The U.S. Congress has been quietly making progress on a couple of key pieces of legislation, and investors should be aware of which bills will matter to markets.-----Transcript-----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, April 27th, at 11 a.m. in New York. Compared to the Russia Ukraine situation, which rightfully has investors focus when it comes to geopolitics, congressional deliberations in D.C. may seem less important. But this is often where things of consequence to markets happen. So we think investors should keep an eye on Congress this week, where progress is quietly being made on key pieces of legislation that will matter to markets. Let's start with legislation directed at boosting energy infrastructure investment. Reports suggest that Democratic senators are seeking to revive the clean energy spending proposed in the build back better plan, and pair it with fresh authorization for traditional energy exploration. The deliberations have momentum for a few reasons. While environment conscious Senate Democrats may have in the past balked about supporting traditional energy investment, they could now see this effort as the last chance to boost clean energy investment for years, given the chance that Democrats lose control of Congress in the midterm elections. Russia's invasion of Ukraine and the resulting need to boost American energy production to aid Europe, may also be persuasive. And while there are several roadblocks to this deal getting done, in particular negotiations about which taxes to increase in order to fund it, investors should pay attention. Such a deal could unlock substantial government energy investments that benefit both the clean tech, and oil and gas sectors of the market. The downside could be that corporate tax increases become its funding source, and if the corporate minimum tax proposal becomes part of the package, that drives margin pressure in banks and telecoms. Investors should also keep an eye on the competition and innovation bill that includes about $250 billion of funding for re-shoring semiconductor supply chains, and federal research into new technologies. The bill, known in the Senate as the U.S. Innovation and Competition Act and the House as the COMPETES Act, is in part motivated by policymakers view that the U.S. must invest in critical areas to maintain a competitive economic advantage over China. While this kind of industrial policy is uncommon in the mostly laissez faire U.S. economic system, these policy motives make it likely, in our view, to be enacted this year. That should help the semiconductor sector, which has been facing uncertainty about how to cope with the risks to its supply chains from export controls and tariffs enacted by the U.S. This week these two bills move into conference, which means in the coming weeks we should have a better sense as to what the final version will look like, and if our view that it will be enacted this year will be right or wrong. So summing it up, don't sleep on Congress. There's slowly but surely working on policies that impact markets. We'll of course track it all, and keep you in the loop. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague or leave us a review on Apple Podcasts. It helps more people find the show.

Global supply chains have been under stress from the pandemic, geopolitical tensions, and inflation, and the outlook for transportation in 2022 is a mixed bag so far. Chief U.S. Economist Ellen Zentner and Equity Analyst for North American Transportation Ravi Shanker discuss.-----Transcript-----Ellen Zentner: Welcome to Thoughts on the Market. I'm Ellen Zentner, Chief U.S. Economist for Morgan Stanley Research, Ravi Shanker: and I'm Ravi Shanker, Equity Analyst covering the North American Transportation Industry for Morgan Stanley Research. Ellen Zentner: And today on the podcast, we'll be talking about transportation, specifically the challenges facing freight in light of still tangled supply chains and geopolitics. It's Tuesday, April 26, at 9:00 a.m. in New York. Ellen Zentner: So, Ravi, it's really good to have you back on the show. Back in October of last year we had a great discussion about clogged supply chains and the cascading problems stemming from that. And I hoped that we would have a completely different conversation today, but let's try to pick up where we left off. Could we maybe start today by you giving us an update on where we are in terms of shipping - ocean, ground and air? Ravi Shanker: So yes, things have materially changed since the last time we spoke, some for the better and some for the worse. The good news is that a lot of the congestion that we saw back then, whether it was ocean or air, a lot of that has eased or abated. We used to have, at a peak, about 110 ships off the Port of L.A. Long Beach, that's now down to about 30 to 40. The other thing that has changed is we just went from new peak to new all time peak on every freight transportation data point that we were tracking over the last two years. Now all of those rates are collapsing at a pace that we have not seen, probably ever. It's still unclear whether this legitimately marks the end of the freight transportation cycle or if it's just an air pocket that's related to the Russia Ukraine conflict or China lockdowns or something else. But yes, the freight transportation worlds in a very different place today, compared to the last time I was on in October. Ellen, I know you wanted to dig a little more deeply into the current challenges facing the shipping and overall transportation industry. But before we get to that, can you maybe help us catch up on how the complicated tangle created by supply chain disruptions has affected some of the key economic metrics that you've been watching over the last six months? That is between the time we last spoke in October and now. Ellen Zentner: Sure. So, we created this global supply chain index to try to gauge globally just how clogged supply chains are. And we did that because, what we've uncovered is that it's a good leading indicator for inflation in the U.S. and on the back of creating that index, we could see that the fourth quarter of last year was really the peak tightness in global supply chains, and it has about a six month lead to CPI. Since then, we started to see some areas of goods prices come down. But unfortunately, that supply chain index stalled in February largely on the back of Russia, Ukraine and on the back of China's zero COVID policy, starting to disrupt supply chains again. So the improvement has stalled. There are some encouraging parts of inflation coming down, but it's not yet broad based enough, and we're certainly watching these geopolitical risks closely. So, Ravi, I want to come back to freight here because you talked about how it's been underperforming for a couple of months now and forward expectations have consistently declined as well. You pointed to it as possibly being just an air pocket, but you're pointing, you're watching closely a number of things and anticipate some turbulence in the second half of the year. Can you walk us through all of that? Ravi Shanker: What I can tell you is that it's probably a little too soon to definitively tell if this is just an air pocket or if the cycles over. Again, we are not surprised, and we would not be surprised if the cycle is indeed over because in December of last year, we downgraded the freight transportation sector to cautious because we did start to see some of those data points you just cited with some of the other analysts. So we were expecting the cycle to end in the middle of 22 to begin with, but to see the pace and the slope of the decline and a lot of these data points in the month of March, and how that coincides with the Russia-Ukraine conflict and that the lockdowns in China, I think, is a little too much of a coincidence. So we think it could well be a situation where this is an air pocket and there's like one or two innings left in the cycle. But either way, we do think that the cycle does end in the back half of the year and then we'll see what happens beyond that. Ellen Zentner: OK, so you're less inclined to say that you see it spilling over into 2023 or 2024? Ravi Shanker: I would think so. Like if this is just a normal freight transportation cycle that typically lasts about 9 to 12 months. The interesting thing is that we have seen 9 to 12 months of decline in the last 4 weeks. So there are some investors in my space who think that the downturn is over and we're actually going to start improving from here. I think that's way too optimistic. But if we do see this continuing into 2023 and 2024 I think there's probably a broader macro consumer problem in the U.S. and it's not just a freight transportation inventory destocking type situation. Ellen Zentner: So Ravi, I was hoping that you'd give me a more definitive answer that transportation costs have peaked and will be coming down because of course, it's adding to the broad inflationary pressures that we have in the economy. Companies have been passing on those higher input costs and we've been very focused on the low end consumer here, who have been disproportionately burdened by higher food, by higher energy, by all of these pass through inflation that we're seeing from these higher input costs. Ravi Shanker: I do think that rates in the back half of the year are going to be lower than in the first half of the year and lower than 2021. Now it may not go down in a straight line from here, and there may be another little bit of a peak before it goes down again. But if we are right and there is a freight transportation downturn in the back of the year, rates will be lower. But, and this is a very important but, this is not being driven by supply. It's being driven by demand and its demand that is coming down, right. So if rates are lower in the back half of the year and going into 23, that means at best you are seeing inventory destocking and at worst, a broad consumer recession. So relief on inflation by itself may not be an incredible tailwind, if you are seeing demand destruction that's actually driving that inflation relief. Ellen Zentner: That's a fair point. Another topic I wanted to bring up is the fact that while freight transportation continues to face significant headwinds, airlines seem to be returning to normal levels, with domestic and international travel picking up post-pandemic. Can you talk about this pretty stark disparity? Ravi Shanker: Ellen it's absolutely a stark disparity. It's basically a reversal of the trends that you've seen over the last 2 years where freight transportation, I guess inadvertently, became one of the biggest winners during the pandemic with all the restocking we were seeing and the shift of consumer spend away from services into goods. Now we are seeing the reversion of that. So look, honestly, we were a little bit concerned a month ago with, you know, jet fuel going up as much as it did and with potential concerns around the consumer. But the message we've got from the airlines and what we are seeing very clearly in the data, what they're seeing in the numbers is that demand is unprecedented. Their ability to price for it is unprecedented. And because there are unprecedented constraints in their ability to grow capacity in the form of pilot shortages, obviously very high jet fuel prices and other constraints, I guess there's going to be more of an imbalance between demand and supply for the foreseeable future. As long as the U.S. consumer holds up, we think there's a lot more to come here. So Ellen, let me turn back to you and ask you with freight still facing such big challenges and pressure on both sides on the supply chain. What does that bode for the economy in terms of inflation and GDP growth for the rest of this year and going into next year? Ellen Zentner: So I think because, as I said, you know, our global supply chain index has stalled since February. I think that does mean that even though we've raised our inflation forecasts higher, we can still see upside risk to those inflation forecasts. The Fed is watching that as well because they are singularly focused on inflation. GDP is quite healthy. We have a net neutral trade balance on energy. So it actually limits the impact on GDP, but has a much greater uplift on inflation. So you're going to have the Fed feeling very confident here to raise rates more aggressively. I think there's strong consensus on the committee that they want to frontload rate hikes because they do need to slow demands to slow the economy. They do almost need that demand destruction that you were talking about. That's actually something the Fed would like to achieve in order to take pressure off of inflation in the U.S.. But we think that the economy is strong enough, and especially the labor market is strong enough, to withstand this kind of policy tightening. It takes actually 4 to 6 quarters for the Fed to create enough slack in the economy to start to bring inflation down more meaningfully. But we're still looking for it to come in, for core inflation, around 2.5% by the fourth quarter of next year. So, Ravi, thanks so much for taking the time to talk. There's much more to cover, and I definitely look forward to having you back on the show in the future. Ravi Shanker: Great speaking with you Ellen. Thanks so much for having me and I would love to be back. Ellen Zentner: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review on Apple Podcasts and share the podcast with a friend or colleague today. 

As U.S. equity markets digest higher inflation and a more hawkish Fed, the question is when this will turn into a headwind for earnings growth.-----Transcript-----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, April 25th and 11:00 a.m. in New York. So let's get after it. As equity strategists our primary job is to help clients find the best areas of the market, at the right time. Over the past year our sector and style preferences have worked out very well as the market has gone nowhere. However, the market has been so picked over at this point, it's not clear where the next rotation lies. When that happens, it usually means the overall index is about to fall sharply, with almost all stocks falling in unison. In many ways, this is what we've been waiting for as our fire and ice narrative, a fast tightening Fed into the teeth of a slowdown, comes to its conclusion. While our defensive posture since November has been the right call, we can't argue for absolute upside anymore for these groups given the massive rerating that they've experienced in both absolute and relative terms. In many ways, this is a sign that investors know a slowdown is coming and are bracing for it by hiding in these kinds of stocks. In our view, the accelerated negative price action on Thursday and Friday last week may also support the view we are now moving to this much broader sell off phase. Another important signal from the market lately is how poorly materials and energy stocks have traded, particularly the former. To us, this is just another sign the market's realization that we are now entering the ice phase, when growth becomes the primary concern for stocks rather than inflation, the Fed and interest rates. On that note, more specifically, we believe inflation and inflation expectations have likely peaked. There's no doubt that a fall in inflation should take pressure off valuations for some stocks. The problem is that falling inflation comes with lower nominal GDP growth and therefore sales and earnings per share grow, too. For many companies, it could be particularly painful if those declines in inflation are swift and sharp. Of course, many will argue that a falling commodity prices will help the consumer. We don't disagree on the surface of that conclusion, but pricing has been a big reason why consumer oriented stocks have done so well. If pricing becomes less secure, the margin pressure we've been expecting to show up this year, may be just around the corner for such stocks, even as the consumer remains active. We can't help but think we are at an important inflection point for inflation, the mirror image of our call in April of 2020. At the time, we suggested inflation would be a big part of the next recovery and lead to extremely positive operating leverage and earnings growth. Fast forward to today, and that's where we are. The question now is will that positive tailwind continue? Or will it turn into a headwind for earnings growth? Our view is that it will be more of the latter for many sectors and companies, and this is why we've been positioned defensively and in stocks with high operational efficiency. The bottom line is that asset markets have been digesting higher inflation and a more hawkish fed path in reaction to that inflation. However, we are now entering a period when slowing growth will determine how stocks trade from here. Overall, the S&P 500 looks more vulnerable now than the average stock, the mirror image of the past year. We recommend waiting for the index to trade well below 4000 before committing new capital to U.S. equities. Thanks for listening! If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show. 

Forecasts for China and other Emerging Markets have continued on a downtrend, extending last year’s underperformance, meaning investors might want to look into regions with a more favorable outlook.Important note regarding economic sanctions. This research references country/ies which are generally the subject of selective sanctions programs administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the European Union and/or by other countries and multi-national bodies. Users of this report are solely responsible for ensuring that their investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions.-----Transcript-----Welcome to Thoughts on the Market. I'm Jonathan Garner, Chief Asia and Emerging Markets Equity Strategist for Morgan Stanley Research. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the key reasons why we recently reiterated our cautious stance on overall emerging market equities and also China equities. It's Friday, April 22nd at 8:00 p.m. in Hong Kong. Now, emerging market equities are underperforming again this year, and that's extending last year's underperformance versus developed market equities. And so indeed are China equities, the largest component of the Emerging Market Equities Index. This is confounding some of the optimism felt by some late last year that a China easing cycle could play its normal role in delivering a trend reversal. We have retained our cautious stance for a number of reasons. Firstly, the more aggressive stance from the US Federal Reserve, signaling a rapid move higher in US rates, is leading to a stronger US dollar. This drives up the cost of capital in emerging markets and has a directly negative impact on earnings for the Emerging Markets Index, where around 80% of companies by market capitalization derive their earnings domestically. Secondly, China's own easing cycle is more gradual than prior cycles, and last week's decision not to cut interest rates underscores this point. This decision is driven by the Chinese authorities desire not to start another leverage driven property cycle. Meanwhile, China remains firmly committed to tackling COVID outbreaks through a lockdown strategy, which is also weakening the growth outlook. Our economists have cut the GDP growth forecast for China several times this year as a result. Beyond these two factors, there are also other issues at play undermining the case for emerging market equities. Most notably, the strong recovery in services spending in the advanced economies in recent quarters is leading to a weaker environment for earnings growth in some of the other major emerging market index constituents, such as Korea and Taiwan. They have benefited from the surge in work from home spending on goods during the earlier phases of the pandemic. Meanwhile, the geopolitical risks of investing in emerging markets more generally have been highlighted by the Russia Ukraine conflict and Russia's removal from the MSCI Emerging Markets Index. So what do we prefer? We continue to like commodity producers such as Australia and Brazil, which are benefiting from high agricultural, energy and metals prices. We also favor Japan, which, unlike emerging markets, has more than half of the index deriving its earnings overseas and therefore benefits from a weaker yen. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

U.S. Treasury bonds have seen significant losses over the last six months, but looking forward investors may be able to use bonds to help balance their cross-asset portfolio in an uncertain market.-----Transcript-----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross Asset Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Thursday, April 21st at 2pm in London. Like any good team, most balanced investment portfolios are built with offense and defense. Stocks are usually tasked to play that proverbial offensive role, producing the majority of inflation adjusted returns over the long run. But because these equity returns come with high volatility, investors count on bonds for defense, asking bonds to provide stability during times of uncertainty with a little bit of income along the way. At least that's the idea. And for most of the last 40 years, it's worked pretty well. But lately it really hasn't. The last 6 months have seen the worst total returns for U.S. 10 year Treasury bonds since 1980, with losses of more than 10%. Investors are likely looking at what they thought was the defense in their portfolio, with a mix of frustration and disbelief. On April 9th, we closed our long held underweight in U.S. bonds in our asset allocation and moved back up to neutral. Part of our reasoning was, very simply, that significantly higher yields now improved the forward looking return profile for bonds relative to other assets. But another part of our thinking is the belief that going forward, bonds will be more effective at providing defense for other parts of the portfolio. We think the path here is twofold. First, even as bonds have struggled year to date, the correlation of U.S. Treasuries to the S&P 500 is still roughly zero. That means stocks and bonds are still mostly moving independent of each other on a day to day basis, and supports the idea that bonds can lower overall volatility in a balanced portfolio if yields have now seen their major adjustment. Second, if we think about why bonds provide defense, it's that when the economy is poor, earnings and stock prices tend to go down. But a poor economy will also lead central banks to lower interest rates, which generally pushes bond prices up. Recently, this dynamic has struggled. Interest rates were so low, with so little in future rate increases expected that it was simply very hard for these rate expectations to decline if there was any bad economic data. But that's now changed and in a really big way. As recently as September of last year, markets were expecting just 25 basis points of interest rate increases from the Federal Reserve over the following 12 months. That number is now 275 basis points. If the U.S. economy unexpectedly slows or the recent rise in interest rates badly disrupt the housing market, two developments that the stock market might dislike, markets might start to think the Fed will do less. They will apply fewer rate increases and thus give support to bonds under this negative scenario. That would be a direct way that bonds would once again provide portfolio defense. Bonds still face challenges. But after a historically bad run, we are no longer underweight, and think they can once again prove useful within a broader cross asset portfolio. Thanks for listening! Subscribe to Thoughts on the Market on Apple Podcasts or wherever you listen and leave us to review. We'd love to hear from you.

