Upside for global equities both in a goldilocks and a mini stagflation scenario - HSBC
Main U.S. indexes little changed; Nasdaq slightly green
Tech leads S&P 500 sector gainers; Energy down most
Euro STOXX 600 index off ~0.4%
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U.S. 10-Year Treasury yield edges up to ~4.42%
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UPSIDE FOR GLOBAL EQUITIES BOTH IN A GOLDILOCKS AND A MINI STAGFLATION SCENARIO - HSBC
Equity markets are contending with various macro scenarios while investors balance the risks of high interest rates for longer and possible stagflation.
HSBC sees greater clarity from the Federal Reserve, "even if it tilts on the more hawkish side" alleviating market pressures. In this case, strategists see potential for global equity gains both in a goldilocks and a mini stagflation scenario.
"After all, the exact timing of Fed cuts should not drastically affect equities, particularly if any delay is due to the strength of the economy", they said in a note.
Meanwhile, a recession implies a greater downside risk for equities, though this is a less likely scenario, in their view.
HSBC estimates that the market is currently pricing a 40% chance of a mini stagflation/higher for longer scenario over the next twelve months, a 35% likelihood of two to five 25bps rate cuts (goldilocks), and a 25% probability of a recession necessitating more significant reductions.
Expectations about a rate cut from the Federal Reserve in September increased after U.S. consumer prices rose less than expected in April, suggesting that inflation resumed its downward trend at the start of the second quarter.
Traders see near 63% odds of the Fed cutting rates in September by at least 25 basis points, according to CME's FedWatch Tool.
Concerning its regional allocation, HSBC upgrades the UK to "neutral" from "underweight" as it could provide a "good and cheap source of defensive, commodity and yield exposure which could come in handy as we head into a more volatile second half of the year".
It remains "overweight" on the U.S. and emerging markets with both markets likely providing the "most resilient earnings estimates", while it downgrades Canada to "underweight" due to a poorer risk-reward.
(Matteo Allievi)
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