Global equities face heightened near-term risks as stretched investor positioning, stronger-than-expected US economic data and renewed geopolitical tensions trigger a pullback in risk assets, according to Standard Chartered.
In a market outlook note, Standard Chartered Global Chief Investment Office strategist Rajat Bhattacharya said the recent correction followed a two-month rally in artificial intelligence (AI)-related sectors, which had pushed investor positioning to elevated levels.
The bank said a stronger-than-expected US jobs report reinforced expectations that the Federal Reserve could maintain a higher-for-longer interest rate stance, while renewed tensions in the Middle East further pressured market sentiment.
“We remain cautious near term as bullish US equity positioning remains elevated, despite the recent reversal,” Bhattacharya said.
Standard Chartered noted that while investor enthusiasm has moderated, US equity positioning remains above historical averages. Its analysis showed positioning currently stands around 1.13 standard deviations above the long-term average, compared with around 2.0 standard deviations a week earlier.
Historically, the S&P 500 has tended to bottom when positioning falls back towards neutral or negative territory, suggesting the current market adjustment may only be halfway through.
The bank also highlighted that its “fear and greed” indicator has eased from near “extreme greed” levels recorded in May, although some components, including the put-call ratio, remain in optimistic territory.
Diversification Preferred Amid Market Volatility
Given the elevated uncertainty, Standard Chartered advised investors to avoid excessive concentration in portfolios and favour diversification across sectors.
The bank recommended maintaining exposure through an equal-weighted Developed Market equity index while spreading technology exposure across semiconductors, hardware, internet and software segments rather than focusing solely on AI-related names.
Standard Chartered said investors should remain flexible and use periods of heightened volatility as opportunities to rebalance portfolios.
Fed Rate Cut Expectations Pushed Back
The bank has revised its Federal Reserve outlook, pushing back expectations for rate cuts to next year.
Standard Chartered expects the Fed to hold interest rates steady for the remainder of the year, citing stronger labour market conditions, persistent inflation concerns and uncertainty surrounding energy prices.
The latest US inflation data showed headline inflation accelerated to a three-year high, driven mainly by higher gasoline prices. However, the bank noted that underlying inflation pressures have remained contained, while wage growth continues to moderate.
If oil prices remain below US$120 per barrel, Standard Chartered expects inflation pressures from energy costs to peak before gradually easing over the following year.
This could provide room for the Fed to begin cutting rates by the middle of next year, particularly if higher oil prices weigh on economic growth.
Shorter Bond Duration Strategy
With US yields expected to remain elevated, Standard Chartered recommended tactically reducing exposure to longer-duration US bonds and focusing on maturities between three and five years.
The bank said ongoing Middle East tensions could disrupt global energy markets and delay the normalisation of shipping activity through the Strait of Hormuz, keeping oil prices elevated during peak demand periods.
Higher energy prices could further complicate the Fed’s policy decisions by keeping inflation risks elevated.
ECB Likely to Pause After Latest Hike
Meanwhile, Standard Chartered expects the European Central Bank (ECB) to pause its tightening cycle following its latest rate increase.
The ECB raised its deposit rate by 25 basis points to 2.25%, in line with expectations, but gave no commitment on further hikes.
While the central bank highlighted concerns over energy-driven inflation, it maintained that future decisions would depend on incoming economic data.
Standard Chartered expects the June rate increase to be the final hike of the current cycle unless significant shocks emerge in energy markets.
The bank said weaker growth expectations and slower wage growth would likely limit further monetary tightening in Europe.
Overall, Standard Chartered said investors should remain cautious, prioritising diversification, disciplined positioning and selective exposure while markets navigate shifting monetary policy expectations and geopolitical risks.