Although consensus forecasts for European equities continue to trend up, there are a few key risks on the horizon that investors may want to keep an eye on during the upcoming earnings season and year ahead.-----Transcript-----Welcome to Thoughts on the Market. I'm Graham Secker, Head of Morgan Stanley's European Equity Strategy Team. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the upcoming earnings season here in Europe and why we think corporate margins look set to come under pressure in the coming months. It's Wednesday, April the 20th at 2pm in London. This week marks the start of the first quarter earnings season for European companies, and we expect to see another "net beat", with more companies exceeding estimates than missing. However, while this may sound encouraging, we expect the size of this beat to be considerably smaller than recent quarters, which have been some of the best on record. At the same time, we think commentary around future trends is likely to turn more cautious, given triple headwinds from elevated geopolitical risks, an increasingly stagflation like economy and intensifying pressures on corporate margins. And we think this last point is probably the most underappreciated risk to European equities at this time. Historically, European margins have been positively correlated to inflation. Which likely reflects the index's sizable exposure to commodity sectors, and also the fact that the presence of inflation itself tends to signal both a strong topline environment and a positive pricing power dynamic for companies. In this regard, we note the consensus sales revisions for European companies are currently close to a 20-year high. So far, so good. However, the influence of inflation on the bottom line depends much more on its relative relationship with real GDP growth. Put simply, when inflation is below real GDP growth margins tend to rise, but when inflation is above real GDP growth, as it is now, margins and profitability in general tend to fall. As of today, consensus forecasts for European margins have yet to turn down. However, we have seen earnings revisions turn negative in recent weeks, such as the gap between sales revisions, which are currently positive, and earnings revisions, currently negative, has never been wider. In addition to this warning signal on margins from higher input costs, companies are also continuing to deal with challenging supply chain issues, whether related to the conflict in Eastern Europe or to the recent COVID lockdowns in China. A recent survey from the German Chambers of Commerce suggested that 46% of companies supply chains are completely disrupted or severely impacted by the current COVID 19 situation in China. In contrast, just 7% of companies reported no negative impact at all. For now, the market appears to be ignoring these warning signs. Consensus 2022 earnings estimates for the MSCI Europe Index are still trending up and have now risen by 5% year to date. This compares to a much smaller 2% upgrade for U.S. earnings and actual downgrades for Japan and emerging markets. While commodity sectors are the main source of this European upgrade, the absence of any offsetting downgrades across other sectors feels unsustainable to us. Ahead of every earnings season, we survey our European analysts to gather their views on the credibility of consensus forecasts. This quarter, the survey generally supports our own top down views, with our analysts expecting a small upside beat to consensus numbers in the first quarter, but then seeing downside risks for the full year 2022 estimates. This is the first time in nearly two years that this survey has given us a cautious message. Taking it to the sector level, our analysts see the greatest downside risks to consensus estimates for banks, construction, industrials, insurance, media, retailing and consumer staples. In contrast, our analysts see upside risks to earnings forecasts for brands, chemicals, energy, mining, healthcare and utilities. Historically, a move higher in equity valuations often tends to mitigate the impact on market performance from prior periods of earnings downgrades. However, we are skeptical that price to earnings ratios will rise much from here, as long as global central banks remain hawkish. Consequently, we continue to see an unattractive risk reward profile for European stocks just here and suggest investors wait for a better entry point, after economic and earnings expectations have reset lower. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today. 

As the U.S. Economy contends with higher inflation, supply chain stress, and rising recession risks, one indicator to keep an eye on is what’s going on at the sector level and how U.S. business conditions may help shape the economic outlook.-----Transcript-----Welcome to Thoughts on the Market. I'm Robert Rosener, Senior U.S. Economist for Morgan Stanley Research. Along with my colleagues bringing you a variety of perspectives, I'll be sharing a read on how industries across the U.S. may be viewing the current economic environment. It's Tuesday, April 19th at noon in New York. As we move through the economic recovery and expansion that has been uneven, it's increasingly important to track what's going on at the sector level. And collaboratively with our equity analysts we do exactly that with our Morgan Stanley Business Conditions Index; a monthly survey to track what's going on across industries. With the MSBCI we try to put all of those stories together into one coherent macro signal, from 0 to 100, where 50 is the even mark, above 50 is expansion and below 50 is contraction.It incorporates a variety of data points on hiring plans, capex plans, advance bookings and how those factors are evolving. Now, amid a more challenging and uncertain economic backdrop with higher inflation, supply chain stress and concerns about rising recession risks, I'd like to dive into a few key findings from our most recent survey to give listeners a picture of how U.S. businesses might be seeing the current environment. First, in our April survey the headline measure for the MSBCI fell to a two year low of 44. We saw that decline in the index as driven by a deterioration in sentiment, because it coincided with a sharp pullback in business conditions expectations - so how analysts are seeing the forward trajectory for activity. And that decline in sentiment was particularly concentrated in the manufacturing sector, where we had a sharp decline in the MSBCI manufacturing component, while service sector activity appeared to bounce a little bit but remained at low levels. When we look at the underlying details, the fundamental components of the survey were more mixed this month. So downside in our survey was led by business conditions expectations, as well as advance bookings and more strikingly, credit conditions. Now some of this can be noise, and we need to look very carefully through the data to see if we can identify a clear trend. Advance bookings, the decline there may have been more noise, but we are monitoring credit conditions very closely as the Fed tries to tighten financial conditions with its monetary policy stance. We also got a bit of insight into supply chain conditions in this report. Responses from analysts in our survey indicated some stalling in the improvement in April, and a pickup in the share of analysts who reported that conditions remained unchanged. Which is broadly consistent with what we've seen in other indicators. Nevertheless, analysts generally expect improvement in supply conditions over the next 3 months.Finally, there was some good news in the survey on business investment plans, what we call capex, as well as hiring plans. There was some moderation, but the two factors remain bright spots in the report, with upside in capex plans, and hiring plans coming back but holding at a fairly solid level. So what does this all tell us about how businesses see the road ahead? First, there's important momentum in hiring and capex. With respect to inflation, the deterioration we saw in supply conditions during the month does point to some upside risk for prices in the near term, and that was also reflected in strong upward pressure in the MSBCI pricing measures during the month. We can also see that businesses are facing increased uncertainty about the outlook. That's clear looking at the deterioration in sentiment, and that's clear looking at the pullback in business conditions expectations. So firms are watching the pace and trajectory of economic activity carefully. So it will continue to be important to watch these stories to judge what's going on at the sector level and how that's all coming together to shape the economic outlook. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

While ongoing inflation has had some positive effects, consumers continue to feel its ill effects and we are beginning to see net negatives for earnings growth as Q1 earnings season begins.-----Transcript-----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, April 18th at 3 p.m. in New York. So let's get after it. Last week, we discussed how stocks were sending different messages about growth than bonds. We laid out our case for why stocks are likely to be the most trusted on this messaging and reiterated our preference for late cycle defensives that we've held since November. This week, we lay out the case for why this earnings season may finally bring the downward revisions to forward earnings forecasts that have remained elusive thus far. While we appreciate how inflation can be good for nominal GDP and therefore revenue growth, we think the inflation we are experiencing now is no longer a net positive for earnings growth for several reasons. First, there's a latent impact of inflation on costs that are now showing up in margins. Secondarily, the spike in energy and food costs, which serve as a tax on the consumer that is already struggling with high prices. In other words, we think the positive effects of inflation on earnings growth have reached their peak, and are now more likely to be a headwind to growth, particularly as inflation forces the Fed to be increasingly bearish, which leads to another headwind - significantly higher long term interest rates. More specifically, the average 30 year fixed mortgage rate is now above 5%, which is more than 60% higher since the start of the year, and why mortgage applications are also down more than 60% from their peak last year. This hasn't gone unnoticed by the market, by the way, which has punished housing related stocks to the tune of 40% or more. Given the long tailed effect that housing has on the economy, we think this is a major headwind to economic and earnings growth more broadly. Perhaps this explains why the de-rating has been so severe in the economically sensitive areas of the market, while defensive areas have actually seen valuations expand. This suggests the market is worrying about higher rates and slower growth, even as the overall index remains expensive. This is also very much in line with our view for defensives to dominate in this late cycle environment. However, the overall index remains a bit of a mystery, with the price earnings multiple down only 11% in the face of much higher interest rates. We chalk this up to the incredibly strong flows into equities from asset owners, which include retail, pension funds and endowments. These investors seem to have made a decision to abandon bonds in favor of stocks, which are a much better inflation hedge. These flows are keeping the main index more expensive, thereby leaving the real message about growth at the sector level. As already suggested, we think that message is crystal clear and in line with our own view that growth is slowing and likely more than most are forecasting. Especially for 2023, when the risk of a recession is increased. With regard to that view, signs are emerging that first quarter earnings season may disappoint, particularly from a guidance and forward earnings standpoint. More specifically, earnings revisions breadth for the S&P 500 has resumed its downward trend over the past 2 weeks, and is once again approaching negative territory. This is largely being driven by declining revisions in cyclical industries where we've been more negative. These include consumer discretionary, industrials, tech hardware and semiconductors. Negative revisions are often an indication that forward earnings estimates are going to flatten out or even fall. When forward earnings fall, it's usually not good for stocks and may even break the pattern of strong inflows to equities, as investors rethink their decision to use stocks at this point as a good hedge against inflation. Bottom line, stick with more defensively oriented sectors and stocks as earnings visibility is challenged for the average company. Secondarily, wait for at least one or two rounds of earnings cuts at the S&P level before adding to broader equity risk. Thanks for listening! If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show.

While there continues to be a lot of market chatter surrounding recession risks and the U.S. Treasury yield curve, there are several key factors that make the most recent dip into inversion different. Chief Global Economist Seth Carpenter and Head of U.S. Interest Rate Strategy Guneet Dhingra discuss.-----Transcript-----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Chief Global Economist, Guneet Dhingra: and I'm Guneet Dhingra, Head of U.S. Interest Rate Strategy. Seth Carpenter: And on this episode of Thoughts on the Market, we're going to be discussing the sometimes inconsistent signals of economic recession and what investors should be watching. It's Thursday, April 14th at 10 a.m. in New York. Seth Carpenter: All right, Guneet, as I think most listeners probably know by now, there's a lot of market chatter about recession risks. However, if you look just at the hard data in the United States, I think it's clear that the U.S. economy right now is actually quite strong. If you look at the last jobs report, we had almost 450,000 new jobs created in the month of March. And between that, the strength of the economy right now and the multi-decade highs in inflation, the Federal Reserve is ready to go, starting to tighten monetary policy by raising short term interest rates and running off its balance sheet. That said, every time short term interest rates start to rise, they rise more than longer term interest rates do, and we get a flattening in the yield curve. The yield curve flattened so much recently that it actually inverted briefly where 2's were higher than 10's in yield. And as we've talked about before on this very podcast, there has been historically a signal from an inverted 2s10s curve to a recession probability, rising and rising and rising. Some of the work you've been doing recently, I think you've argued very eloquently, that this time is different. Can you walk me through why this time is different? Guneet Dhingra: Yeah, absolutely. I mean, right now you cannot have a conversation with investors without discussing yield curve inversion and the associated recession risks. So I think the way I've been framing it, this time is different because of two particular reasons that haven't been always true. The first one is the yield curve today is artificially very distorted by a multitude of factors. The number one and the most obvious one is the massive amounts of central bank bond buying from the Fed, from the ECB, from the Bank of Japan over the last few years. And so that puts a lot of flattening pressure on the curve, which makes it appear that the curve is too flat, whereas in practice it's just the residual effect of how central banks have affected the yield curve. On top of that, what's also happening is the Fed is obviously trying to address the inflation risk and they are looking to make policy restrictive in the next couple of years. So take the dot plot for instance, right, at the March meeting the Fed gave us a dot plot where the median participant expects the Fed funds rate to get to close to 3% in 2023, and the neutral rate that they see for the economy is close to 2.5%. So in essence, the Fed is telegraphing a form of inversion and ultimately the markets are mimicking what the Fed is telling them, which naturally leads to some curve inversion. So overall, I would say a combination of artificially flattening forces, a restrictive fed, just means that 2s10s curve today is not the macro signal it used to be. Seth Carpenter: Got it, got it, so that helps and that squares things, I think, with the way we on the economics team are looking at it. Because in our baseline forecast, there is not a recession in the US. But if that's right, and if we end up avoiding a recession, you've got a bunch of clients, we've got a bunch of clients who are trying to make trades in a market. What are you telling investors that they should be doing, how do you trade in an environment with an inverted curve? Guneet Dhingra: Right. So I think the way I talk to investors about this issue is the 2s10s curve merely inverting is not the signal used to be, which means for the yield curve to be predictive for a recession this time, the level threshold is much lower. So, for instance, you can imagine an economy where 2s10s curve inverting to minus 50 or minus 75 is the real true signal for a slowdown ahead and a recession ahead. And so what I tell investors today is do not get concerned about the yield curve getting to 0 basis points, there's a lot more room for the yield curve to keep inverting. And the target you should have for yield curve flattening trade should be more like minus 50 or minus 75.  Seth Carpenter: Got it. That that's a very big difference, very far away from where we are now. And in fact, as I mentioned earlier, the inversion that we did see was somewhat short lived and we've actually had a bit of a steepening off the back of it. I guess one question, and this is something that you've also written about is, what's driving that tightening? Is it because the Fed is going to be unwinding its balance sheet, doing so-called quantitative tightening. If the quantitative easing that they were doing flattened the curve, are you seeing the quantitative tightening is the thing that's going to be steepening the curve? Guneet Dhingra: I think instinctively, many investors think tightening is the opposite of easing, so that must mean quantitative tightening is the opposite of quantitative easing. And that's why I think a big fallacy lies in how people are simplifying the understanding of QT. I think the reality is quantitative tightening is perhaps not the perfect term for what the Fed is going to do next. The main thing to understand here is when the Fed does QE, the Fed chooses which part of the Treasury curve are they going to target, and that ultimately decides whether the curve will steepen or flatten. However, in this case, it's the U.S. Treasury, which is going to decide once the Fed stops reinvesting, how will the U.S. Treasury respond by increasing supply in the front end or the back end? And that decides whether the yield curve should steepen or flatten, quite the opposite from QE where the Fed decides. So the way I sort of summarize this to people is QT is not the opposite of QE, asset sales are. So Seth, you spent 15 years working at the Fed. Do you think the FOMC cares about an inverted curve? Seth Carpenter: I would not say that the core of the FOMC cares about an inverted curve the same way that the average market participant does. I think it's undeniable that the Fed is aware of all of the research, all of the history, all of the correlation between an inverted curve and a recession. But I don't think it's a dispositive signal. And by that what I mean is, if we got to the point where the 2s10s curve were pancake flat, it was a zero or even slightly inverted, but if at the same time we were still getting 400-500,000 nonfarm payrolls per month, I think then that signal from the yield curve would get dismissed against the evidence that the economy is very, very strong. So I think an inverted curve is the sort of thing that would cause the Fed to double check their math in some sense. But it's not going to be the signal by itself. And then, going back to what you had said earlier about the dot plot. I think that's very important. What the Fed is trying to do is engineer a so-called soft landing. That is, they are trying to tighten policy so that the economy slows a lot, but not too much. So that the inflationary pressures that we see start to abate. How would they do that? Well, in part, they'd be raising the short term interest rate. They'd be raising it above their own estimate of neutral. And as you pointed out, in their last dot plot they said they'll go up to maybe 3% before eventually coming back down to 2.5%. So achieving that soft landing is almost surely going to end up creating an inverted yield curve anyway. Guneet Dhingra: Yeah, so you talk about the Fed engineering a soft landing. Have they successfully done it in the past? And what makes you think that they can do it this time? Seth Carpenter: So two very, very important questions. The answer to the first one, have they done it in the past, is a bit in the eye of the beholder. If you listen to Chair Powell a couple of weeks ago, when he gave a speech at the National Association of Business Economists conference, he gave at least three different examples where he says historically the Fed has achieved a soft landing. If I was going to point to a soft landing, I would look at 1994 to 1995. The economy did slow pretty dramatically after the Fed had hiked rates fairly aggressively, and then the Fed paused the hiking and eventually reversed course, and the economic expansion continued. I think you could consider that to be a soft landing. The big difference this time is that this is the first rate hiking cycle since the 1970s where the Fed is actively trying to bring inflation down. Whereas the more recent cycles have been the Fed trying to keep inflation from rising above their target. So bringing it down as opposed to keeping it down are two very different things. So the way I like to think about it is the Fed's got a very difficult job. Can they do it? Yes, I absolutely think they can do it. And part of what gives me hope is the episode in late 2018 to early 2019, the last time the Fed was hiking, running off the balance sheet, raising short term interest rates. We had that period where the economy slowed, risk markets cracked. And what did the Fed do? They reversed course. Chair Powell has taken to using the word nimble a lot recently. I think if they can be that responsive to conditions, it increases the chances that they pull it off. But it's going to be difficult. Seth Carpenter: Well Guneet, I think we would both agree that we don't think an inverted yield curve is signaling a recession, but that doesn't mean that one can't happen. The world is an uncertain place, but thanks for joining us and taking the time to talk. Guneet Dhingra: Absolutely. Great speaking to you Seth. Seth Carpenter: And as a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show.

