Author: Fiona Craig

Risk assets have continued to withstand a series of potential market pressures since 2022, with HSBC strategist Max Kettner attributing the pattern to factors ranging from earnings growth to changes in monetary policy tools and market structure.

Kettner said in a Tuesday note that markets have encountered higher inflation and interest rates, turmoil among U.S. regional banks, tariffs, a cryptocurrency market decline and the unwinding of carry trades during the period.

“Yet it seems as if risk assets continue to ignore every negative catalyst,” he wrote, calling their resilience “nothing short of breathtaking.”

HSBC Strategist Points to Earnings, Growth and Asset Allocation

One explanation identified by Kettner is the performance of corporate earnings and economic growth. He said consensus estimates have consistently underestimated their resilience, including outside the technology and artificial intelligence sectors.

Changes in the relationship between equities and fixed income have also contributed, according to the strategist. A positive equity-bond correlation has reduced the role of bonds as a portfolio diversifier, which Kettner said has helped keep equity allocations elevated.

A wealth effect has also contributed to higher valuations, he said.

Kettner identified several additional structural factors, including an expansion of the tools available to central banks since the global financial crisis. He also noted that developed economies are less dependent on oil relative to economic activity than they were during the 1970s and 1980s.

Other factors cited in the note include comparatively low leverage outside government sectors, changes in the quality of credit indices, quicker price discovery and portfolio rebalancing by passive funds.

U.S. Market Exposure Among Potential Sources of Risk

Kettner said the U.S. represents the main potential source of risk to the current environment because of its comparatively large share of global equity and credit markets.

Among the developments that could affect risk assets, he cited an increase in corporate taxation.

Below-target inflation could also result in equities and bonds returning to a negative correlation, changing one of the conditions that Kettner identified as supporting current asset allocations.

The strategist additionally cited the possibility that central banks could withdraw the support markets expect during periods of financial stress. Kettner said he finds such an outcome difficult to envisage given the degree to which equities, wealth effects and financial conditions have become interconnected.

JPMorgan analysts expect corporate earnings momentum to remain supportive for equities despite higher government bond yields, inflation pressures and expectations for further monetary tightening.

Key Investor Takeaways

• Rising bond yields are increasing competition between fixed-income assets and equities, potentially putting pressure on stock valuations.
• JPMorgan nevertheless sees continued earnings growth as a factor that may limit the impact of higher borrowing costs on equity markets.
• Inflation remains central to the outlook, with the bank’s assessment dependent on longer-term inflation expectations staying anchored.
• Oil-price pressures related to the Iran conflict and potential rate increases from the Federal Reserve and European Central Bank are among the near-term macro risks.
• JPMorgan also sees improving activity outside the technology sector as evidence that corporate momentum is becoming broader.

Why Equity Markets Are in Focus

Global government borrowing costs have risen toward levels not seen in decades as markets price in inflation risks, higher interest rates and concerns about government debt.

The Iran conflict has added another variable through higher oil prices, which have contributed to inflationary pressure and increased expectations for tighter monetary policy.

Those conditions have revived questions about whether rising yields could trigger a broader equity-market correction. Higher fixed-income returns can reduce the relative appeal of stocks, particularly when investors reassess the valuations they are willing to pay for future corporate earnings.

Why This Matters for Investors

JPMorgan’s argument rests on the difference between the current earnings environment and the conditions that accompanied the 2022 monetary tightening cycle.

“This is in a huge contrast to 2022, where central banks had to tighten very significantly, in turn resulting in a sustained fall in equity prices through that year,” the analysts said.

Corporate profits are currently “on an uptrend,” according to JPMorgan. The bank therefore sees earnings momentum as potentially providing support even if higher yields periodically weigh on equity prices.

The analysts also pointed to improving corporate confidence, increased global manufacturing activity outside China and a recovery in U.S. non-tech capital expenditure and structures.

JPMorgan said continued improvement in the second-half macroeconomic outlook could provide scope for “further equity upside,” although that assessment remains conditional on inflation expectations staying under control.

What to Watch Next

The interaction between inflation and monetary policy is likely to remain central. Upcoming Federal Reserve and European Central Bank decisions could influence both bond yields and equity valuations.

Oil prices are another key variable because further increases could add to inflation pressures. Corporate earnings and non-tech economic activity will meanwhile indicate whether the broader fundamental momentum highlighted by JPMorgan is continuing.

The analysts said investors “should continue using the dips” to “add” to positions. That reflects JPMorgan’s market strategy view rather than investment advice.

Gold prices moved higher on Friday following a decline of nearly 2% in the previous session, as investors awaited US consumer inflation data and assessed expectations for the Federal Reserve’s interest-rate decision next week.

At 01:59 ET (05:59 GMT), spot gold gained 0.8% to $4,351.28 an ounce, while gold futures declined 0.4% to $4,391.37. Spot silver increased 0.8% to $64.10 an ounce, while platinum rose 1.1% to $1,801.18.

The US Dollar Index was broadly unchanged at 99.04.

Economists expect headline US CPI to increase 0.4% month on month in August and 3.4% from a year earlier. Core CPI, which excludes food and energy, is forecast to rise 0.2% from July.

Fed Rate Expectations Remain in Focus

Spot gold fell 1.8% on Thursday and remained on track to record a third consecutive weekly decline.

US producer prices increased 0.4% in August, matching expectations and recording their largest monthly increase since May.

Higher energy prices were also being assessed for their potential impact on inflation. Brent crude traded close to $108 per barrel amid the continuing conflict between the United States and Iran.

