HSBC downgrades US stocks, turns bullish on EU equities

HSBC on Monday downgraded US equities, citing uncertainty around tariffs, while turned bullish on European stocks following boost from Germany loosening its fiscal reforms.

The brokerage lowered US equities to “neutral” and raised rating on European stocks, excluding UK stocks to “overweight” from “underweight.” The Trump administration’s massive moves on trade and other policies have injected uncertainty, while a proposed $1.2 trillion European fiscal bazooka and the emergence of China as the tech race leader are marking a potential turning point for investor capital away from the United States.

The S&P 500 has pulled back about 6.1% from its February 19 record high on worries that the trade war will hurt corporate profit and slow growth.

“It is important to stress that we are not turning negative on US equities - but tactically, we see better opportunities elsewhere for now,” said HSBC’s Global Equity Strategist Alastair Pinder said.

Morgan Stanley Equity Strategist Michael Wilson believes the S&P 500 could fall another 5% to 5,500 points by mid-year, before ending the year at around 6,500, which is a 12.7% upside from the benchmark index’s last close.

“The path is likely to be volatile as the market continues to contemplate these growth risks, which could get worse before they get better,” Morgan Stanley’s Wilson said in a note on Monday. European shares dipped to their lowest in almost a month on Monday and world stocks followed as building deflationary pressure in China added to growth worries from a lacklustre US economy and an escalating global trade war.

Europe’s broader STOXX 600 regional benchmark fell by as much as around 1%, just as a gauge of equity volatility nudged up to a fresh 7-month high above 23 points.

“This week is a big week, we have some massive policy decisions coming up that potentially define not only the next quarters but possibly the years to come,” said James Rossiter, head of global macro strategy at TD Securities.

Stock investors were holding back because of a lack of conviction amid the uncertainty, Rossiter added.

European Union finance ministers this week are set to discuss how to pay for defence through new joint borrowing, existing EU funds and a greater role for the European Investment Bank.

German leaders agreed last week to overhaul state borrowing rules to boost defence spending and also set aside 500 billion euros ($541 billion) for infrastructure investments over 10 years.

Investors looked ahead to Germany’s inflation figures later this week, a reading that comes as European Union trade tensions with the United States simmer.

In the US, Federal Reserve speakers scheduled to speak include Chair Jerome Powell on the US economic outlook. China’s consumer price index fell at the sharpest pace in 13 months in February, data showed, while producer price deflation persisted in the latest hit to consumer confidence in the world’s second-biggest economy.

China’s blue-chip CSI300 Index closed 0.4% lower, while the Shanghai Composite Index eased 0.2%. Hong Kong’s benchmark Hang Seng fell 1.9%.

The yen strengthened 0.7% to 146.975 per dollar. Beijing pledged more stimulus to boost consumption and foster innovation in artificial intelligence at the start of the week-long National People’s Congress meeting that runs until Tuesday.

‘CAVALIER’ US President Donald Trump in a Fox News interview on Sunday declined to predict whether his tariffs on China, Canada and Mexico would result in a US recession.

A run of soft US economic data continued on Friday after monthly figures showed the labour market created fewer jobs than expected in February, in the first payrolls report capturing Trump’s policies.

“I think it’s Trump’s cavalier approach to economic policy that’s rattling sentiment,” said Kyle Rodda, senior financial markets analyst at Capital.com.

“Unlike during his first administration, where signs of an economic slowdown or market correction would see a pivot on policy, he is genuinely focused on significant, structural change to the economy - even if it comes at the expense of short-term growth.” The 10-year US Treasury yield dropped 7 basis points to 4.2474% and the two-year yield fell 6 bps to 3.945%.

The US dollar index, which measures the currency against six others, was steady at 103.61.

The euro edged up 0.3% to $1.0865 and sterling was little changed at $1.2926. In his latest warning to Canada, Trump said on Friday that reciprocal tariffs on dairy and lumber could be imminent.

Agencies