As investors continue to discuss the uncertainty surrounding the U.S. Treasury market, there may be some good news for bond holders as the year progresses.-----Transcript-----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the intersection between U.S. Public Policy and financial markets. It's Wednesday, April 13th at 10 a.m. in New York. It's been a tough year for bond investors so far. As inflation picked up, the Fed signaled its intent to hike rates rapidly. That pushed market yields for bonds higher and prices lower. And with the latest consumer price index showing prices rose 8.5% over the past year, bond investors could, understandably, be concerned that there's still more poor returns to come. But we're a bit more optimistic and see reason to think that bonds could deliver positive returns through year-end and, accordingly, play the volatility dampening role they typically play in one's multi-asset portfolio. Accordingly, our cross-asset team is no longer underweight government bonds. And our interest rate strategy team has said that the recent increase in longer maturity bond yields have put that group in overshoot territory. What's the fundamental basis for this thinking? In short, it has to do with something economists typically call demand destruction. Basically, it's the idea that as prices on a product increase, perhaps due to inflation, they reach a point where fewer consumers are willing or able to purchase that product. That in turn crimps economic growth and, accordingly, one would expect that longer maturity bond yields would rise less, or perhaps even decline, to reflect an expectation of lower inflation and economic growth down the road. And we're starting to see evidence of that demand destruction. Last week we talked about how the federal government was attempting to reduce the price of oil by selling some of its strategic petroleum reserve. But it's noteworthy that the biggest declines in the price of oil from its recent highs happened before this announcement, suggesting that the price surge at the pump was already crimping demand, resulting in prices having to come back down to put supply and demand in balance. You can also see similar evidence in the market for used cars. For example, used car dealer CarMax reported this week its biggest earnings miss in four years. Management cited car affordability as a key reason that it sold less cars year over year. So the bottom line is this: bond investors may have taken some pain this year, but that doesn't mean it's time to run from the asset class. In fact, there's good reason to believe it can deliver on its core goal for many investors, diversification in uncertain markets. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

In light of the U.S. Treasury yield curve recently inverting, many are asking if home prices will be affected and how the housing market might look going forward. Co-Heads of U.S. Securitized Product Research Jay Bacow and Jim Egan discuss.-----Transcript-----Jay Bacow: Welcome to Thoughts on the Market. I'm Jay Bacow, Co-Head of U.S. Securitized Products Research here at Morgan Stanley. Jim Egan: And I'm Jim Egan, the other Co-Head of U.S. Securitized Products Research. Jay Bacow: And on this edition of the podcast, we'll be talking about the state of the mortgage and housing market, amidst an inverted yield curve. It's Tuesday, April 12th at 11 a.m. in New York. Jay Bacow: Now, Jim, lots of people have come on to talk about curve inversion and Thoughts on the Market. But let's talk about the impact to the mortgage and housing market. Now, the big question that everybody wants to know, whether or not they own a home or they're thinking about buying one, is what does an inverted curve mean for home prices? Jim Egan: When we look back at the history of, let's use the Case-Shiller home price index, we look back at that into the 80’s, it's turned negative twice over that 35-year period. Both of those times were pretty much immediately preceded by an inverted yield curve. However, there's a lot of other instances where the yield curve has inverted and home prices have climbed right on through, sometimes they've accelerated right on through. So if we're using history as our guide, we can say that an inverted yield curve is necessary but not sufficient to bring home prices down. And the logical next question that follows from that is, well, what's the common denominator? And in our view, there's a very clear answer, and that clear answer is supply. The times when home prices fell, the supply of homes was abundant. The times when home prices kept rising, we really did not have a lot of homes for sale. And when we look at the environment as we stand today, the inventory of homes for sale is at historic lows. Jay Bacow: OK, but that's the current inventory. What do you think about supply for the next year? Jim Egan: So I think there's two ways we have to think about the 12-month outlook for supply. The first is existing inventory, the second is new inventory, so building homes that come on market. Existing inventory is really driving that total number to historic lows. And we think it's just headed lower from here. One of the big reasons for that is, let's just talk about mortgage rates away from curve inversion. The significant increase we've seen in mortgage rates because of the unique construction of the mortgage market today, we think are going to bring inventories lower. And that's because an overwhelming majority of mortgage borrowers have fixed rate mortgages today, much more than in prior cycles in the past. And what that means is as rates go higher, as affordability deteriorates, which is something we've discussed in previous episodes of this podcast, that's for first time homebuyers. The current homeowner locked into those low fixed rates is not experiencing affordability pressure as mortgage rates go higher. In fact, they're probably less likely to put their home on the market. Selling their home and buying a new home would involve taking out a mortgage that might be 150 to 200 basis points higher. That can be prohibitively expensive in some instances, and so you actually get an environment where supply gets tighter and tighter, which could be supporting home prices. Now the other side of the equation is new homes. If existing inventory is at all-time lows, if prices continue to climb like they have, that should be an environment where we'll see more building. And we do think that inventories are already primed to come on the market over the next year because of the fact that look, we look at building permits, we look at housing starts, we look at completions, those numbers get talked about all the time when they come out monthly and they've been climbing. But they haven't been climbing all that much relative to history. What is up is kind of the interim points between those events, between housing start and completion. Units under construction is back to where we were in kind of late 2004, early 2005. Further up the chain units that have been permitted or authorized but haven't been started yet, that's starting to swell too. Now what’s currently in the pipeline isn't enough to alleviate the tight supply situation we find ourselves in. But it is enough to soften home price growth a little bit. But the real common denominator for home price growth in a curve inverted environment is that existing inventory number, which is at historic lows and continuing to go lower. Jay Bacow: All right, Jim. So mortgage rates are a lot higher, causing people to be locked in to their mortgage, and supply is low and you're saying probably going to stay that way. So what does that mean for housing activity going forward? Jim Egan: We think sales are going to fall. Housing sales normally fall either while the curve is inverted or shortly after the curve inverts, this time is no different. When we look at the impact that the incredible decrease in affordability that we've seen over the past 6 months, over the past 12 months, that also normally leads to sales volume slowing 6 months forward and 12 months forward. We've already started to see it. Existing home sales are starting to turn negative on a year over year basis, pending home sales are negative, purchase applications have decoupled even more than those statistics. So the ingredients for that decline in sales volumes that typically follow a curve inversion, they're already in place. We think that existing home sales have already peaked for at least the next year. But Jay, if we think existing home sales are going to fall, then that would mean fewer mortgages and fewer mortgages would mean less supply for mortgage-backed securities. Now that would be a good thing, right? Jay Bacow: Yeah, look, it's not advanced research to say that less supply is good for a market, and we think that's absolutely the case here. But the other side of the supply is demand, and the biggest source of demand, the largest holder of mortgages, is domestic banks. And domestic banks have a problem in an inverted yield curve that the incremental spread that they pick up to own mortgages versus their deposits is just going to be lower in an inverted yield curve. When we look at the data historically, we see that strong statistical correlation. That as the curve flattens, bank demand goes lower. It's also exacerbated by the fact that a lot of the mortgages that banks own are in their hold to maturity portfolios, over a trillion dollars. And those bonds yield less than where we project fed funds to be at the end of the year. So when we think about the demand for mortgages, the largest source of demand, it's going away. That's going to be a problem for mortgages. Jim Egan: OK, so the largest source of demand? Banks, they're going away. Who else is going to buy, if not the banks? Jay Bacow: Well, that's when we run into an even bigger problem. The second largest source of demand is the Fed, and the Fed has basically said in the minutes that were released last week, that they're going to be normalizing their mortgage holdings. Taking those two largest sources of demand it's likely to force money managers and overseas to end up buying mortgages, but probably at wider spreads than here. And that's why we're recommending still an underweight agency mortgages, which will cause spreads to go a little wider and maybe mortgage rates to go higher, further impacting the affordability problems that you were discussing earlier in the podcast, Jim. Jim Egan: All right Jay. Thanks for taking the time to talk today. Jay Bacow: Always great speaking with you, Jim. Jim Egan: As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show. 

Original Release on March 31st, 2022: As interest in using cryptocurrencies for transactions continues to rise for both consumers and businesses, crypto has begun a cycle of increased stability and popularity - but the question is, can this cycle continue? -----Transcript-----Welcome to Thoughts on the Market. I'm Sheena Shah, Lead Cryptocurrency Strategist for Morgan Stanley Research. Along with my colleagues bringing you a variety of perspectives, today I will be asking the question - are cryptocurrencies currency? It's Thursday, March 31st at 2:00 p.m. in London. Did you really buy that house with crypto? Or did you just sell your crypto for dollars and use dollars to buy the house? Crypto skeptics think that goods cannot be priced in cryptocurrencies like bitcoin, primarily because their price is too volatile. But at some point, if crypto begins to be used for enough purchases of everyday goods and services, prices may begin to stabilize. Increased stability will further entice consumers to use crypto, and the cycle will continue. The question has always been, will this virtuous cycle ever begin? The answer is now clear, it has already begun. Here are some examples. Firstly, paying with cryptocurrency needs to be as easy as paying with a credit or debit card today. Over 50 crypto companies and exchanges have issued their own crypto cards, and these are attached to the Visa or MasterCard payments networks, meaning they're accepted all around the world. In the last quarter of 2021, Visa said its crypto related cards handled $2.5 billion worth of payments. Now that may sound small, at less than 1% of all Visa's transactions, but it is growing quickly. The difficulty in increasing crypto adoption is getting the merchant to accept crypto. It needs to be easy and cheap, which is something lots of new crypto companies and products are trying to achieve. Secondly, many would argue that something can only be a currency if you can pay your taxes with it. Even that is changing today. Over the past year, local and some national governments have introduced or proposed laws that will allow its residents to use cryptocurrency to pay their taxes. El Salvador famously made bitcoin legal tender in its country in 2021. In the past week, Rio de Janeiro announced it will become the first city in Brazil to allow cryptocurrency payments for taxes starting next year. It isn't just emerging economies, though, that are trying to attract global crypto investors. The city of Lugano in Switzerland has teamed up with Tether, the creator of the largest stablecoin - a type of cryptocurrency that's kept stable versus the U.S. dollar, to make bitcoin and two other cryptocurrencies de facto legal tender. In the U.S., Colorado is hoping to become the first state to accept crypto for taxes later in the year, and Florida's governor is investigating the logistics of doing the same. Both these proposals may be difficult to put into law in the end, as the U.S. constitution doesn't allow individual states to create their own legal tender, but it hasn't stopped these proposals and more from coming in. In both these examples, the receiver of the crypto typically immediately converts to fiat currency, like U.S. dollars, through an intermediary service provider. So let's come back to our original question - did you really buy that house with crypto? In February, a house in Florida was sold for 210 Ether, the second largest crypto, or the equivalent of over $650,000 dollars. Interestingly, the seller received the ether but didn't liquidate into U.S. dollars soon afterwards due to market volatility, because the value of ether in U.S. dollars fell by around 10%. Consumers and businesses are increasingly wanting to transact in cryptocurrency. Maybe most are simply wanting to trade the value of the asset, but as it becomes easier to transact in crypto and legal structures are defined, cryptocurrencies could start to become currency. The question is, will the virtuous cycle continue or be broken? Cryptocurrencies are beginning the long journey of challenging U.S. dollar primacy, and the president's recent executive order on digital assets shows little sign of regulators getting in their way for now. Thanks for listening. If you enjoy Thoughts on the Market, share this and other episodes with a friend or colleague today.  

Since the Fed’s first rate hike and the inversion of the U.S. Treasury yield curve, the outlook on U.S. government bonds has changed, leading to a new take on U.S. Bonds.-----Transcript-----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, April 8th at 2:00 p.m. in London. We've made a key change in our strategic cross-asset allocations, closing our underweight to government bonds and are overweight in cash. We did this via U.S. Treasuries. This is a big debate among investors, many of whom are underweight bonds and questioning when to buy them back. There are a couple of reasons why we made this change. First, U.S. 10 year Treasury yields are now above the 2.6% year-end yield target of Morgan Stanley's U.S. interest rate strategists, meaning our forecast for U.S. bond returns are looking better on a cross asset basis. These forecasts should reflect the impact and the uncertainty of higher inflation, quantitative tightening and the growth outlook. Second, another part of our asset allocation framework is asking what economic indicators say about future cross asset performance. On these measures the outlook for U.S. bonds is also improving. For example, bonds tend to do better on a cross asset basis after the yield curve inverts, which recently happened. Another reason we were underweight bonds is that they often underperform other asset classes during the expansion phase of our cycle indicator, a tool we've developed within Morgan Stanley research to measure the ebb and flow of the economic cycle. But this underperformance starts to shift and stop when this indicator gets very extended, and on its current measures, well, it's very extended. Third, while this change was made with a 12 month horizon in mind, we could see some reasons to take action now rather than wait. Recently, cyclical stocks have been sharply underperforming defensive stocks, and that usually coincides with unusually good bond market performance as investors worry about growth. But recently, bonds have been underperforming, even as defensive stocks have worked. That divergence is unusual, but could normalize. We also have an important release of U.S. Consumer Price Inflation next week. While a peak in inflation has so far been elusive, Morgan Stanley's economists believe it may arrive with next week's number. Of course, there are many risks to adding back to bonds at the current juncture. One of those risks is that the U.S. Federal Reserve remains hawkish, and committed to a large number of rate hikes over the next 12 months. While that is certainly possible, the market is now expecting a faster rate hiking path, reducing the chance of a Federal Reserve surprise. To raise our weight of U.S. bonds back to neutral, we are closing or overweight to cash. Cash has performed well year to date, as many other asset classes have seen price declines. But this outperformance is unusual and warrants a more balanced approach for the time being. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts or wherever you listen, and leave us a review. We'd love to hear from you.

