Skip NavigationMarketsBusinessInvestingTechPoliticsVideoWatchlistInvesting Club
PRO
LivestreamMenuMarkets should prepare for a number of unexpected narratives or ‘pain trades’ in the second half of the year, according to an HSBC report, with a steepening U.S. Treasury, unabated AI trade and an “explosive” U.S. dollar among the potential surprises in store. Trade in the artificial intelligence sector is expected to be bogged down by bearish narratives over the coming months, HSBC noted. “For many names at the forefront of the AI story in the US, expectations for full year 2026 earnings growth is flat or lower than the year-on-year earnings growth we have seen in the 12 months to Q2 2025,” HSBC said. The bank added that the pain trade in this case could be continued strength and upside surprises on AI in the second half, even as the narrative on AI “continues to search for cracks.” The idea of outperformance in European markets could also represent another pain trade for investors in the second half of the year, according to HSBC, as Europe does not have the same AI exposure on a market cap basis as the U.S. or certain emerging markets. “Even away from that the resurgence of US exceptionalism keeps the idea of a European outperformance firmly away from consensus views,” HSBC said. The bank also expects an “explosive” rally in the U.S. dollar to pose a pain trade, following the Fed’s more hawkish stance in June, which boosted higher front-end U.S. yield. “A stronger USD would be painful, but we see the ‘pain trade’ in the FX market taking the form of a more explosive period of USD strength,” HSBC said. If the Fed gives signals that it is prepared to “act more aggressively” than market pricing in the coming months, it would likely lead to a “sharper ascent in the currency if this also translated into a rapid tightening of financial conditions,” HSBC noted. A steepening curve in U.S. Treasury could also surprise investors, amid higher headline and core inflation driven by oil shocks resulting from the Middle East conflict, HSBC said. “We think the evolution of risks to the Fed’s dual mandate and skews to forward rate pricing increasingly reflect a market primarily concerned about Treasury curve flattening,” HSBC said. A decline in yield in emerging markets may also surprise, HSBC noted, adding that investors are expecting policy rates to go higher over the next three months, as there seems to be a shift in preference for fixed income toward hard currency debt. “In other words, investors appear to have positioned for persistent inflation pressure, limited monetary easing, and continued underperformance of local rates amidst a stronger US dollar,” it said.
About The Author
