Investment Weekly: Turbulent policy outlook

1 June 2026

If rates are so volatile, why are broader financial markets so calm? Central bank expectations are swinging sharply in 2026, but overall asset class performance has been resilient. And that disconnect may signal something important about the macro regime.

First, policy hikes are back on the table. A few hikes from the Bank of England (BoE) or European Central Bank (ECB) always felt like a stretch. But policymakers on both sides of the Atlantic are talking tougher and worrying about second‑round effects from the commodities shock. You may not see it in market pricing, but many investors already accept that “3% is the new 2%” for inflation.

Second, short-rate volatility feels unusually high. Market expectations started the year pricing two cuts for the BoE, but now it’s two hikes. Policy forecasts have swung alongside spot oil prices. In a radically uncertain and supply‑shocked world, that instability shouldn’t surprise us. It’s an environment where forward guidance has become less effective.

Finally, the puzzle is why the turbulent policy outlook hasn’t transmitted to other asset classes. Credit, stocks, and emerging markets have all been impressively resilient. Implied volatility remains low across bonds, currencies, and stocks. 

The deeper point is this: the cost of capital isn’t just about policy rates. Fiscal and industrial policies, and geopolitics, are steering the macro regime now.

Upcoming stock market listings for a handful of US tech giants have been grabbing headlines lately. But it’s not the only place where IPO activity has been catching attention. An increase in new flotations across frontier market exchanges is signalling growing confidence among companies and investors.

Industry data point to a pick-up in IPO activity over the past year in regions like Southeast Asia (notably Vietnam), the Gulf (including Saudi Arabia and the UAE), and selected African exchanges, such as Nigeria.

This growing universe of stocks adds to the appeal of frontier markets. Despite the Middle East conflict, the MSCI Frontier Index has risen 10% in US dollar terms in 2026. That’s been helped by frontier firms’ exposure to strong growth in local economies. Regional idiosyncrasies also mean that frontier stocks are a diverse asset class, with relatively modest correlations to emerging and developed markets. They are also a potentially attractive source of income, historically paying a higher share of earnings as dividends than their emerging and developed market peers.

With signs that some frontier markets are open for IPOs, the combination of local growth, portfolio diversification, and decent dividends supports the case for a closer look.

From a macro perspective, AI investment should continue to underpin real GDP growth, although more spending is absorbed by higher prices. Even so, it remains good news for nominal profits across the data centre supply chain.

Looking ahead, mainland China’s continued policy support, diversified energy supply, and an extended US–China truce could help sentiment. A strengthening renminbi could also lift global investor interest in Chinese assets.

Second, policymakers have been disciplined. Following a pivot to economic orthodoxy in May 2023, Türkiye’s central bank (CBRT) has pursued policies focused on taming inflation through high interest rates, unperturbed by domestic political developments. 

Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Costs may vary with fluctuations in the exchange rate. Source: HSBC Asset Management. Macrobond, Bloomberg, Refinitiv, Factset. Data as at 7.30am UK time 29 May 2026.

For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index.  Source: HSBC Asset Management. Data as at 7.30am UK time 29 May 2026.

Market sentiment was supported by continued AI-driven earnings optimism and a further pullback in oil prices amid easing geopolitical concerns. US Treasury yields broadly fell, alongside declines in sovereign yields across other major markets. In FX markets, major currencies generally strengthened against the US dollar. Global equities broadly rose, with the S&P 500 extending gains to a new all-time high; the Nasdaq and small-cap Russell 2000 led the rally. In Europe, the Euro Stoxx 50 eked out modest gains, while the Nikkei 225 posted more notable advances. EM equities outperformed, driven by strong gains in semiconductor-heavy markets, with Kospi reaching another high. Elsewhere in Asia, markets were mixed: Sensex was on course to end a holiday-shortened week higher, while Chinese equities slipped.