As the European Central Bank prepares to meet, the war in Ukraine continues to add to uncertainty, forcing investors in Europe to adjust their expectations for the remainder of the year. Chief Cross Asset Strategist Andrew Sheets and Chief Europe Economist Jens Eisenschmidt discuss.Important note regarding economic sanctions. This research references country/ies which are generally the subject of selective sanctions programs administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the European Union and/or by other countries and multi-national bodies. Any references in this report to entities, debt or equity instruments, projects or persons that may be covered by such sanctions are strictly incidental to general coverage of the issuing entity/sector as germane to its overall financial outlook, and should not be read as recommending or advising as to any investment activities in relation to such entities, instruments or projects. Users of this report are solely responsible for ensuring that their investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions. ----- Transcript -----Andrew Sheets Welcome to Thoughts on the Market. I'm Andrew Sheets, Morgan Stanley's Chief Cross Asset Strategist.Jens Eisenschmidt And I'm Jens Eisenschmidt. Morgan Stanley's Chief Europe Economist.Andrew Sheets And today on the podcast we'll be talking about the outlook for Europe's economy amid possible rate hikes, business reopenings and the war in Ukraine. It's Thursday, April 7th at 3 p.m. in London.Andrew Sheets Jens, clearly we're dealing with a lot in Europe right now amid the Ukraine conflict and I want to get into that situation and the impacts on the economy. But given that the European Central Bank is meeting in just a few days and there is speculation about possible rate hikes, let's start there. Maybe you could give a bit of a background on what we expect the ECB is going to do.Jens Eisenschmidt Thanks a lot, Andrew. First of all, let me say that we don't expect any change at next week's meeting relative to what the ECB has been saying in March at their last meeting. They're essentially keeping all options open. They have started on a gradual exit from their very accommodative monetary policy. They have increased the pace of policy normalization at their last meeting, and we do not expect the ECB to change that roadmap now. Just as a reminder, the roadmap is asset purchases could end in Q3 and any interest rate hike would come sometime thereafter. And any decision on ending asset purchases and rate hikes is highly data dependent. And that really it takes us to the current situation. Inflation continues to surprise to the upside. We just had a 7.5 percentage point print in March, and this undoubtedly does increase the pressure on the ECB to act. At the same time, there are significant downside risks to the outlook for growth in the Euro area stemming essentially from the Ukraine-Russia conflict, and this puts a premium on treading very carefully with any changes to the monetary policy configuration, hence the emphasis on optionality, flexibility and gradualism by the ECB.Andrew Sheets Jens, when you talk about gradualism, that implies that the inflation that we're seeing in Europe is more temporary, is more transitory, isn't going to get out of hand. Can you talk a little bit about what is different at the moment between inflation in Europe and inflation in the U.S.?Jens Eisenschmidt I think there are a lot of technical aspects that indeed you could be looking at on that question, but I think it's sufficient for our purposes here really to focus on the key difference. In the U.S. there's a huge internal demand component to inflation. While the same is not true for the euro area, where most of the inflation, you could argue, largest part is imported through energy. Another difference is that the outlook for the economy is slightly different. While you would say that in the U.S., if you're talking about an overheated economy, you have a very tight labor market, it's very difficult to see, you know, some sort of self-correcting forces bringing down inflation, which is why the Fed is embarking on a relatively aggressive tightening cycle. Here in the euro area, there is, of course, growth we see in '22 in our base case but at the same time, we are far away from such an overheating situation and even we are here now relying increasingly on fiscal stimulus to keep the growth momentum going given the high energy prices that are coming, dampening growth. So I think the situation is fundamentally a different one.Andrew Sheets And so Jens, maybe digging more into that growth outlook. You mentioned this rise in energy prices. There is uncertainty over the war in Ukraine. And yet in your team's base case, we see GDP growth in Europe growing about 3% this year, which would be pretty good by the standards of the last decade. What's behind that overall outlook?Jens Eisenschmidt You're right. our base case has the euro area economy growing by 3% in '22 on the back of the ongoing recovery from the pandemic, 'reopening' in one word, which has lagged here relative to, say, the U.S., as well as due to the fiscal stimulus. But we see increasing headwinds emerging as you were just also referencing. We had this series of consumer confidence prints clearly affected by high inflation and the ongoing conflict, and we are watching attentively how this develops. Energy prices have skyrocketed. So, while we stick to our base call for now, we think that the balance of risks is slowly migrating to the downside. As for the ECB, the projections presented at their last meeting in March are more optimistic in terms of growth than ours. Now, clearly, if the ECB's view of the world prevails, so growth comes in better than we expect, we think the ECB will start to raise rates as early as September this year. Contrary to that, we think that incoming data will disappoint the ECB and this is why we have the first rate hike only in December. In any case, you can see the ECB is clearly on the path of policy normalization, the need for which is driven by the high inflation regime we are in and even the less favorable growth outlook won't change that fundamentally.Andrew Sheets Jens, given that we were discussing the ECB, I'd also like to talk about what higher interest rates mean in Europe. How do you think about that debate and do you see a scenario where the ECB might be quicker to take rates from negative to zero, but then pause at zero for a more extended period of time?Jens Eisenschmidt I think this is a fair question, given that the negative rate experiment, if you want to call it, is really unique in its scope in the Euro area. And there has been a lot of debate about the effect of negative rates on banks, and you can probably argue that revising or returning from negative to zero is a little bit of a different journey than just raising rates in positive territory like what the what the Fed is going to do or is about to do now. So I'd say while there are some merits in the argument that probably, you know, getting rid of negative rates in the front end will help banks and may be good for lending in some sense, I think overall, our assessment would be increasing rates is something that detracts from economic activity.Andrew Sheets So Jens, you know, you mentioned some of the risks around energy supply, and I think it's safe to say this is the single biggest area of questions for investors who are in Europe or are looking at Europe is, how would the region respond to either cutting off its imports of gas and oil from Russia voluntarily or this disruption happening involuntarily? What would a complete cut off of Russian oil and gas mean for Europe's economy? And how does somebody in your position even go about trying to model that sort of outcome?Jens Eisenschmidt So we have, of course, tried to get our head around this question and we we have published last week a note on exactly that issue. The typical approaches or the approaches that we have as economists here is really you look at the sectoral dependencies on on these flows of gas and oil, say. You make some assumptions and of course, it gives rise to ranges which are relatively wide. What we can say with certainty is that in a scenario of a complete cut off of Russian supplies in terms of oil and gas, we we are very, very likely in a recession in 22 in the euro area. And we are really talking about a significant recession risk. While only through higher energy prices, so oil going the direction of 150, but you know, other than that supply still flowing, we also see huge dampening impact on the economy with a shallow recession emerging not as bad as we would see in a total cutoff scenario. But I have to admit there's huge uncertainty.Jens Eisenschmidt But Andrew, I was going to ask you a similar question as a strategist looking at different asset classes around the world. What's your team's view on Europe?Andrew Sheets Well thanks, Jens. So I think, unfortunately, the outlook for Europe, as you mentioned, has deteriorated since the start of the year. This terrible conflict in Ukraine has introduced additional uncertainty and binary risks to Europe around energy security that are difficult for investors to price and to discount. So, we've lowered our price target for European equities, which now leaves very limited upside versus current prices. And I think the region is now less attractive than something like Japan, for example, where I think you still have some of the same positive arguments that apply to Europe. The valuations are low. The currency is weak. Investors, I do not think are overly positioned in the region, but with less risk around aggressive central bank policy and with less risk around energy security. So for those reasons, we now think Japan is going to be outperforming market on a on a global basis.Andrew Sheets So Jens, all that said, the war in Ukraine is a wild card for our forecasts. What are the developments or indicators that you and your team are going to be watching?Jens Eisenschmidt We are really dependent on what's happening in the political sphere, given that the cut off of energy supplies will be either a decision by Russia or by the EU to no longer accept delivery of any gas or oil or coal. And obviously, this is a political process for which you have many ingredients, so you would want to watch these ingredients and some of which are essentially in the conflict itself. So I think we are attentively watching the developments that the conflict is taking. And there for instance, the news flow coming out of potential war crimes that certainly has not helped the case of energy supplies flowing freely. So there is a discussion right now in the European Union to restrict import of coal. And I think it's exactly these sort of developments that you have to be watching. Another space that we attentively watch is energy markets because high energy prices are so detrimental for the growth outlook. And might remind you, we have one scenario, our so-called bear scenario, which sees energy prices almost as high as we have seen them or higher a little bit maybe as we have seen them in early March. That is a scenario which would get us very, very close to recessionary territory. So, in some sense, it's a situation where we have to watch the energy markets as much as we have to watch the political scene and see how this conflict evolves.Andrew Sheets Well, clearly a lot that we'll need to follow. Jens, thanks for taking the time to talk.Jens Eisenschmidt Great speaking with you, Andrew.Andrew Sheets And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review on Apple Podcasts and share the podcast with a friend or colleague today.

As the U.S. government attempts to combat high gas prices by drawing on its oil reserves, investors should pay attention to the impacts on the U.S. economy and consumer behavior.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, April 6th at 10 a.m. in New York.Last week President Biden announced the largest release of oil reserves in history, about 1 million barrels per day for the next 6 months from the government's Strategic Petroleum Reserve. The move is intended to put downward pressure on the price of gasoline by increasing the supply of oil, thereby relieving pressure on the American consumer from higher costs at the pump. Will it work? That remains to be seen, but investors should pay close attention, not just because it impacts their cost of driving, but also because it impacts the outlook for the U.S. economy by affecting how consumers behave.Our U.S. economics team, led by Ellen Zentner, has done some work worth highlighting here. The big takeaway is this; oil price shocks do dampen consumer activity, but not right away. The jump in oil prices seems to have to sustain itself before having a big impact. For example, consumption in real dollar terms seems to weaken after initial oil price increases, but it's not until 2 to 3 months after that shock that consumers start to buy less of other things in order to have enough money to pay the higher costs of filling up their cars. Looking at this effect on a specific product, for instance automobiles, you can see a similar pattern. Spending on cars doesn't seem to change in the first month after a price shock but drops almost 10% thereafter for 8 months.So the bottom line is this; the White House's move on releasing oil reserves has some time to play out. But if it doesn't reduce gas prices in the next couple months, then it becomes one cost pressure among several, including labor costs, that could start slowing the U.S. economy from its currently healthy pace. It's one reason our equity strategy team continues to see higher costs creating some pressure in key sectors of the stock market, notably consumer services, apparel and staples.Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

Original Release on March 30th, 2022: As the Fed kicks off a new rate hiking cycle, investors are looking back at the previous hiking cycle to ease their concerns today. Head of Public Policy Research and Municipal Strategy Michael Zezas and Global Head of Macro Strategy Matthew Hornbach discuss.-----Transcript-----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Matthew Hornbach: And I'm Matthew Hornbach, Global Head of Macro Strategy for Morgan Stanley. Michael Zezas: And today on the podcast, we'll be discussing the last Fed hiking cycle and what it might mean for investors today. It's Wednesday, March 30th at 11:00 a.m. in New York. Michael Zezas: Matt, we've recently entered a new Fed hiking cycle as the Fed deals with inflation. But it seems like clients have been focusing with you of late on the question of what drove the Fed during the last hiking cycle, where they paused their tightening and started to reverse course. Why is that something investors are focusing on right now? Matthew Hornbach: Well, Mike, investors are looking for answers about this hiking cycle, and a good place to start is the last cycle. The past week saw U.S. Treasury yields reach new highs and the Treasury curve flattened even more. Markets are now pricing Fed policy to reach a neutral setting this year of around 2.5%. The market also prices Fed policy to reach 3% next year. For context, the Fed was only able to raise its policy rate to 2.5% in the last cycle. So the fact that markets now price a higher policy rate than in the last cycle, after which the Fed ended up cutting interest rates, has people nervous. It's worth noting, though, that a 3% policy rate is still some distance below policy rates in the mid 1990s and the mid 2000s. Michael Zezas: Got it. So then, what do you think of the argument that the Fed may have over tightened in the last cycle? Matthew Hornbach: Well, instead of telling you what I think, let me tell you what FOMC participants were thinking at the time. I went back and read the minutes from the June 2019 FOMC meeting. That was the meeting before the Fed first cut rates, which they did in July. I chose to focus on that meeting because that's when several FOMC participants first projected lower policy rates. And according to the account of that decision, participants thought that a slowdown in global growth was weighing on the U.S. economy. In fact, evidence from global purchasing manager data showed that growth in emerging market and developed market economies was slowing, and was occurring well before the U.S. economy began to slow. And also, data suggested that global trade volumes were well below trend. So Mike, let me put it back to you then. It seems to me that Fed policy wasn't driving economic weakness back then, but that something else was driving this change in global economic activity. And I think, you know where I'm going with this... Michael Zezas: Yes, you're talking about the trade conflict between the U.S. and China, where from 2017 to 2019 there was a slow and then rapidly escalating series of tariff hikes between the two countries. It was a very public pattern of response and counter response, interspersed with negotiations and sharp rhetoric from both sides, eventually resulted in tariffs on hundreds of billions of dollars in traded goods. Now, those tariffs endure to this day, but the tariff hikes stopped in late 2019 after the two sides made a stopgap agreement. But even though this was just a few years ago and perhaps seems tame in comparison to the global challenges that have come up since, like the pandemic and now the Russia-Ukraine conflict, I think it's important to remember that at the time this was a big deal and created a lot of concern for companies, economists and investors. You have to remember that before 2017, the consensus in the US and most of Europe was that free trade was good, and anything that raised trade barriers was playing with fire for the economy. We'd often hear from clients that raising tariffs was just like Smoot-Hawley, the legislation in the U.S. that hiked tariffs in many textbooks credit as a key cause of the Great Depression. So, as the U.S. and China engage in their tariff escalation and in many ways demonstrate, at least on the U.S. side, that the political consensus no longer viewed low trade barriers as intrinsically good, you have corporations becoming increasingly concerned about the direction of the global economy and starting to take steps to protect themselves, like limiting capital investment to keep cash on hand. And this, of course, concerned investors and economists. Matthew Hornbach: Right. So this is more or less what the Fed suggested when it actually moved to cut its policy rate in July of 2019. The opening paragraph of the FOMC statement, in fact, suggested that U.S. labor markets remain strong and that economic activity had been rising at a moderate rate. But to your point, Mike, the statement also said that growth of business fixed investment had been soft. And in describing the motivation to cut rates, the statement pointed to implications from global developments and muted inflation pressures at home. Michael Zezas: OK, so then if it wasn't tight Fed policy, it was instead this exogenous shock, the trade conflict between the US and China. What does that tell us about how investors should look at the risks and benefits of the Fed's policy stance today? Matthew Hornbach: Well, it first tells us that policy rates near 2.5% shouldn't worry us very much. Of course, a 2.5% policy rate today may not be the same as it was in 2018 at the height of the last hiking cycle. It may be more, or it may be less restrictive, only time will tell. But we know the economy we have today is arguably stronger than it was at the end of the last hiking cycle. The unemployment rate's about the same, but the level of real gross domestic product is higher, its rate of change is higher and inflation is higher as well, both for consumer prices and for wages. All of this suggests that Fed policy could go above 2.5%, like our economists suggest it will, without causing a recession. But as the last hiking cycle shows us, we need to keep our eyes out for other risks on the horizon unrelated to Fed policy. Michael Zezas: Well, Matt, thank you for taking the time to talk with me today. Matthew Hornbach: It was great talking with you, Michael, Michael Zezas: And thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show. 

With the end of the first financial quarter of 2022 the market has begun to price in some of the continuing risks to economic growth, forcing investors to reconsider the trajectory for the rest of the year.-----Transcript-----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, April 4th, at 11:00 a.m. in New York. So let's get after it. Given how bad first quarter returns were for both stocks and bonds, most investors were probably happy to see it end. Furthermore, the rally in the second half of March made it considerably better for stocks than it was looking just a few weeks ago. In the end, though, bond returns ranked worse than stocks from a historical perspective, with Treasuries posting the worst quarter in 50 years. The tough first quarter was very much in line with our view coming into 2022. To recall, we didn't see many fat pitches given the Fed's resolve to fight the surge in inflation in the face of slowing growth. Whether it was for technical or fundamental reasons, bond and stock markets ignored this risk into year-end. Apparently, they required a more obvious signal, which appeared on January 5th with the minutes of the Fed's December meeting. From that moment, both stocks and bonds made a sharp U-turn and never really looked back for the entire first month of the year. In short, headline indices for both stocks and bonds finally adjusted to the fire part of our narrative, a risk that started to price under the surface back in November. With inflation and the Fed the number one concern during the first quarter, it makes sense that bonds would be worse than equities. It also makes sense that stocks more vulnerable to higher interest rates underperformed. As an example, the Nasdaq performance was considerably worse than both the S&P 500 and the small cap Russell 2000, a very rare occurrence over the past few years. And this is after a major rally in the past two weeks that was led by the Nasdaq. Our conclusion is that markets were preoccupied in the first quarter with the Fed's sharp pivot, more than anything else, and it played out in asset prices appropriately. Of course, the other major driver for markets in the first quarter was the war in Ukraine. While tensions had been building since late last year, it's fair to say markets had ignored that risk, too. The only difference is that the Fed's pivot was well telegraphed, while Russia's invasion was far from a sure thing and more of an unknown known to most, including us. Obviously, such an event did materially factor into the risk for the first quarter by accentuating the fire and ice by making inflation worse whilst simultaneously dampening growth prospects. It also has rattled confidence for both businesses and consumers, especially in Europe. This was not in our calculus when we made our forecast for 2022. As such, we find ourselves incrementally more negative on growth trends than we were at the end of last year. Last fall, we pushed out the timing of the ice part of our narrative to the first half of this year, when we realized that the economy still had plenty of strength left for companies to deliver on earnings growth. But now investors face multiple headwinds to growth that will be harder to ignore. These include the payback in demand from last year's fiscal stimulus, demand destruction from higher prices, food and energy price spikes from the war that serves as a tax and inventory bills that have now caught up to demand. While the employment report for March last Monday was strong once again, the Purchasing Managers Survey for Manufacturing showed a sharp deterioration in the orders component. Relative to inventories it looks even worse, with the inventory component of the index now below orders for the first time since the recovery began. Think of this ratio as the book to bill for the broader manufacturing economy. Perhaps this survey is the moment of recognition for the slowdown, much like the Fed's minutes were for inflation and Fed policy. The bottom line is that the fundamental outlook for stocks has deteriorated in our view since the end of last year. While markets have reflected some of this deterioration, we think it remains vulnerable to disappointing growth and increased risk of a recession next year. As such, we continue to recommend investors position for this late cycle setup. More specifically, that means favor defensively oriented sectors like Utilities, REITs and Healthcare, while avoiding stocks more vulnerable to a payback in consumer demand. Thanks for listening. If you enjoyed Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show. 

