Recently, global stock markets have continued to rise, driven by a strong earnings season and easing trade tensions, with investors chasing risk assets in a &#34;YOLO&#34; (You Only Live Once) frenzy. However, a correction triggered by major central banks may be brewing.
According to Wind Trading Desk, a report from HSBC on July 28 indicated that market sentiment indicators have issued a mild sell signal, and the true catalyst for a pullback is most likely to come from the Federal Reserve and the Bank of Japan adopting a more hawkish stance than expected.
The market is closely watching the Federal Reserve's developments this week. The team led by Chief Multi-Asset Strategist Max Kettner analyzed in the report that if U.S. economic data exceeds expectations, combined with the Federal Reserve resisting political pressure and maintaining a tough stance, global market expectations for interest rate cuts will face reassessment.
Meanwhile, the Bank of Japan may also release more hawkish signals. Analysts suggest that the recently reached trade agreement between Japan and the U.S. paves the way for the normalization of the Bank of Japan's monetary policy. This central bank-level &#34;one-two punch&#34; may first impact developed market interest rates, especially short-term bonds, and subsequently pose a challenge to risk assets.
<h2>Market sentiment shows yellow light, but a pullback needs a catalyst</h2>
The report shows that the short-term sentiment and positioning indicators it tracks, particularly technical and daily indicators, are still issuing &#34;sell&#34; signals. However, this is merely a &#34;mild&#34; warning.
The report argues that to trigger a real pullback in risk assets, the market needs a sufficiently strong fundamental catalyst. The reasoning is that the sentiment of long-only investors remains relatively restrained, and the risk exposure of some systematic strategies has not yet reached the tense levels seen in 2021. This means that without a clear negative catalyst, any market decline may be temporary and shallow.
<h2>Tariffs and earnings season: Risks are controllable</h2>
In the search for potential catalysts, analysts have ruled out two recent market focal points: trade tariffs and the second-quarter earnings season.
The report believes that the recent trade agreements between the U.S. and Japan, as well as the EU, have reduced the risk of a full-blown trade conflict. Media reports indicate that U.S. Treasury Secretary Janet Yellen has suggested that key deadlines are not &#34;set in stone,&#34; which gives the market confidence that there is still room for negotiation and postponement in the future.
In terms of corporate earnings, especially for U.S. companies, the performance has been robust. Data from the report shows that the beat rate for S&amp;P 500 constituent companies in the second quarter reached about 80%, exceeding expectations and above the long-term average. Sectors such as technology and communication services have performed particularly well, providing solid fundamental support for the market.
<h2>Central banks become the biggest variable, hawkish turn may first impact the bond market</h2>
After ruling out other options, central bank policy has become the most likely variable. Analysts believe that if a combination of &#34;strong U.S. economic data&#34; and a &#34;steadfast Federal Reserve&#34; emerges this week, market expectations for interest rate cuts will be challenged
In addition, the stance of the Bank of Japan is also crucial. The report analyzes that the trade agreement reached in advance between Japan and the United States provides a breather for the automotive export industry, which accounts for about 1.3% of Japan's GDP, potentially giving the Bank of Japan more confidence to advance its interest rate hikes and the normalization of its monetary policy.
However, analysts emphasize that even if the central bank turns hawkish, its direct impact will vary across different asset classes. The report predicts that the biggest downside risk lies in the interest rates of developed markets, rather than in the risk assets themselves.
Analysts believe that the market is still some distance away from triggering a widespread sell-off in the &#34;Danger Zone&#34;—for example, when the yield on the 10-year U.S. Treasury reaches around 4.7%. Therefore, any turbulence caused by hawkish remarks may be more about the front-end rates of bonds. Based on this judgment, analysts continue to choose to &#34;reduce&#34; holdings in U.S. Treasuries and Japanese government bonds in tactical asset allocation.
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HSBC

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Global stock markets continue to rise driven by strong earnings season and easing trade tensions, but the hawkish statements from major central banks may trigger adjustments. HSBC's report indicates that market sentiment indicators are signaling a sell, and the firm stance of the Federal Reserve and the Bank of Japan is expected to reassess interest rate cut expectations. Although market sentiment is showing caution, a real pullback still requires strong fundamental catalysts, and current investor sentiment is relatively restrained, with manageable risks in the short term

- Global stock markets are rising due to strong earnings and easing trade tensions, but a potential adjustment driven by central banks may be on the horizon.  
- A report from HSBC indicates a mild sell signal in market sentiment, with the Federal Reserve and Bank of Japan's hawkish stances likely to be the main catalysts for any downturn.  
- Analysts suggest that while current market conditions are stable, a significant catalyst is needed for a real correction, as investor sentiment remains cautious and trade agreements have reduced the risk of conflict.

Global stock markets continue to YOLO? Central bank hawkish statements may trigger a sell-off