HSBC explains why risk assets continue to ignore every negative catalyst

Investing.com -- In a note Tuesday, HSBC laid out why financial markets keep shrugging off bad news, arguing that a structural shift over the past several years has left risk assets unusually resilient to shocks.

The bank’s strategist Max Kettner pointed to a long run of potential setbacks since 2022, from higher inflation and rates, a U.S. regional banking crisis and tariffs, to the crypto crash and the unwind of carry trades.

"Yet it seems as if risk assets continue to ignore every negative catalyst," he wrote, describing the strength as "nothing short of breathtaking."

Kettner set out several reasons for the resilience. Chief among them is earnings and growth resilience, even outside technology and artificial intelligence, which he said consensus has persistently underestimated.

He also cited a positive equity-bond correlation that has reduced bonds' role as a diversifier, keeping equity allocations high, along with a wealth effect lifting valuations.

Other supports include a central bank toolkit far larger than before the global financial crisis, lower oil intensity in developed economies than in the 1970s and 1980s, low leverage across non-government sectors, better credit index quality, faster price discovery and passive fund rebalancing.

As for what could end the run, Kettner said the greatest risk lies in the U.S., given its outsized weight in equities and credit.

Higher corporate taxes, a return to negative equity-bond correlation from below-target inflation, or the removal of central bank puts could all weigh, though he believes the last is hard to imagine given how intertwined equities, wealth effects and financial conditions have become.

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