Investors are looking to the U.S. Treasury bond market as concerns rise around what the flattening, and potential inversion, of the yield curve might mean.-----Transcript-----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross Asset Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, April 1st at 2:00 p.m. in London. The so-called flattening and inversion of the U.S. yield curve is a dominant story in financial markets. As rates have risen, short term interest rates have risen more, meaning investors receive about the same yield on a 2 year U.S. Treasury as its 10 year version. This is unusual, and raises big questions for both bond investors and the economic outlook overall. Unsurprisingly, investors are usually paid more for investing in longer term bonds because these are generally more volatile. When that's not the case, it often means the market thinks the economy is going to be good in the near term, keeping short term central bank rates high, but possibly weaker in the longer term, which would imply lower future central bank rates and more supportive policy further out. And that feels like a pretty decent encapsulation of the current market debate. The U.S. economy is very strong at the moment, with the US unemployment rate recently falling to just 3.6%. But that strength is driving inflation and leading the Federal Reserve to raise interest rates more aggressively, rate increases that investors fear could weaken growth further out in the future. With implications like this it's no wonder that a lot of other asset classes, from credit markets, to equity markets, to commodities, really care about what the bond market is doing. And for these investors, we think there are a number of interesting implications. Let me start by saying that similar yields on 2 year and 10 year government bonds is not, in itself, a sell signal. Indeed, the last five times these rates were the same, global stocks rose by an average of about 10% over the following year. What we do see, however, is that a flat yield curve starts to support the outperformance of higher quality, more defensive assets. I try to explain this by the idea that investors do try to retain some growth in income exposure, given the strong current economic conditions, but try to move away from assets that could be much more vulnerable if growth deteriorates in the future. Specifically, when the U.S. 2 year and 10 year yields become similar, investment grade bonds start to outperform high yield bonds. Developed market stocks start to outperform emerging market stocks. And defensive sectors like health care and utilities outperform the broader market over the ensuing 12 months. Today, we think all of those strategies make sense. That's not because we necessarily think a recession is likely. Rather, we think it's a prudent reading of history in response to current bond market signals. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts or wherever you listen and leave us a review. We'd love to hear from you.

As interest in using cryptocurrencies for transactions continues to rise for both consumers and businesses, crypto has begun a cycle of increased stability and popularity - but the question is, can this cycle continue? -----Transcript-----Welcome to Thoughts on the Market. I'm Sheena Shah, Lead Cryptocurrency Strategist for Morgan Stanley Research. Along with my colleagues bringing you a variety of perspectives, today I will be asking the question - are cryptocurrencies currency? It's Thursday, March 31st at 2:00 p.m. in London. Did you really buy that house with crypto? Or did you just sell your crypto for dollars and use dollars to buy the house? Crypto skeptics think that goods cannot be priced in cryptocurrencies like bitcoin, primarily because their price is too volatile. But at some point, if crypto begins to be used for enough purchases of everyday goods and services, prices may begin to stabilize. Increased stability will further entice consumers to use crypto, and the cycle will continue. The question has always been, will this virtuous cycle ever begin? The answer is now clear, it has already begun. Here are some examples. Firstly, paying with cryptocurrency needs to be as easy as paying with a credit or debit card today. Over 50 crypto companies and exchanges have issued their own crypto cards, and these are attached to the Visa or MasterCard payments networks, meaning they're accepted all around the world. In the last quarter of 2021, Visa said its crypto related cards handled $2.5 billion worth of payments. Now that may sound small, at less than 1% of all Visa's transactions, but it is growing quickly. The difficulty in increasing crypto adoption is getting the merchant to accept crypto. It needs to be easy and cheap, which is something lots of new crypto companies and products are trying to achieve. Secondly, many would argue that something can only be a currency if you can pay your taxes with it. Even that is changing today. Over the past year, local and some national governments have introduced or proposed laws that will allow its residents to use cryptocurrency to pay their taxes. El Salvador famously made bitcoin legal tender in its country in 2021. In the past week, Rio de Janeiro announced it will become the first city in Brazil to allow cryptocurrency payments for taxes starting next year. It isn't just emerging economies, though, that are trying to attract global crypto investors. The city of Lugano in Switzerland has teamed up with Tether, the creator of the largest stablecoin - a type of cryptocurrency that's kept stable versus the U.S. dollar, to make bitcoin and two other cryptocurrencies de facto legal tender. In the U.S., Colorado is hoping to become the first state to accept crypto for taxes later in the year, and Florida's governor is investigating the logistics of doing the same. Both these proposals may be difficult to put into law in the end, as the U.S. constitution doesn't allow individual states to create their own legal tender, but it hasn't stopped these proposals and more from coming in. In both these examples, the receiver of the crypto typically immediately converts to fiat currency, like U.S. dollars, through an intermediary service provider. So let's come back to our original question - did you really buy that house with crypto? In February, a house in Florida was sold for 210 Ether, the second largest crypto, or the equivalent of over $650,000 dollars. Interestingly, the seller received the ether but didn't liquidate into U.S. dollars soon afterwards due to market volatility, because the value of ether in U.S. dollars fell by around 10%. Consumers and businesses are increasingly wanting to transact in cryptocurrency. Maybe most are simply wanting to trade the value of the asset, but as it becomes easier to transact in crypto and legal structures are defined, cryptocurrencies could start to become currency. The question is, will the virtuous cycle continue or be broken? Cryptocurrencies are beginning the long journey of challenging U.S. dollar primacy, and the president's recent executive order on digital assets shows little sign of regulators getting in their way for now. Thanks for listening. If you enjoy Thoughts on the Market, share this and other episodes with a friend or colleague today.  

As the Fed kicks off a new rate hiking cycle, investors are looking back at the previous hiking cycle to ease their concerns today. Head of Public Policy Research and Municipal Strategy Michael Zezas and Global Head of Macro Strategy Matthew Hornbach discuss.-----Transcript-----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Matthew Hornbach: And I'm Matthew Hornbach, Global Head of Macro Strategy for Morgan Stanley. Michael Zezas: And today on the podcast, we'll be discussing the last Fed hiking cycle and what it might mean for investors today. It's Wednesday, March 30th at 11:00 a.m. in New York. Michael Zezas: Matt, we've recently entered a new Fed hiking cycle as the Fed deals with inflation. But it seems like clients have been focusing with you of late on the question of what drove the Fed during the last hiking cycle, where they paused their tightening and started to reverse course. Why is that something investors are focusing on right now? Matthew Hornbach: Well, Mike, investors are looking for answers about this hiking cycle, and a good place to start is the last cycle. The past week saw U.S. Treasury yields reach new highs and the Treasury curve flattened even more. Markets are now pricing Fed policy to reach a neutral setting this year of around 2.5%. The market also prices Fed policy to reach 3% next year. For context, the Fed was only able to raise its policy rate to 2.5% in the last cycle. So the fact that markets now price a higher policy rate than in the last cycle, after which the Fed ended up cutting interest rates, has people nervous. It's worth noting, though, that a 3% policy rate is still some distance below policy rates in the mid 1990s and the mid 2000s. Michael Zezas: Got it. So then, what do you think of the argument that the Fed may have over tightened in the last cycle? Matthew Hornbach: Well, instead of telling you what I think, let me tell you what FOMC participants were thinking at the time. I went back and read the minutes from the June 2019 FOMC meeting. That was the meeting before the Fed first cut rates, which they did in July. I chose to focus on that meeting because that's when several FOMC participants first projected lower policy rates. And according to the account of that decision, participants thought that a slowdown in global growth was weighing on the U.S. economy. In fact, evidence from global purchasing manager data showed that growth in emerging market and developed market economies was slowing, and was occurring well before the U.S. economy began to slow. And also, data suggested that global trade volumes were well below trend. So Mike, let me put it back to you then. It seems to me that Fed policy wasn't driving economic weakness back then, but that something else was driving this change in global economic activity. And I think, you know where I'm going with this... Michael Zezas: Yes, you're talking about the trade conflict between the U.S. and China, where from 2017 to 2019 there was a slow and then rapidly escalating series of tariff hikes between the two countries. It was a very public pattern of response and counter response, interspersed with negotiations and sharp rhetoric from both sides, eventually resulted in tariffs on hundreds of billions of dollars in traded goods. Now, those tariffs endure to this day, but the tariff hikes stopped in late 2019 after the two sides made a stopgap agreement. But even though this was just a few years ago and perhaps seems tame in comparison to the global challenges that have come up since, like the pandemic and now the Russia-Ukraine conflict, I think it's important to remember that at the time this was a big deal and created a lot of concern for companies, economists and investors. You have to remember that before 2017, the consensus in the US and most of Europe was that free trade was good, and anything that raised trade barriers was playing with fire for the economy. We'd often hear from clients that raising tariffs was just like Smoot-Hawley, the legislation in the U.S. that hiked tariffs in many textbooks credit as a key cause of the Great Depression. So, as the U.S. and China engage in their tariff escalation and in many ways demonstrate, at least on the U.S. side, that the political consensus no longer viewed low trade barriers as intrinsically good, you have corporations becoming increasingly concerned about the direction of the global economy and starting to take steps to protect themselves, like limiting capital investment to keep cash on hand. And this, of course, concerned investors and economists. Matthew Hornbach: Right. So this is more or less what the Fed suggested when it actually moved to cut its policy rate in July of 2019. The opening paragraph of the FOMC statement, in fact, suggested that U.S. labor markets remain strong and that economic activity had been rising at a moderate rate. But to your point, Mike, the statement also said that growth of business fixed investment had been soft. And in describing the motivation to cut rates, the statement pointed to implications from global developments and muted inflation pressures at home. Michael Zezas: OK, so then if it wasn't tight Fed policy, it was instead this exogenous shock, the trade conflict between the US and China. What does that tell us about how investors should look at the risks and benefits of the Fed's policy stance today? Matthew Hornbach: Well, it first tells us that policy rates near 2.5% shouldn't worry us very much. Of course, a 2.5% policy rate today may not be the same as it was in 2018 at the height of the last hiking cycle. It may be more, or it may be less restrictive, only time will tell. But we know the economy we have today is arguably stronger than it was at the end of the last hiking cycle. The unemployment rate's about the same, but the level of real gross domestic product is higher, its rate of change is higher and inflation is higher as well, both for consumer prices and for wages. All of this suggests that Fed policy could go above 2.5%, like our economists suggest it will, without causing a recession. But as the last hiking cycle shows us, we need to keep our eyes out for other risks on the horizon unrelated to Fed policy. Michael Zezas: Well, Matt, thank you for taking the time to talk with me today. Matthew Hornbach: It was great talking with you, Michael, Michael Zezas: And thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show. 

As oil and gas prices rise, governments and investors must weigh investment in clean energy initiatives and new capacity in traditional energy commodities. Head of North American Power & Utilities and Clean Energy Research Stephen Byrd and Head of North American Oil and Gas Research Devin McDermott discuss.Important note regarding economic sanctions. This research references country/ies which are generally the subject of comprehensive or selective sanctions programs administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the European Union and/or by other countries and multi-national bodies. Any references in this report to entities, debt or equity instruments, projects or persons that may be covered by such sanctions are strictly informational, and should not be read as recommending or advising as to any investment activities in relation to such entities, instruments or projects. Users of this report are solely responsible for ensuring that their investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions.-----Transcript-----Stephen Byrd: Welcome to Thoughts on the Market. I'm Stephen Byrd, Morgan Stanley's Head of North American Power and Utilities, and Clean Energy Research. Devin McDermott: And I'm Devin McDermott, Head of Morgan Stanley's North American Oil and Gas Research. Stephen Byrd: And today on the podcast, we'll be discussing the key debate around energy security and energy transition amid the Ukraine Russia conflict. It's Tuesday, March 29th, at 9 a.m. in New York. Stephen Byrd: So, Devin, the Russia-Ukraine conflict has, among other concerns, really put a spotlight on energy supply and demand. I want to get into this perceived tension between energy security, that is making sure there's enough supply to meet demand, and the transition to clean energy. But first, maybe let's start with the backdrop. There's been a lot of discussion around higher energy prices. This is a world you live in every day, and I wondered if you could paint us a picture of both oil and natural gas supply and demand globally. Devin McDermott: Yeah, certainly, Stephen, and it's definitely been a dynamic market here over the last several years, coming out of COVID and the price declines that we saw then and the sharp recovery that we've been in now for about a year and a half across the energy commodity complex. If we start with oil first, we had record demand destruction in the second quarter of 2020 around global lockdowns, industrial activity slowing and along with that, oil prices broke negative for the first time in history. And then coming out of that, we've had the combination of a few factors that drove prices higher. The first has been demand has been on a very strong recovery path since that bottom in the second quarter of 2020, growing alongside people getting out again, aviation starting to pick up, the economy growing on the back of the stimulus that was injected over the past few years around the world, not just in the US. And then constrained supply, and that constrained supply comes from a mix of different factors, but the biggest of which is a reduction in investment around the world. The other factor is decarbonization goals, in particular with the global oil majors, which are big investors in global oil and gas capacity, and they've put their marginal dollar increasingly into low carbon initiatives, New Energy's platforms, renewables, driving decarbonization goals across their global footprint. Now, shifting over to the gas side, gas is a fascinating market. Globally, it's fairly regionally disconnected historically, but we've had this big investment over the past decade in liquefied natural gas or LNG that's really brought these regional markets together into one global picture. And we've been on, up until COVID, a declining path on prices. LNG projects take many years to build, they're expensive, they have long paybacks, and they were first to get chopped when companies cut capital budgets to preserve liquidity back in 2020, but demand was still growing through that timeframe. So it pushed us into this period of supply shortfall and higher prices. And actually, last year, on three separate occasions, we set new all time highs for global non-U.S. natural gas prices, and that recovery path and period of stronger for longer prices has persisted here into 2022. And even prior to Russia Ukraine, it was something that we thought would persist for at least the next several years. Stephen Byrd: You know, it's fascinating before the Russia-Ukraine conflict we already had, you know, tight markets, rising pricing. Now we really need to dig into the Russia-Ukraine conflict and all the impacts. Maybe let's just start Devin with, sort of, how big of a player Russia is in terms of oil and gas, and what the impact is of any current or future sanctions against Russia. Devin McDermott: Russia is one of the world's largest producers of oil and also one of the world's largest producers of natural gas. And to put some numbers around that, Russia represents about 10% of the world's oil supply, about half of that gets exported to the rest of the world. And they represent about 17% of the world's natural gas supply, about 7 of that gets exported to the rest of the world. These are big numbers. And if you look at Europe specifically, about 30% of their gas needs are coming from Russia on pipeline gas right now. So any disruptions to those flows have significant impacts to the global oil and gas market on top of this already tight backdrop. Stephen Byrd: And Devin I guess as we think about Europe, there's tremendous focus, as you point out Russia is a major player in energy and a major exporter. And I wonder if you could just talk to the current situation and what do you think would be feasible in terms of satisfying energy demand as Europe thinks about looking for other sources of energy? Devin McDermott: Yeah, it's a good question, Stephen and our European energy team has done a lot of work around this and they think that because of the events that have happened so far, not including any potential incremental sanctions or disruption of supply, that we'll lose about a million barrels a day of Russian oil here over the next several months, starting in April through the balance of this year. And again, just to put that in the context, that's about 10% of Russian supply, about 1% of the world's supply on a normalized pre-COVID basis. Now, some of the disruption in flows to Europe will be bought by other countries. You've seen India and China step in and pick up some of this Russian crude that's no longer going to Europe, but it's not going to fill the entire gap. So it leaves us tighter in the oil market than we were just a few weeks ago. On the natural gas side, it'll be a gradual pivot away from Russian pipeline gas within the European market toward a range of different things, one of which is LNG liquefied natural gas. But, as I mentioned before, that market was already in a shortfall, meaning there was not enough supply to meet demand prior to this. So this transition away from Russian gas is going to require substantial investment and take a long time, 5 to 10 years plus, to carry out. It means that these high prices that we're seeing likely have some sustainability to them. Devin McDermott: Stephen, that brings me to a question that I wanted to ask you on the clean energy side. Do you think that we might see a greater policy, and even energy consumer push, to clean energy both in the US and globally on the back of these elevated commodity prices and what's going on in Russia and Ukraine at the moment? Stephen Byrd: Yeah, Devin, we've been seeing a lot of interest among investors in exactly what is going to be the policy response both in Europe and the United States and elsewhere. And I'd say the EU has taken action already. The European Commission laid out a repower EU plan that is very aggressive in terms of additional renewables growth, additional growth in green hydrogen. We see quite a few European utilities and clean energy developers benefiting from the EU's increased emphasis and push towards more and more clean energy. And Rob Pulleyn, my colleague who covers European utilities and clean energy developers and is also a commodities strategist with respect to carbon, has been spending a lot of time on this, has laid out a suite of companies that would benefit quite significantly. There does seem to be a really big policy push in Europe. The United States is not clear. The real question is whether some version of build back better legislation will pass. We just don't know. Now, there is a reason to believe that there could be a compromise position in which some elements of a support for fossil fuel production are included, along with the whole suite of clean energy support that we already know is there. That said, it's possible that compromise simply won't be met. And in that case, we won't get any kind of additional support at the federal level. What's fascinating in the United States, though, is frankly, we don't necessarily need to see that support in order to see tremendous growth in clean energy, we are already seeing a big shift. And as we stand today, we think that clean energy in the United States will more than triple between now and 2030. It's one of the fastest growth rates globally. That is driven mostly by economics, in some cases by state policy, but mostly by economics. Devin McDermott: So, Stephen, I wanted to go back to this question on the tension between energy security and the energy transition. Is it an either or? Stephen Byrd: You know, Devin, we get asked that question a great deal, and I strongly believe the answer is no, those two ideas are not mutually exclusive. And in fact, what we're seeing is both the policy push as well as a business push in both directions. And a good example of that would be the U.S. Utilities that I cover. They are certainly very focused on deploying more renewable energy. And as a group, for example, we see that utilities will decarbonize in the United States by about 75% by 2030 off of 2005 baseline. So very aggressive decarbonization. At the same time, those utilities are very focused on ensuring grid reliability. Now, as we deploy more renewable energy, we're learning quite a few lessons. One lesson is the importance of more energy storage, so demand has been picking up a great deal for that. Another lesson we're learning is the importance of nuclear generation, we're learning that they're critical. They provide both reliability and also zero carbon energy. And in the U.S., we've had a very strong operational track record for our nuclear fleet. So we're learning lessons along the way, but what we're seeing is a push in both directions. Now, as you know, clean energy relative to the world that you live in, oil and gas, is still fairly small. It's going to take many years before clean energy really makes a meaningful impact in terms of global energy consumption. That said, for example, coal generation in places like the United States will decline over time and be replaced with mostly renewable energy, but also with some degree of natural gas generation to ensure reliability. So we're seeing really both ideas play out, and both investment theses are very rational, and we see really good opportunities on both of those ideas. Devin McDermott: And let's take it one step further and talk investment opportunities and themes on the back of this. As you think about the different subsets of clean energy and clean tech, where would you be focused for opportunities here? Stephen Byrd: You know, it's interesting. One group of stocks that we generally like are clean energy developers. And the reason we like those stocks is essentially this spread between what we're thinking of as inflationary traditional energy like oil and gas, and this deflationary dynamic of clean energy. One example is in places like California, the traditional utility costs to customers are rising very rapidly above 10% a year. If you look in the long term, the cost of our clean energy solutions are dropping anywhere from 5% a year, to 10, 15% per year. That's a tremendous economic wedge, and we think the developers will be able to essentially capture a lot of that spread. On the manufacturers side there are still some supply chain dynamics, which can cause some near-term margin compression that concerns us, in some cases. I would say another area of really interesting growth is green hydrogen, especially in Europe. A number of our companies are focused on that market as well. So those would be a couple of the buckets of opportunity that we see. Devin McDermott: Great. Stephen, thanks so much for the time today. It's really a fascinating topic and one that's unfolding right before our eyes today. Stephen Byrd: Well, it was great speaking with you, Devin. Devin McDermott: And thanks for listening. If you enjoy Thoughts on the Market, please give us a review on Apple Podcasts and share the podcast with a friend or colleague today. 

