Halister News

(Bloomberg) -- Main risk to Morgan Stanley’s 2H views would be if governments ramped up stimulus, spurring a faster pace of growth than the bank is currently forecasting, analyst Andrew Sheets says in London briefing.

• If there were a shift toward fiscal stimulus that would also suggest an increase in the supply of govt bonds, which would lift yields and lead to steeper curves
  • Such a move would be quite supportive for banks, should drive a rotation within equity markets, given stretched valuations in defensives, spurring more interest in consumer cyclicals and may undermine the case for EM outperformance
• While such a shift would be helpful for growth and market pricing, analysts at the bank are skeptical it could get off the ground in a meaningful way in key markets
• The bank’s base case is that growth will be lower than the current consensus and that Fed will be on hold until end 2017
• That, and the gains in many asset classes YTD, means Morgan Stanley favors quality and carry
  • Many of Morgan Stanley’s best ideas for 2H deliver relatively unexciting returns of 3% to 4% but do so with reasonable risk/reward, Sheets says; credit remains a preferred asset class and U.S. remains top equity region; lifts weighting for USTs and EM local rates; favors EM over DM
• MS is above consensus on euro and yen outlook; while Japan would like to weaken the currency likely won’t be successful as there are limited policy options and as yen is still one of the cheaper G-10 currencies: Sheets
• New FX forecasts for 3Q and 4Q 2016 for EUR/USD are 1.16 vs 1.15 for 1.18 vs 1.13 respectively; for USD/JPY are 97 vs 100 and 99 vs 98 while for GBP/USD, cuts 3Q forecast to 1.24 vs 1.42 and to 1.26 for 4Q vs 1.41
• NOTE: The possibility of fiscal easing adds to risks core EGB yields will rise; see views on the possibility of fiscal easing and what that means for rates in the research roundup