The source cited US strikes on Iranian oil tankers, Iranian missile attacks on an airbase in Jordan and attacks on Saudi infrastructure by Iran-backed Houthi forces in Yemen.

Markets were pricing in approximately a 70% probability of a Federal Reserve rate increase this month. The pricing reflects market expectations and does not represent a confirmed Fed decision.

Gold ETF Holdings Reach Record 4,189 Tonnes

Gold investment demand remained elevated during August, according to the World Gold Council.

Global physically backed gold exchange-traded funds attracted $18 billion during the month, representing the second-largest monthly inflow on record.

ETF holdings increased by 121 tonnes to a record 4,189 tonnes, while assets under management rose 16% to $615 billion.

The World Gold Council said gold gained 13% in August, representing its third-largest monthly return in 25 years.

Tony Sycamore, senior market analyst at IG, said gold remained below its 200-day moving average near $4,537. According to his technical assessment, gold would need to recover above that level to indicate that the decline from the $4,697 high was ending. Otherwise, Sycamore said there was scope for prices to move towards $4,200.

Oil prices moved lower on Friday but remained on track to close the week above $100 per barrel for the first time since mid-May, while the US national average diesel price moved above $6 per gallon for the first time.

Brent crude futures declined $1.65, or 1.53%, to $105.98 per barrel by 07:58 GMT, while US West Texas Intermediate fell $1.36, or 1.33%, to $101.12.

The benchmarks reversed earlier gains after the Financial Times reported that foreign ministers in the Middle East were seeking a temporary agreement with Iran to manage shipping through the Strait of Hormuz.

Both Brent and WTI rose more than 6% on Thursday and remained more than 10% higher for the week.

“Some headlines of possible new talks in the Middle East are weighing moderately on oil prices today,” UBS energy analyst Giovanni Staunovo said, adding: “I keep seeing near-term risks to the upside for oil prices, but we should expect ongoing high price volatility too”.

Hormuz Ship Transits Decline to Seven

Iran said it attacked 10 ships near the Strait of Hormuz on Wednesday following US strikes on five Iranian oil tankers. Iran’s Islamic Revolutionary Guard Corps said it would escalate its response if further attacks occurred.

Preliminary tracking data showed seven vessels transited the Strait of Hormuz on Thursday, down from 11 a day earlier and below the 10-day average of 15.

Before the Iran war began in late February, the Strait of Hormuz handled approximately one-fifth of global daily oil and liquefied natural gas supplies.

Iran-aligned Houthi forces took control of Yemen’s port of Mocha on Thursday, adding another potential disruption to Red Sea shipping. The source also cited attacks from Yemen on Saudi energy facilities.

The International Energy Agency said global oil supply and demand will decline by more than previously expected this year, with the continuation of the Iran war delaying a return to normal Middle East flows into 2027.

Supply Disruptions Push US Diesel Above $6

Supply disruptions associated with the Iran war, together with Ukrainian attacks on Russian refineries, contributed to the US national average diesel price moving above $6 per gallon for the first time on Thursday, according to GasBuddy.

“Refined products, particularly diesel, are feeling a one-two punch right now,” KCM Trade chief market analyst Tim Waterer said.

“As long as both the Gulf shipping constraints and Russian refining outages remain in play, diesel and other refined products are likely to show a higher upside tendency than the broader crude market,” he added.

US President Donald Trump said the US may strike Iran’s Pickaxe Mountain near the damaged Natanz uranium enrichment facility. Trump also said he thought the war would end immediately after the November midterm elections.

China’s state planner separately announced that retail price caps for petrol and diesel will rise from September 12 by 260 yuan ($38.76) and 250 yuan per metric ton, respectively.

European and British wholesale natural gas prices declined on Friday following several sessions of gains, while both benchmarks remained on course for a fifth consecutive weekly increase amid concerns over Middle East supply routes.

The benchmark Dutch front-month gas contract fell 2.5% to around €77.60 per megawatt-hour. The decline followed five consecutive sessions of gains, with the contract reaching €79.64 per MWh on Thursday, its highest level since 2023.

The Dutch benchmark was up 12.1% for the week.

In Britain, the equivalent NBP wholesale gas contract declined 1.5% to 195.00 pence per therm after previously reaching around 198 pence. The UK benchmark was up 12.6% for the week, also marking a fifth consecutive weekly increase.

Middle East Shipping Risks Remain in Focus

Natural gas markets continued to assess the potential effect of military developments in the Middle East on global energy supplies.

Military exchanges between US forces and Iran have restricted tanker traffic through the Strait of Hormuz, which handles approximately 20% of global liquefied natural gas flows, primarily from Qatar.

The source also cited US strikes on Iranian oil tankers and an Iranian missile attack on a US base in Jordan. Iran-aligned Houthi forces seized the Yemeni port of Mocha, adding to concerns over shipping through the Red Sea.

Crude oil remained above $108 per barrel. The source said restrictions in the Persian Gulf have increased competition between European and Asian buyers for alternative LNG cargoes from the Atlantic basin.

European Gas Storage at Around 67%

Data from Gas Infrastructure Europe showed European underground gas storage at approximately 67% of capacity, below the five-year seasonal average.

The source attributed slower storage replenishment during August and early September to summer heatwaves, Norwegian pipeline maintenance and market pricing that reduced the economic incentive for near-term storage injections.

Higher European energy prices were also cited in connection with Thursday’s European Central Bank policy decision.

The ECB raised its deposit facility rate by 25 basis points to 2.50%, its second increase of the year, citing inflation risks associated with higher energy input costs.