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Pro: 'Pain trades'
HSBC warns markets to brace for several "pain trades" in the second half of 2025, which could surprise investors. Key potential surprises include a steepening U.S. Treasury yield curve, continued strength in the AI trade, an "explosive" U.S. dollar rally, outperformance by European markets, and a decline in emerging market yields. For AI, HSBC notes that despite expectations of flat or slowing earnings growth for many U.S. AI leaders through 2026, the "pain trade" could be further upside surprises in AI strength. European markets may also defy consensus, as their lack of AI exposure relative to the U.S. keeps European outperformance away from mainstream views. The U.S. dollar could see an explosive rally, especially if the Federal Reserve signals more aggressive action than currently priced in, leading to rapid tightening of financial conditions. This follows the Fed's hawkish stance in June that boosted front-end U.S. yields. A steepening U.S. Treasury curve is another risk, driven by higher headline and core inflation from potential oil shocks due to Middle East conflict. HSBC says risks to the Fed's dual mandate are skewing forward rates toward flattening concerns. Finally, emerging market yields could decline unexpectedly. Investors have positioned for persistent inflation and limited monetary easing, favoring hard currency debt over local rates. This positioning could be wrong if EM yields fall, as HSBC expects a shift away from current expectations of higher policy rates. In summary, HSBC identifies these five "pain trades" as narratives that could diverge sharply from prevailing market consensus in the second half.