Recent gains in the US stock market have been concentrated among a handful of large-cap technology names, with the recent sell-off primarily affecting heavyweight semiconductor and other AI-related stocks, while other sectors have not seen significant selling pressure. The market's stabilization on Monday may reflect a prevailing view that the decline is a short-term correction, with immediate attention shifting to the upcoming release of US May inflation data. Should the pace of inflation accelerate beyond expectations, further strengthening market expectations for a Federal Reserve rate hike within the year, it is possible that the valuations of higher-priced US mega-cap tech stocks could still face near-term downward pressure.
The bank anticipates that short-term volatility in risk assets is likely to remain elevated. In equity markets, risk assets, including stocks, may experience significant fluctuations due to positive or negative news related to geopolitical conflicts. If a peace agreement remains elusive, leading to heightened inflation expectations, this could increase pressure on stock markets, particularly in Asia-Pacific and Europe, as well as on some richly valued technology stocks. Additionally, large-scale initial public offerings by individual mega-companies could also create some funding pressure in the near term.
However, from a medium- to long-term perspective, the bank maintains that if conflicts subside and inflation recedes, coupled with sustained strong demand for AI-related infrastructure, equity markets benefiting from AI and related technological developments (especially in the US) are still expected to outperform. The bank maintains a positive outlook on US stocks. Markets in the Taiwan region of China and South Korea are expected to continue benefiting from robust demand for high-end and memory chips.
Regarding bond markets, the bank notes that if oil prices remain persistently high, driving a faster-than-expected rise in inflation expectations, it could intensify pressure on some major central banks to tighten monetary policy. Furthermore, the long-term worsening of fiscal deficit issues in some major countries could push sovereign bond yields higher. The bank continues to hold a bearish view on bonds.
In the foreign exchange market, the bank mentions that rising expectations for the Federal Reserve to pivot towards rate hikes could lead to a slight short-term stabilization in the US Dollar Index, potentially limiting the performance of major non-dollar currencies. Risk-sensitive currencies like the Australian and New Zealand dollars may remain volatile, swayed by changes in market risk sentiment. Currencies benefiting from rate hike expectations, such as the Euro and British Pound, may find support, but weakening economic momentum could constrain their performance. The Japanese Yen and Canadian Dollar are largely influenced by oil price movements, with the Yen's decline potentially being relatively limited due to market speculation about possible intervention by Japanese authorities.
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