As the Fed continues down a hawkish road for 2022, investors must consider the impact of policy tightening on economic growth and equity risk premiums.-----Transcript-----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, March 28th at 11:00 a.m. in New York. So let's get after it. 2022 has been a year of extraordinary hawkishness from the Fed, and it continues to surprise on the upside with both its formal guidance and informal communications. This has led to almost weekly revisions for more Fed rate hikes from just about everyone, including our economists who now expect 50 basis point interest rate hikes in both May and June, and then 25 basis points in every meeting thereafter. The bond market has definitely gotten the message, too, with one of the sharpest rises in short term interest rates ever witnessed. Longer term rates have also adjusted as the expected terminal rate for this cycle has risen to 2.9%. The questions for equity investors now is whether they believe the Fed will actually tighten this much and what will be the impact on the economy from a growth standpoint. We have several takeaways from these recent moves. First, the Fed appears to be very committed to reducing inflation. Friday's University of Michigan Consumer Confidence Report for March confirmed that high prices are still the key reason this metric has plummeted to levels usually reserved for recessions. Second, 10 year yields are now at a level that takes the equity risk premium to its lowest level since the Great Financial Crisis. As a reminder, equity risk premium is the return and investor receives above and beyond the yield on a Treasury bond. The higher the risk, the greater the equity risk premium. In our view, it makes little sense for the equity risk premium to be so low right now, given the heightened risks to earnings growth from a rise in cost pressures, payback in demand, and a war that has structurally increased the price of food and energy. While stocks are a good hedge from higher inflation, keep in mind that inflation from food and energy is bad for most companies as it acts as a tax on consumers. Only energy and materials companies really benefit from this kind of inflation but they make up a very small slice of the index. Some may argue technology companies are less affected, but we're skeptical as they will feel it too in lower revenues if the consumer spending fades. Third, the risk from further exogenous shocks to growth are also elevated given the war in Ukraine, China's real estate stress, and ongoing battle with COVID, to name a few. This is one reason why market volatility remains so high. Importantly for investors, our work suggests the equity risk premium is also understated relative to this high market volatility. In short, equity investors are not being properly compensated for taking equity like risk at current prices. Finally, these high valuations are not isolated to just a few sectors. The lower equity risk premium is present across all sectors except energy and materials, and these are the two biggest beneficiaries of high commodity inflation. In some ways, the low equity risk premium for these sectors is simply saying the market does not believe the recent boost to earnings and cash flow is sustainable, due to either demand destruction or the eventual supply response. The bottom line is that we remain bearish on the S&P 500 index from a risk reward standpoint, particularly after the recent rally. Our year end base case target of 4400 is 4% below current levels. At the stock level, we continue to recommend investors look for stable cash flow generating companies in defensive sectors like utilities, health care, REITs and consumer staples. Thanks for listening! If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show. 

The new Fed hiking cycle has begun and with it comes expectations for faster rate hikes and quantitative tightening to address inflation, as well as questions around how and when the U.S. economy will be affected. Chief U.S. Economist Ellen Zentner and Senior U.S. Economist Robert Rosener discuss.-----Transcript-----Ellen Zentner: Welcome to Thoughts on the Market. I'm Ellen Zentner, Chief U.S. Economist for Morgan Stanley Research. Robert Rosener: And I'm Robert Rosner, Morgan Stanley's Senior U.S. Economist. Ellen Zentner: On this episode of the podcast, we'll be talking about the outlook for the U.S. economy as the Fed begins a new rate hike cycle. It's Friday, March 25th at 9:00 a.m. in New York. Ellen Zentner: So Robert, last week the U.S. Federal Reserve raised the federal funds rate a quarter of a percentage point, which is notable because it's the first interest rate hike in more than two years, and it's likely to be the first of many. Chair Powell has told us that it's unlikely to be like any prior hiking cycle, so maybe you could share our view on the pace of hikes and where and when it might peak for the cycle. Robert Rosener: Well, it certainly is starting off unlike any recent policy tightening cycle, and recent remarks from Fed policymakers have really doubled down on the message that policy tightening is likely to be front loaded. And we're now forecasting that we're likely to see an even steeper path for Fed policy tightening this year, and we think that as soon as the May meeting, we could see the Fed pick up the pace and hike interest rates by 50 basis points and follow that in June with yet another 50 basis point increase. We're expecting they'll revert back to a 25 basis point per meeting pace after that, but still that marks 225 basis points of policy tightening that we're expecting this year in our baseline outlook. Ellen Zentner: So how does Jay Powell, the chair of the FOMC, fit into this? Do you think he's about in line with this view as well? Robert Rosener: He does seem to be generally in line with this view, but he is negotiating the outlook among a committee that has a diversity of views, and we've been hearing from policy makers, a wide range of policy makers, over the last week. What's been notable is that more and more policymakers are starting to get on board the train that a faster pace of policy tightening is likely to be warranted. And that may very well include rate hikes that come in larger increments, such as 50 basis point increments, over the course of the year as policymakers seek to get monetary policy into more of a neutral setting. Ellen Zentner: So this is all because of inflation. Inflation's broad based, it's rising. I think it felt like there was a very big shift on the FOMC January/February, when the inflation data was really rocketing to new heights. So in order to bring inflation down when the Fed is hiking, how long does it take for those hikes to flow through into the economy to bring inflation down? Robert Rosener: Well, that's a really good question, and certainly that broadening that you mentioned is key. We saw a run up in inflation in the later part of last year that was driven by a few segments, particularly on the goods side. But as we moved into the end of 2021 and early 2022, what we really started to see was a broadening out of inflationary pressures and particularly a broadening into the service sectors of the economy where price pressures began to pick up more notably and began to lead the inflation data higher. Now, as we think about how monetary policy interacts with that, tighter monetary policy needs to slow growth in order to slow inflation. And typically, you would look at monetary policy and not expect it to be really materially affecting the economy for, say, a year out. Something that Chair Powell has stressed is that monetary policy transmits through financial conditions, and financial markets moved to price in a more hawkish Fed outlook as soon as the latter part of last year. Now, as those rate hikes got priced into the market, that acted to tighten financial conditions. So as Chair Powell noted in his press conference, the clock for when rate hikes start to impact the economy doesn't necessarily start on the delivery of those rate hikes. It starts when they affect financial conditions. And so we may start to see that a backdrop of tighter financial conditions begins to reduce some of the steam in the economy and reduce some of the steam in inflation as we move through the course of the year. But with headline CPI currently at around 8%, likely to march higher in the upcoming data, there's a lot of room to bring that down. So we might have to wait some time before we see material relief on inflation. Ellen Zentner: So let's talk about the balance sheet because they're not just hiking rates, right? They're going to reduce the size of their balance sheet, what we call quantitative tightening or Q.T. And so run us through our view and how the Fed's thinking about that quantitative tightening process when they're unwinding much of that four and a half trillion in asset purchases that they made during the pandemic. Robert Rosener: So the Fed has made it clear they're on track to begin winding down the size of their balance sheet, and that's a decision that we're expecting will come at the May meeting, that in very short order the Fed would begin to reduce the size of its balance sheet with caps on reinvestment and total at about $80 billion per month. And that would set roughly the monthly pace by which the balance sheet would decline, and Chair Powell has indicated that that process may take around three years to bring the balance sheet down to a size that would be consistent with a neutral balance sheet. It's going to act to tighten financial conditions in the same way or similar ways that rate hikes do, but it's a little bit less clear how those effects happen, over what time horizons they happen. So there's some uncertainty there, but it's something that the Fed wants to have running in the background, while they pursue rate hikes. Ellen Zentner: So in terms of, you know, if the balance sheet is going to be doing additional tightening, what do we think the Fed funds equivalent of that is, has Chair Powell discussed that?Robert Rosener: So when we looked at this, we looked at the effects through financial conditions. And in our estimates, the tightening of financial conditions that we would see on the back of the balance sheet reduction that we're expecting, was about the equivalent this year of one additional 25 basis point hike. Now, perhaps coincidentally, Chair Powell in his most recent remarks, also noted that the tightening of the balance sheet or the shrinking of the balance sheet this year would be about the equivalent of one rate hike. So there's some consolidation of views there that it does act to tighten. Again, there's uncertainty bands around that, but it's about the equivalent of one additional hike this year. Robert Rosener: So Ellen, we can't really talk about the Fed raising rates without thinking about the broader implications for the yield curve, and more recently the applications for yield curve inversion. For listeners who might not be familiar, that's when shorter term investments in U.S. treasuries, such as the 2-year yield, pay more than longer term treasuries, such as the 10-year yield. Historically, when we've seen that spread inverting, it's been a signal that a recession might be coming. What are you thinking about the risks that the yield curve is telling us now? And does that tell us anything about the risk of a future recession? Ellen Zentner: Well, Robert, I think it is clear that the yield curve, if we're talking about just the spread between 2-year treasuries and 10-year treasuries, is going to continue to flatten and invert. And policymakers have made it clear that because of special factors, they shouldn't be concerned this time. And when I look at factors in the economy that are typically what you would look at for signals of recession, you know, jobs, we are still creating jobs, it’s been a very steady run of about 500,000 jobs a month. We are expecting another strong print in the upcoming payroll report, that does not speak to approaching recession. When I look at retail and wholesale sales still growing, industrial production still growing, real disposable income of households still growing. Even though we're dealing with the fading of fiscal stimulus, that labor income has been very strong. So all of those traditional measures would tell you that an inverted yield curve today is not providing you a signal of approaching recession, and I think overall inversion of the yield curve has become less of a recession indicator since we have been trapped so near the zero lower bound over the last cycle and this cycle. Robert Rosener: So we talked about the Fed, we talked about the yield curve and financial conditions, but of course, there's a lot of things that the Fed has to take into account as it thinks about the outlook. And of course, we're all watching the terrible events unfolding in Ukraine. And as we think about the ripple effects on the world economy, particularly in Europe, as well as more broadly on energy security and supply and so much more. Clearly, this is an impact that's going to be affecting regions differently. But how should we think about how that's going to be felt here in the U.S. economy? And what does that mean for the Fed? Ellen Zentner: So I think first and foremost, it plays back into the inflation story. I think what we've heard from the chair is that typically they do look through food and energy price fluctuations. But in this case, where inflation is already broad based and high, they do have to act and it just puts more fuel behind the need to have a more aggressive tightening cycle. When we look at our own analysis and impact analysis that you've done for us on the team, the impact on inflation from increases in energy prices is four times that of the impact on GDP growth. In the U.S. we're just about energy independent. And so it's become more ambiguous as whether higher energy prices are really a negative for the U.S. economy. But the way I would look at this is, it will slow activity in parts of the economy, we've taken our own growth forecasts down to reflect that forecast for GDP, and it will disproportionately affect lower income households. Where food prices, energy prices and just general inflation impacts them to a much greater degree than upper income households. So overall, aggregate spending will look quite strong in the U.S. economy, but for the lower income groups, I think it's going to be lagging behind. But certainly you mentioned Europe, you know, Europe is facing possible recession if gas supplies are cut off, which is a very real risk. But it's just not going to be as big of an impact to the U.S. economy, where we'll feel it is if other parts of the globe are deteriorating it can hamper financial conditions here, and that's something that the Fed will be watching closely. And so, Robert, you and I will be watching these developments closely as well. We've made it clear and the Fed has made it clear that it's on the path higher for interest rates, but the outlook always comes with risks and we'll be reporting back on those risks in future podcasts. So, thanks for taking the time to talk, Robert. Robert Rosener: Great talking with you, Ellen. Ellen Zentner: And thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

While the possibility of a yield curve inversion in the U.S. has news outlets and investors wondering if a recession is on the way, there’s more to the story that should put minds at ease.-----Transcript-----Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about global macro trends and how investors can interpret these trends for rates and currency markets. It's Thursday, March 24th at noon in New York. For most investors, most of the time, the general level of U.S. Treasury yields is more important than the differences between yields on shorter maturity bonds and those on longer maturity bonds. The most widely quoted Treasury yield is usually the one investors earn by lending their money to the government for 10 years. But there are times when the difference between yields on, say, treasuries that mature in 2 years and those that mature in 10 years make the news. And this is one of those times. These yields are tracked over time on a visual representation we call the yield curve. And at some point soon, we expect the yields on 2 year treasuries to be higher than those on 10 year treasuries. This is what we call a 2s10s yield curve inversion. The reason why yield curve inversion makes the news is because, in the past, yield curve inversion has preceded recessions in the U.S. economy. Still, there are two points to make about the relationship between the yield curve and recessions, both of which should put investors' minds at ease. First, using history as a guide, inverted 2s10s yield curves preceded recessions by almost two years on average. While time flies, two years is plenty of time for people to prepare for harder times ahead. Second, despite popular belief, yield curve inversions don't necessarily cause recessions, and neither does significantly tighter fed monetary policy - which also can cause yield curves to invert. In his recent speech, Fed Chair Powell highlighted 1965, 1984, and 1994 as times when the Fed raised the federal funds rate significantly without causing a recession. Another important point is that the yield curve can flatten for reasons unrelated to tighter Fed policy. For example, between 2004 and 2006, the yield curve flattened by much more than Fed policy alone would have suggested. The curve flattening during this period baffled the Fed and investors alike. Former Fed Chair Greenspan labeled the episode "a conundrum" at the time. So what caused the yield curve to flatten so much during that period? Former Fed Chair Bernanke suggested it was a global savings glut. Overseas investors purchased an increasingly larger share of the Treasury market than they had ever bought before. Fast forward to today and the demand from overseas investors has been replaced by demand from the Fed. In fact, the Fed owns almost 30% of outstanding Treasury notes and bonds, which goes some way to explaining how flat the yield curve is today. And, to be clear, fed ownership of those bonds also isn't a reason to think recession is right around the corner. Another common concern about a flat yield curve is that it will cause banks to stop lending. And without banks lending into the real economy, recession might loom large. But our U.S. Bank Equity Research Team is less concerned. Their work shows that bank loans grew during the prior 11 periods of yield curve inversion since 1969. While they found some moderation in loan growth, it was modest. And this year, despite our forecast for an inverted yield curve. The project loans to grow 7% over the year, after loans shrank last year, when the yield curve was actually much steeper. So in the end, while we think the yield curve will invert this year, we don't think investors should worry too much about a looming recession - even if the news does. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show.

