No peace deal yet in the Middle East
Market Development:
- Last week, the major parties in the Middle East conflict agreed to a two-week ceasefire. The news lifted global equity markets, with the three major US indices surging by more than 3% last week, while WTI crude oil futures for May tumbled by more than 10%.
- The two parties held peace talks over the weekend but failed to reach a long-term peace agreement due to clear differences on key issues. The Strait of Hormuz remains closed.
HSBC economic views：
- We believe investors are likely to remain cautious until there is greater clarity on a longer-term resolution.
- If tensions in the Middle East ease and energy supply gradually recovers:
We expect market volatility to decline, with risk assets potentially bottoming out and rebounding. Fund may rotate from energy stocks into technology and other lagging sectors.
Lower oil prices would help ease inflationary pressures. Markets may expect central banks to keep monetary policy unchanged, while high-yield and emerging market bonds would benefit from improved risk appetite.
Reduced safe-haven demand could soften the US dollar, potentially supporting emerging market currencies and AUD.
- If the conflict persists, or even energy infrastructure is damaged:
Market volatility would stay elevated, with Asian emerging markets and European equities potentially underperforming.
Oil prices would likely remain at high level, leading investors to expect central banks’ rate hikes in response to inflation risk. Investment-grade bonds are likely to outperform high-yield bonds due to risk aversion.
US dollar may strengthen. EUR and GBP are expected to be under pressure due to strong USD despite rate hike expectations.
- Given inflation pressures and increasing downside risks to growth, we still expect the Fed will keep rates unchanged this year.
HSBC asset class views：
- US equities: While near-term performance of US equities still depends on developments in the Middle East, we believe structural factors will continue to favour the market—resilient fundamentals, the ongoing development and opportunities in artificial intelligence, and supportive government fiscal policies. Recent pullbacks have also brought valuations back to more reasonable levels. As a result, HSBC remains overweight on US equities.
- Fixed income: Rising inflation pressures have led markets to price in the risk of rate hikes by central banks, triggering correction in bond prices. However, amid volatility and uncertainty, we believe high-quality bonds, such as investment-grade bonds, still play an important role in portfolio construction. Their relatively stable income can strengthen a portfolio’s defensiveness and overall stability.
- US Dollar: The temporary ceasefire has improved risk sentiment and reduced safe-haven demand. It might weigh on the US dollar in the near term, while supporting non-US currencies such as the Australian dollar, where markets are pricing in potential rate hikes. If the longer-term ceasefire agreement is finally reached, markets may price a bias towards gradual Fed easing, which could allow the USD to resume its softening trend.
“Overweight” implies a positive tilt towards the asset class, within the context of a well-diversified, typically multi-asset portfolio.
“Underweight” implies a negative tilt towards the asset class, within the context of a well-diversified, typically multi-asset portfolio.
“Neutral” implies neither a particularly negative nor a positive tilt towards the asset class, within the context of a well-diversified, typically multi-asset portfolio.