and by extension, the US – exposed.

_{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. Costs may vary with fluctuations in the exchange rate. Source: HSBC Asset Management. Macrobond, Bloomberg, Refinitiv, Factset. Data as at 7.30am UK time 15 May 2026.}

Key Events and Data Releases

Last week

This week

_{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. You cannot invest directly in an index.  Source: HSBC Asset Management. Data as at 7.30am UK time 15 May 2026.}

Market review

Global equities were mixed as investors weighed strong Q1 US earnings against ongoing geopolitical uncertainty. The meeting between the US and Chinese leaders was also a focus. In the US, AI-driven euphoria lifted the S&P 500 and Nasdaq indices to fresh highs. The Euro Stoxx 50 edged higher, alongside the rebound in the UK FTSE 100. Conversely, the Nikkei 225 retreated as JGB yields climbed further to new multi-decade highs. Other Asian markets diverged, with the tech-heavy Kospi hitting a new high on continued earnings optimism. In rates markets, US Treasury yields rallied on rising inflation worries, while UK Gilt yields were on course to end a volatile week higher amid lingering political uncertainty. In FX markets, the US dollar strengthened against major peers. In commodities, oil prices advanced, while gold prices weakened.

https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/