While the demand for Environmental, Social, and Governance investing has been growing primarily in Europe, a potential new regulatory policy may drive new interest and opportunity for U.S. investors.-----Transcript-----Welcome the Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, March 23rd at 10 a.m. in New York. Taking a break from specific market impacts for the moment, we want to focus on the growth of a new market for investors - the market for ESG investing, which a new regulatory policy may help nudge into the mainstream in the U.S. As you may already know, ESG stands for Environmental, Social and Governance, three factors that represent a measurement of how socially conscious the investment is. The demand for this style of investing has grown substantially in recent years. For example, per our sustainability research team, there are about 2 trillion dollars of dedicated ESG assets under management globally. But about 85% of that is in Europe, showing how U.S. investors have been relatively slower to adopt such strategies. Yet earlier this week, the SEC proposed a new rule that could create new incentives for U.S. investors to adopt ESG strategies. This rule would require companies to provide disclosures about their emissions, as well as governance and strategy for dealing with climate related risks. As our sustainability research team noted in a report this week, having a standard for disclosure can help build the ESG market by giving investors a common template for understanding ESG impacts. That differs from the current state of play, where many companies do disclose on climate related issues, but to different levels and by differing standards, making analytical comparisons difficult. We should note, though, that this is just a first step toward a regulation that could boost the size of the ESG market. Regulatory rules tend to take a long time to finalize and implement. According to Government Accountability Office case studies, it can take anywhere from six months to five years, as proposed rules navigate a series of comment periods, judicial challenges and revisions. So we'll track the process here and report back when there's more to know. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

While the cost of shelter has risen quickly, the measure of housing inflation has been slow to catch up, creating challenges for renters, homeowners and the Fed.-----Transcript-----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Tuesday, March 22nd at 2:00 p.m. in London. Our base case at Morgan Stanley is that the U.S. economy sees solid growth over the next two years, with inflation moderating but still being somewhat higher than the Federal Reserve would like. We think this means the Fed raises interest rates modestly more than the market expects, flattening the US yield curve. But what are the risks to this view? Specifically, what could cause inflation to be much higher, for much longer, putting the Federal Reserve in a more pressing bind? I want to focus here on core inflation as central banks have more leeway to look through volatile food or energy prices. This is a story about shelter. The cost of shelter represents about 1/3 of U.S. core consumer price inflation. That makes sense. For most Americans, where you live is your largest expense, whether you rent or pay a mortgage. The CPI measure of inflation assumes that the cost of renting has risen 4.5% in the last year. Now, if that sounds low, you're not alone. At the publicly traded apartment companies covered by my colleague Richard Hill, a Morgan Stanley real estate analyst, rents have risen 10% or more year-over-year. There are reasons that the official CPI number is lower. For one, not everyone renews their lease at the same time. But with a strong labor market and limited supply, the case for higher rents going forward looks strong. Owner occupied housing is even more interesting. Since 2016, U.S. home prices have risen about 56%. But the cost of a house that goes into the CPI inflation calculation, known as "owners’ equivalent rent", has risen only 21%. That's a 35% gap between actual home prices and where the inflation calculation sits. This is a potential problem. Even if home prices stop going up, the official measure of housing inflation could keep rising at a healthy clip to simply catch up to where home prices already are. And given high demand, low supply, and still low interest rates, home prices may keep going up, meaning there's even more catching up to do from the official inflation measure. Higher shelter costs are also a challenge because they're very hard for the Federal Reserve to address. Raising interest rates, which is the usual strategy to combat inflation, makes buying a house less attractive relative to renting. Which means even more upward pressure on rental demand and even higher rents. And higher interest rates make building homes more costly to finance, further restricting housing supply and raising home prices.Housing has long been a very important sector for the economy and financial markets. Over the next 12 months, expect it to be central to the inflation debate as well. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts or wherever you listen, and leave us a review. We'd love to hear from you. 

This year is validating our call for a shorter but hotter economic cycle. As the indicators begin to point to a late-cycle environment, here’s how investors can navigate the change.-----Transcript-----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, March 21st at 1:00 p.m. in New York. So let's get after it. A year ago, we published a joint note with our Economics and Cross Asset Strategy teams arguing this cycle would run hotter but shorter than the prior three. Our view was based on the speed and strength of the rebound from the 2020 recession, the return of inflation after a multi-decade absence and an earlier than expected pivot to a more hawkish Fed policy. Developments over the past year support this call - US GDP and earnings have surged past prior cycle peaks and are now decelerating sharply, inflation is running at a 40-year high and the Fed has executed the sharpest pivot in policy we've ever witnessed. Meanwhile, just 22 months after the end of the last recession, our Cross Asset team's 'U.S. Cycle' model is already approaching prior peaks. This indicator aggregates key cyclical data to help signal where we are in the economic cycle and where headwinds or tailwinds exist for different parts of the market.With regard to factors that affect U.S. equities the most, earnings, sales and margins have also surged past prior cycle highs. In fact, earnings recovered to the prior cycle peak in just 16 months, the fastest rebound going back 40 years. The early to mid-cycle benefits of positive operating leverage have come and gone, and U.S. corporates now face decelerating sales growth coupled with higher costs. As such, our leading earnings model is pointing to a steep deceleration in earnings growth over the coming months. These negative earnings revisions are being driven by cyclicals and economically sensitive sectors - a setup that looks increasingly late cycle. Another key input to the shorter cycle view was our analysis of the 1940s as a good historical parallel. Specifically, excess household savings unleashed on an economy constrained by supply set the stage for breakout inflation both then and now. Developments since we published our report in March of last year continue to support this historical analog. Inflation has surged, forcing the Fed to raise interest rates aggressively in a credible effort to restore price stability. Assuming the comparison holds, the next move would be a slowdown and ultimately a much shorter cycle.Further analysis of the postwar evolution of the cycle reveals another compelling similarity to the current post-COVID phase - unintended inventory build from over ordering to meet an excessive pull forward of demand. In short, we think the risk of an inventory glut is growing this year in many consumer goods, particularly in areas of the economy that experienced well above trend demand. Consumer discretionary and technology goods stand out in our view. Now, with the Fed raising rates this past week and communicating a very hawkish tightening path over the next year, our rate strategists are looking for an inversion of the yield curve in the second quarter. While curve inversion does not guarantee a recession, it does support our view for decelerating earnings growth and would be one more piece of evidence that says it's late cycle. In terms of our U.S. strategy recommendations, we continue to lean defensive and focus on companies with operational efficiency with high cash flow generation. This leads us to more defensive names with more durable earnings profiles that are also attractively priced. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show.

The U.S. Federal Reserve recently enacted its first interest rate hike in two years, but there is still more work to be done to counteract rising inflation and markets are watching closely.-----Transcript-----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross Asset Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, March 18th at 2:00 p.m. in London. On Wednesday, the U.S. Federal Reserve raised interest rates for the first time in two years. This is notable because of how much time has passed since the Fed last took action. It's notable because of how low interest rates still are, relative to inflation. And it's notable because rate increases, and decreases, by the Fed tend to lump together. Once the Fed starts raising or lowering rates, history says that it tends to keep doing so. Now, one question looming over the Fed's action this week could be paraphrased as, "what took you so long?" Since the Fed cut rates to zero in March of 2020, the U.S. stock market is 77% higher, U.S. home prices are 35% higher, and the U.S. economy has added over 5.7 million new jobs. Core consumer price inflation, excluding volatile food and energy prices, has risen 6.4% in the last year, indicative of demand for goods outpacing the ability of the economy to supply them at current prices, exactly what a hot economy implies. The reason the Fed waited was the genuine uncertainty around the impact of COVID on the economy, and the risk that new variants would evade vaccines or dash consumer confidence. But every decision has tradeoffs. Easy Fed policy has helped the U.S. economy recover unusually quickly, but that quick recovery now means the Fed has a lot more to do to catch up. Specifically, we think the Fed will need to raise the upper band of its policy rate, currently at 0.5%, to about 2.75% by the end of next year. This is more than the market currently expects, and we think outcomes here are skewed to the upside, with it more likely that rates end up higher than lower. My colleagues in U.S. interest rate strategy believe that this should cause U.S. rates to rise further, with 2 year bond yields rising most and ultimately moving higher than 10 year bond yields. It's rare for 2 year bonds to yield more than their 10 year counterpart, a so-called curve inversion. Nevertheless, this is what we expect. Now, one counter to this Fed outlook is that the U.S. economy simply can't handle higher rates, and that will force the Fed to stop hiking earlier. But we disagree. With a large share of household debt in the U.S. in the form of 30 year fixed rate mortgages, the impact of higher rates may actually be more muted than in the past, as the cost of servicing this debt won't change even as the Fed raises rates. Higher short-term interest rates and an inverted yield curve are one specific implication of these expectations. More broadly, inverted yield curves have historically been key signposts for increased risk of recession. While we think a recession is unlikely, the market could still worry about it, supporting U.S. defensive equities and investment grade over high yield credit. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts or wherever you listen, and leave us a review. We'd love to hear from you.

The U.S. and its allies have frozen the Central Bank of Russia’s foreign currency reserves, leading to questions about the safety of FX assets more broadly and the centrality of the U.S. dollar to the international financial system.Important note regarding economic sanctions. This research references country/ies which are generally the subject of comprehensive or selective sanctions programs administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the European Union and/or by other countries and multi-national bodies. Any references in this report to entities, debt or equity instruments, projects or persons that may be covered by such sanctions are strictly informational, and should not be read as recommending or advising as to any investment activities in relation to such entities, instruments or projects. Users of this report are solely responsible for ensuring that their investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions.-----Transcript-----Welcome to Thoughts on the Market. I'm James Lord, Head of FX and EM Strategy for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about global macro trends and how investors can interpret these trends for currency markets. It's Thursday, March 17th at 3:00 p.m. in London. Ever since the U.S. and its allies announced their intention to freeze the Central Bank of Russia's foreign exchange, or FX, reserves, market practitioners have been quick to argue that this would likely accelerate a shift away from a U.S. dollar based international financial system. It is easy to understand why. Other central banks may now worry that their FX reserves are not as safe as they once thought, and start to diversify away from the dollar. Yet, despite frequent calls for the end of the dollar based international financial system over the last couple of decades, the dollar remains overwhelmingly the world's dominant reserve currency and preeminent safe haven asset. But could sanctioning the currency reserves of a central bank the size of Russia's be a tipping point? Well, let's dig into that. The willingness of U.S. authorities to freeze the supposedly liquid, safe and accessible deposits and securities of a foreign state certainly raises many questions for reserve managers, sovereign wealth funds and perhaps even some private investors. One is likely to be: Could my assets be frozen too? It's an important question, but we need to remember that the U.S. is not acting alone with these actions. Europe, Canada, the UK and Japan have all joined in freezing the central bank of Russia's reserve assets. So, an equally valid question is: Could any foreign authority potentially freeze my assets? If the answer is yes, that likely calls into question the idea of a risk free asset that underpins central bank FX reserves in general, and not just specifically for the dollar and U.S. government backed securities. If that's the case, what could be the implications? Let me walk you through three. First would be identifying the safest asset. Reserve managers and sovereign wealth fund investors will need to take a view on where they can find the safest assets and not just safe assets, as the concept of the latter may have been seriously impaired. And in fact, the dollar and U.S. Government backed securities may still be the safest assets since the latest sanctions against the central Bank of Russia involve a broad range of government authorities acting in concert. A second implication is that political alliances could be key. These sanctions demonstrate that international relations between different states may play an important role in the safety of reserve assets. While the dollar might be a safe asset for strong allies of the U.S., its adversaries could see things differently. To put the dollar's dominance in the international financial system at serious risk, would-be challenges of the system would need to build strategic alliances with other large economies. Finally, is the on shoring of foreign exchange assets. Recent sanctions have crystallized the fact that there is a big difference between an FX deposit under the jurisdiction of a foreign government and one that you own on your home ground. While both might be considered cash, they are not equivalent in terms of accessibility or safety. So another upshot might be that reserve managers bring their foreign exchange assets onshore. One way of doing this is to buy physical gold and store it safely within the home jurisdiction. The same could be said of other FX assets, as reserve managers will certainly have access to printed U.S. dollars, Euros or Chinese Yuan banknotes if they are stored in vaults at home, though there could be practical challenges in making large transactions in that scenario. Bottom line, though, while these are all important notions to consider, in our view recent actions do not undermine the dollar as the safest global reserve asset, and it's likely to remain the dominant global currency for the foreseeable future. Thanks for listening! As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show. 

As oil prices rise across the globe, investors wonder if governments will continue to incentivize clean energy development or pivot to greater investment in traditional fossil fuels.-----Transcript-----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, March 16th, at 10:00 a.m. in New York. With the conflict in Ukraine ongoing, many investors continue to ask questions about the U.S. and European policy response to the rising price of oil. In particular, many ask if governments will continue down the path of incentivizing clean energy development, or pivot to greater exploration of traditional fossil fuels. But as my colleague Stephen Byrd, who heads North America Power Utilities and Clean Energy Research, pointed out in a recent report, this is a false choice, and it's one that many policymakers are likely to reject in favor of embracing an "all of the above" strategy. It's important to understand that focusing only on traditional energy sources wouldn't solve the problem in the near term. For example, switching on any dormant U.S. oil production facilities would only replace a fraction of the oil that Russia produces, so fresh explorations ramp up production would be needed, and that could take a few years. The same could be said about natural gas. The U.S. Has the spare capacity to backfill with Europe imports from Russia, but Europe mostly doesn't have the facilities to accept liquefied natural gas shipped overseas from America. Germany has announced plans to build two liquefied natural gas terminals, but that could take years to complete. The point is, focusing on traditional energy sources alone is no quick fix for high energy prices and energy independence, and therefore there's little opportunity cost in also focusing on renewable energy development. For that reason, we think western governments are likely to include both clean energy and traditional investments in their strategy going forward. You see this echoed in the statements of policymakers, such as U.S. Climate Envoy John Kerry's recent comments that the US is committed to an "all of the above" energy policy. So what does it mean for investors? In short, expect energy companies of all types to have business to do with governments in the coming years. That includes traditional oil exploration companies, but also clean tech companies, as market beneficiaries. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show. 

As global markets face a rise in commodity prices due to geopolitical conflict, investors in Asia and EM equities will want to keep an eye on the divergence between commodity exporters and importers.Important note regarding economic sanctions. This research references country/ies which are generally the subject of comprehensive or selective sanctions programs administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the European Union and/or by other countries and multi-national bodies. Any references in this report to entities, debt or equity instruments, projects or persons that may be covered by such sanctions are strictly informational, and should not be read as recommending or advising as to any investment activities in relation to such entities, instruments or projects. Users of this report are solely responsible for ensuring that their investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions.-----Transcript-----Welcome to Thoughts on the Market. I'm Jonathan Garner, Chief Asia and Emerging Market Equity Strategist for Morgan Stanley Research. Along with my colleagues bringing you a variety of perspectives, I'll be talking about geopolitical risk, commodity exposure, and how they affect our views on Asia and EM Equities. It's Tuesday, March the 15th at 8:00 p.m. in Hong Kong. The Russia Ukraine conflict is having a profound impact on the investment world in multiple dimensions. In this episode we focus on just two, commodity prices and geopolitical alignment, and what they mean for investors in Asia and emerging market equities. The major sanctions imposed by the U.S., U.K., European Union and their allies are focused not only on isolating Russia financially but depriving it, in some instances overnight and in others more gradually, of the ability to export its commodities. And Russia is a major producer of oil, natural gas, food and precious metals and rare minerals. Ukraine is also a major food exporter. In our coverage there's a sharp divergence between economies which are major commodity importers, and are therefore suffering a negative terms of trade shock as commodity prices rise, and those which are exporters and hence benefit. Major importers include Korea, Taiwan, China and India, all with more than a 5% of GDP commodity trade deficit. Meanwhile, Australia, Mexico, Brazil, Saudi Arabia, UAE and South Africa are all significant commodity exporters and stand to benefit. Australia's overall commodity trade surplus is the largest at 12% of GDP, and that is before the recent gains in price for almost everything which Australia produces and exports. Meanwhile, on the geopolitical risk front, we've been monitoring the pattern of voting on Russia's actions at the United Nations, where there have been both UN Security Council and General Assembly votes. Although none of the countries we cover actually voted with Russia on either occasion, two major countries, China and India, did abstain twice. South Africa abstained at the General Assembly. The UAE abstained in the Security Council, but then voted with the US and Europe in the General Assembly vote. This pattern of voting, in our mind, may have an impact in raising the equity risk premium, i.e. lowering the valuation, for China and to a lesser extent India in the current environment. All taken together, we are shifting exposure further towards commodity exporting markets and in particular those such as Australia, which are also geopolitically aligned with the major sources of global investor flows. We lowered our bear-case scenario values for China further recently and are turning incrementally more cautious on India. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today. 

