Asian stock markets
Watch the strong first quarter of Asian equities
Foreign exchange fluctuations
How different interest rate policies can lead to volatility in money markets
Fiscal outlook
The outlook for U.S. fiscal policy and its implications for multi-asset investors
This week's key chart – rising bond yields weigh on equities
Since the beginning of the year, US Treasury yields have risen significantly, with the 10-year yield rising above 4.5% last week for the first time since mid-November. The market's renewed expectation of the Fed's interest rate cut in 2024 is the main driving factor. This positive outlook for higher-than-expected inflation (including last week's release of the March CPI showing widespread stiffness in the services sector) and continued solid economic performance (especially last week's multiple employment data) have prompted investors to revive the view that interest rates are "on the high side for an extended period of time", which was an important feature of last autumn's market move.
Interest rates continue to rise, but year-to-date gains in risk assets remain strong. However, there are signs that rising risk-free rates are putting pressure on risk markets and could start to shake risk markets.
Valuations in some market sectors appear to be overvalued, and a further rise in bond yields could pose significant challenges for risk asset pricing. The level of the neutral interest rate is highly uncertain, which means that the long-term interest rate lacks reliable support, making it sensitive to cyclical developments or changes in commodity prices.
The most worrying thing is if interest rate movements are driven by stubborn inflation or supply-side concerns in the oil market, rather than strong economic activity.
Market Focus
Q1 results quarter – and earnings performance
The S&P 500's first-quarter results quarter kicked off last week, with large financials set to report results first. Earnings per share for the full year 2024 are forecast to grow by 10% overall, with earnings up 3% in Q1 and 17.5% in Q4.
With the index trading at a high P/E of 21x and interest rates still elevated, it seems unlikely that the P/E multiple will be able to expand further significantly, and investors will need to see earnings progress after a sluggish 2023.
Technology and communication services led the way in EPS growth in the first quarter (up about 20% year-on-year). Base effects are expected to boost utilities. As investors look to the first quarter, five sectors are expected to fall, including cyclical sectors such as industrials, energy and materials, which have seen the recent rally widen. A positive surprise could support further market upside. Financials appear to be in mixed shape, with the banking sector being the weakest and the insurance sector being the strongest.
Analysts expect oil, shipping, transportation and financing costs to fall back even though wages are still likely to pose significant headwinds. As such, we will be keeping a close eye on the outlook statement for indications that margins can recover in the second half of the year as expected, which is already factored in. Finally, the previous AI boom may also shift in a more practical and short-term cost direction.
The value of the investment and the income received may go down as well as up and investors may not get back the principal amount invested. Past performance is not indicative of future returns. Interest rate levels are not guaranteed and may go up or down in the future.
Source: HSBC Asset Management. Macrobond and Bloomberg. Data as of 12 April 2024 (11am UK time).
Market movements
Asian equities were on the upswing
Asian equities were positive in the first quarter. While Japan leads the region, Asia ex-Japan also outperforms Latin America and Europe, the Middle East and Africa.
Benefiting from the upward semiconductor cycle, Taiwan, China recorded double-digit growth and outperformed South Korea. In addition, South Korea has recently announced a "Value Up" program that aims to improve valuations and shareholder returns, which will be an important area for investors.
Indian equities continue last year's strength. In contrast, ASEAN equities had a weak growth outlook and were flat for the quarter. However, there are also some markets within ASEAN that are worth noting. The Philippines, for example, is attracting investors' attention due to its low valuations, healthy earnings outlook and the possibility of a significant interest rate cut by the central bank next year.
The focus in the first quarter may be Chinese mainland, whose policy measures seem to have finally bottomed out for prices.
The Federal Reserve affects foreign exchange
Volatility in the currency market has been extremely modest for a period of time, in the same way that the VIX index reflects extremely low implied equity market volatility.
This may reflect greater confidence in the "soft landing" narrative, which means solid growth and a pullback in inflation across economies, and that central banks around the world will cut interest rates roughly in sync.
However, last week's release of the US consumer price index called into question this scenario. While there is growing evidence of stubbornly high services inflation in the US, Europe and many emerging market regions are making better progress in bringing inflation down. This increases the likelihood of widening policy divergence and even raising concerns about foreign exchange-driven inflationary pressures, limiting the extent to which policy can be eased outside the US.
Money markets are likely to be volatile again in the coming months as inflation moves more on a rocky trajectory and the pullback in inflation is more dependent on domestic than global factors.
Keep an eye on fiscal policy
The strong balance sheet of the private sector is largely responsible for the continued strength of the US economy amid the fastest policy tightening cycle since the 1980s. But fiscal policy has also played a role.
Last year, government incentives under the CHIPS and Science Act and the Inflation Reduction Act gave a slight boost to business investment. Direct spending by the federal and state governments has also rebounded.
But 2024 will be different. Fiscal policy is expected to tighten, dragging down economic growth. Previous tightening of monetary policy may have had a lag effect. Interest rates are "on the high side for an extended period of time", which may mean that policy officials will need to risk a recession to fight persistent inflation. This poses some risks to future GDP and profit growth, as well as stock market performance.
Long-term fiscal plans will be affected by the outcome of the U.S. election, which is an important event for investors. But the point is that fiscal policy is likely to be aggressive again, and the public deficit is likely to remain high. We're not going back to the 2010s, and there are important implications for investors.
Past performance is not indicative of future returns.
Source: HSBC Asset Management. Macrobond and Bloomberg. Data as of 12 April 2024 (11am UK time).
Announcement of important events and data
Last week's market overview
Market outlook for next week
Source: HSBC Asset Management. Data as of 12 April 2024 (11am UK time).
Market review
Risk assets took a breather on disappointing US inflation data, while core government bonds softened as markets recalibrated US interest rate expectations. US Treasuries lagged German government bonds as ECB President Christine Lagarde hinted that the eurozone was about to cut interest rates (possibly in June) and a "small number of members" called for immediate easing. U.S. equities were mixed, with the rate-sensitive Russell 2000 being the worst performer, but big tech stocks recovered some of their losses late last week. The Dow Jones Europe 50 was sideways, while Japan's Nikkei rebounded on a weaker yen. In emerging markets, China's Shanghai Composite Index fell, while India's Sensex Index hit a new high before selling off on US inflation data. On the commodity front, geopolitical concerns continue to support energy prices. Gold prices hit new highs.
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