This week the market turns to the Federal Reserve as it eyes challenges to growth while remaining committed to combating high inflation with its first rate hike of the tightening cycle.-----Transcript-----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, March 14th at 11:00 a.m. in New York. So let's get after it. With all eyes on the Russian invasion of Ukraine, markets are likely to turn back towards the Fed this week as it embarks upon the first tightening of the cycle and the first rate hike since 2018. This follows a period of perhaps the most accommodative monetary support ever provided by the Federal Reserve, an extraordinary statement unto itself given the Fed's actions over the past few decades. When it comes to measuring how accommodative Fed policy is at the moment, we look at the Fed funds rate minus inflation, or the real short-term borrowing rate. Using this measure tells us that fed accommodation has been in a steady downtrend since the early 1980s. In fact, the real Fed funds rate has been in a remarkably well-defined channel for this entire period. Second, after reaching the low end of the channel in record time during the COVID recession, the real Fed funds rate has turned higher- albeit barely. That low was in November of last year, when Fed Chair Jerome Powell was renominated by President Biden, and he made it clear that the Fed was going to pivot hard on policy. It was no coincidence that this is exactly when expensive growth stocks topped and began what has been one of the largest and most persistent drawdowns in growth stocks ever witnessed. Finally, based on how low the Fed funds rate remains, the Fed has a lot of wood to chop to get this rate back to a more normal level. Furthermore, if Powell is truly committed to making monetary policy restrictive to fight inflation, expensive growth stocks remain vulnerable, in our view. Currently, the bond market is pricing in eight 25 basis point hikes over the next 12 months. If the Fed is successful in executing this expected path, it will have achieved the soft landing it seeks. Inflation will come down as the economy remains in expansion. However, we think that's a big if at this point. First, growth is already at risk as we enter 2022 due to the payback in demand lapsing government transfers, generationally high inflation and rising inventories at the wrong time. Now, the conflict in Ukraine is leading to even higher commodity prices, while the growth outlook deteriorates further. While we are likely to avoid an economic recession in the U.S., we can't say the same for earnings. We think the Fed will keep a watchful eye on the data, but air on the side of hawkishness given the state of inflation. This likely means a collision with equity markets this spring, with valuations overshooting to the downside. While short-term interest rates are still at zero, longer term treasury yields are now approaching a level that may offer some value for asset owners, even if they are unattractive on a standalone basis. This is especially true if one is now more concerned about growth like we are. Let's assume we're wrong about growth slowing, under such a view it's unlikely the Fed hikes faster than what is already priced into the bond market. Therefore, longer term rates are unlikely to raise much more by the time we know the answer to this growth question. Conversely, if we're right about growth slowing more than expected, longer term rates likely have room to fall and provide a cushion to equity portfolios. High quality investment grade credit may also offer some ballast given the significant correction in both rates and spreads. For equity investments, we continue to favor defensive quality stocks as well as companies with high operational efficiency. Yes, boring is still beautiful. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show.

With multiple countries now imposing sanctions, investors in Russian government bonds and currencies will need to consider their options as the risk of default rises.Important note regarding economic sanctions. This research references country/ies which are generally the subject of comprehensive or selective sanctions programs administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the European Union and/or by other countries and multi-national bodies. Any references in this report to entities, debt or equity instruments, projects or persons that may be covered by such sanctions are strictly informational, and should not be read as recommending or advising as to any investment activities in relation to such entities, instruments or projects. Users of this report are solely responsible for ensuring that their investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions.-----Transcript-----James Lord: Welcome to Thoughts on the Market. I'm James Lord, Head of FX and EM strategy. Simon Waever: And I'm Simon Waever, Global Head of Sovereign Credit Strategy. James Lord: And on this special episode of Thoughts on the Market, we'll be discussing the impact of recent sanctions on Russia for bonds and currency markets. It's Friday, March 11th at 1:00 p.m. in London. Simon Waever: and 8:00 a.m. in New York. James Lord: So, Simon, we've all been watching the recent events in Ukraine, which are truly tragic, and I think we've all been very saddened by everything that's happened. And it certainly feels a bit trite to be talking about the market implications of everything. But at the same time, there are huge economic and financial consequences from this invasion, and it has big implications for the whole world. So today, I think it would be great if we can provide a little bit of clarity on the impact for emerging markets. Simon, I want to start with Russia itself. The strong sanctions put in place have really had a big impact and increasing the likelihood that Russia could default on its debt. Can you walk us through where we stand on that debate and what the implications are? Simon Waever: That's right, it's had a huge impact already. So Russia's sovereign ratings have been downgraded all the way to Triple C and below, which is only just above default, and that's them having been investment grade just two weeks ago. If you look at the dollar denominated sovereign bonds, they're trading at around 20 cents on the dollar or below. But I think it all makes sense. The economic resilience needed to support an investment grade rating goes away when you remove a large part of the effect reserves, have sanctions on 80% of the banking sector, and with the economy likely to enter into a bigger recession, higher oil prices help, but just not enough. For now, the question is whether upcoming payments on the sovereign dollar bonds will be made. And I think it really comes down to two things. One, whether Russia wants to make the payments, so what we tend to call the willingness. And two whether US sanctions allow it, so the ability. Clarifications from the US Treasury suggests that beyond May 25th, payments cannot be made. So, either a missed payment happens on the first bond repayment after this, which is May 27th or Russia may also decide not to pay as soon as the next payment, which is on March 16th. And of course, the reason for Russia potentially not paying would be that they would want to conserve their foreign exchange. And actually, we've already had some issues on the local currency government bonds, so the ones denominated in Russian ruble. James, do you want to go over what those issues have been? James Lord: That's absolutely right. Already, foreigners do not appear to have received interest payments on their holdings of local currency government bonds. There was one due at the beginning of March, and it looks as though, although the Russian government has paid the interest on that bond, the institutions that are then supposed to transfer the interest payments onto the funds of the various bondholders haven't done so for at least the foreign holders of that bond. Does that count as default? Well, I mean, on the one hand, the government can claim to have paid, but at the same time, some bondholders clearly haven't received any money. There's also another interest payment due in the last week of March, so we'll see if anything changes with that payment. But in the end, there isn't a huge amount that bondholders can really do about it, since these are local currency bonds and they're governed under local law. There isn't really much in the way of legal recourse, and there isn't really much insurance that investors can take out to protect themselves. The situation is a bit different for Russian government bonds that are denominated in US dollars, though. So I'd like to dig a little bit more into what happens if Russia defaults on those bonds. For listeners that are unfamiliar, investors will sometimes take out insurance policies called CDSs or credit default swaps just for this type of situation, and they've been quite a lot of headlines around this. So, Simon, I'd be curious if you could walk us through the implications of default there. Simon Waever: So it's like two different products, right? So you have the bonds there, it can take a long time to recover some of the lost value. I mean, either you actually get the economic recovery and there's no default or you then go to a debt restructuring or litigation. But then on the other hand, you have the CDS contracts, they're going to pay out within a few weeks of the missed bond payment. But it's not unusual to find disagreement on exactly what that payment will look like. And that payment is, we call it, the recovery value perhaps is a bit like the uncertainty that sometimes happens when standard insurance needs to pay out. But if we start with the facts, if there is a missed payment on any of the upcoming dollar or euro denominated bonds, then CDS will trigger. Local currency bonds do not count and the sovereign rating does not matter either. So far I think it's clear, the uncertainty has been around what bonds can actually be delivered into the contract, as that's what determines the recovery value. As it stands, sanctions do allow secondary trading of the bonds. There have been some issues around settlement, but hopefully that can be resolved by the time an auction comes around. The main question is then where that recovery rate will end up, and I would say that given the amount of selling I think is yet to come I wouldn't be surprised if it ends up being among the lower recovery rates we've seen in E.M sovereign CDS. James Lord: Yeah, that makes sense on the recovery rates and the CDs. But I mean, clearly, if Russia defaults, there could be some big implications for the rest of emerging markets as well. And even if they don't default, I mean, there's been a lot of spill over into other asset classes and other emerging markets. How do you think about that? Simon Waever: So I try to think of it in two ways, and I would expect both to continue if we do not see a de-escalation in Ukraine. So first, it really impacts those countries physically close to Russia and Ukraine and those then with trade linkages, which mainly comes with agriculture, energy, tourism and remittances. And that points you towards Eastern Europe, Turkey and Egypt, for instance. Secondly, if we also then see this continued weaker risk backdrop, it would then impact those countries where investor positioning is heavier. But enough on sovereign credit, I wanted to cover currencies, too. The Russian central bank was sanctioned. What do you think that means for EM currencies? James Lord: Absolutely. The sanctions against the central Bank of Russia were really quite dramatic and have understandably had a very big impact on the Russian exchange rate. The ruble’s really depreciated in value quite significantly in the last couple of weeks. I mean, during periods of market uncertainty, the central Bank of Russia would ordinarily sell its foreign exchange assets to buy Ruble to keep the currency under control. But now that's not really possible. It's led to a whole range of countermeasures from Russia to try and protect the currency, such as lifting interest rates from just under 10% to 20%. There have also been significant restrictions on the ability of local residents to move capital abroad or buy dollars, and on the ability of foreigners that hold assets in Russia to actually sell and take their money home. All of that's designed to protect the exchange rate and keep foreign exchange reserves on home soil. I think the willingness of the US to go down that road, as well as the authorities in Europe and Canada and other jurisdictions, it does raise some important questions about whether or not investors will continue to want to hold dollars and US government bonds as part of their FX reserves. Many reserve asset holders may wonder whether or not similar action could be taken against them. This has become a big debate in the market. Some investors believe that this turn of events could ultimately lead to some long-term weakness in the dollar. But I think it's also important to remember that yes the U.S. is not the only country that has done this, and it's probably the case that actually any country could potentially freeze the foreign assets of another central bank. And if that's the case, then I don't see having a materially negative impact on the dollar over the long term, as many now seem to be suggesting. But I think that's all we have time for today. So let's leave it there. Simon, thanks very much for taking the time to talk. Simon Waever: Great speaking with you, James. James Lord: As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show. 

As inflation remains a focal point for the U.S. consumer, higher energy costs will dampen discretionary spending for some. But not all are impacted equally and there may be good news in this year’s tax refunds and the labor market.-----Transcript-----Ellen Zentner: Welcome to Thoughts on the Market. I'm Ellen Zentner, Morgan Stanley's Chief U.S. Economist. Sarah Wolfe: And I'm Sarah Wolfe, also on Morgan Stanley's U.S. Economics Team. Ellen Zentner: And today on the podcast, we'll be discussing the outlook for the U.S. consumer during this year's tax season and after, as inflation remains in the driver's seat and new geopolitical realities raise further concerns. It's Thursday, March 10th, at 9:00 a.m. in New York. Sarah Wolfe: So, Ellen, I know you want to get into the U.S. consumer, but before we dig in, I think it would be useful to hear your view on the overall U.S. economy, especially given the new geopolitical challenges. Ellen Zentner: So, I think it's helpful to think about a rule of thumb for the effects of oil on overall GDP. For every 10% sustained increase in oil prices, it shaves off about one tenth on GDP growth. And so when we take into account the rise in energy prices that we've seen thus far, we took down our growth forecast for GDP this year by three tenths and shaved off an additional tenth when looking further out into 2023. Now, one thing that I think is important for the U.S. outlook versus European and U.K. colleagues is that energy prices are a much bigger factor in an economy like Europe's, and the U.K.'s where they're much more reliant on outside sources, where in the US we've become much more energy independent over the past decade. But I think where I step into your world, Sarah, as we think about higher oil prices, then translate into higher gasoline prices, which hits consumers in their pocketbook. So Sarah, that's a great segue to you on the U.S. consumer because this has been one of your focuses on the team. Consumers don't like higher prices. And, you know, we've been seeing this big divergence between sentiment and confidence. So why aren't those measures moving exactly hand in hand if inflation is the biggest concern there? Sarah Wolfe: Definitely. There's a lot of focus on consumer confidence, which comes from the Conference Board and consumer sentiment, which comes from University of Michigan. Both have been trending down, but there's been a record divergence between the two, where Conference Board is sitting about 48 points higher than sentiment. And inflation plays a huge role in this. So just getting down to the methodology of the surveys, the reason there's been such a divergence is because Conference Board places more of a focus on labor market conditions, whereas University of Michigan sentiment focuses more on inflation expectations. And so when you're in an environment like today, where the unemployment is very low, the labor market is very tight, that's very good for income that gets reflected through the confidence surveys. But at the same time, inflation is extremely high, which erodes real income, and that's getting reflected more in the sentiment survey. So, we are seeing this large divergence between the surveys and they're telling us different things, but I think both are very important to take into account. Ellen Zentner: So let me dig into inflation a little bit further then specifically and how it affects you when you're thinking about our consumer spending outlook. I mean, some of the changes that we've made to CPI forecast, you know, talk us through that and how you're building that into your estimates for the consumer. Sarah Wolfe: So we recently raised our headline forecast for CPI, or Consumer Price Index, inflation for the end of this year by 40 basis points to 4.4%. And we've also lowered our forecasts for real Personal Consumption Expenditure, or PCE, but only about 10 basis points this year to around 2.8%. And the reason that it's not a one for one pass through is, first of all, we're tracking the first quarter spending so much higher than what we had expected, so overall, even though higher gasoline prices will likely hit spending a bit more in the second quarter of 2022, we are already tracking this year much stronger. So on net, the impacts a bit smaller. Also, just because gasoline prices are going up doesn't mean that people spend less. Actually, overall, it tends to mean that people just increase their spending pool. So you have income constrained households at the lower end of the income spectrum, they're gonna pull back their spending on non-gasoline, non-utility expenditures, but on the other end, middle higher income households will just increase their spending pool, you know, gasoline prices go up so they’re just going to be spending a bit more. It doesn't necessarily mean that consumption is going to be lower. If anything, it could add more upside risk to consumer spending.Ellen Zentner: You know, this is where economists can always sound a bit dispassionate because we oftentimes look at things in the aggregate and you've been writing about, how different income levels deal with higher gas prices. Talk about some of the work that you've put out with the retail teams that might be affected by that lower income consumer pulling back. Sarah Wolfe: Yeah. So just to start off with when we look at what this is going to cost households at higher gas prices, we estimate that on an annualized basis, it's going to cost households roughly $1600 dollars more on gasoline and utilities a year. So that's if higher prices that are where they are today last for the entire year. In terms of the hit by income group that could raise spending on energy by about 2% of disposable income for the highest income group, but by about 7% for the lowest income group, so that basically can equate to a 7% hit on non-gasoline and utility spending for lower income households. And so that feeds through mostly into discretionary spending for the lowest income group. And we did work with our retail teams describing this and talking about how very strong job growth and positive real wages are a tailwind for lower end consumers. But it's not enough to outpace the headwinds of stimulus rolling off on top of higher energy prices, which act as a tax to households. Ellen Zentner: Yeah, so it'll be a little bit more of a struggle for them until we get some alleviation from this price burden. I want to walk you through, though something else that we're in the midst of now. Tax refund season is upon us, and I think the refund season started a few weeks ago. And so, you track this on a weekly basis once those tax refunds start getting sent out, where are we tracking? Sarah Wolfe: Yeah, so you are right, refund season started in late January, and it's going to end in mid-April, so it's about a month earlier than last year. There's also a lot more going on with tax refunds because of all the COVID emergency programs. There's a lot more refund programs that lower middle income households could file for. You had the child tax credit, you have childcare refunds, elderly care refunds, so there was a lot of uncertainty on how refunds were going to come in this year. Through the week ending February 25th, the average refund size was roughly $3500 dollars per person, which is well above the average refund amount during the same week in previous years. So it's about $1500 higher than in 2020 and about $800 to $900 than 2019. So it's really quite significantly higher, and I think this is really important because when we talk about the low end consumer it could really provide this extra cushion that they need. We're already seeing in the auto sub-prime space and credit sub-prime space that delinquencies are starting to pick up. But I do think that this tax refund season could really help alleviate some of these pressures and bring delinquencies back down as more refunds get distributed. Ellen Zentner: So if I tie a bow around all of this, we still have a constructive outlook on the consumer. You've written about excess savings, you're now tracking the tax refund season, at the end of the day, right, you've talked about how the fundamentals drive the consumer and the fundamentals are income and strong labor market. We've got above average job gains, we've got above average wage growth, that creates this income proxy for the consumer that looks quite strong. So I think there's a lot more room to absorb the impact of higher prices today in the U.S. and especially when you compare it to some of our other major trading partners. So, Sarah, thanks for taking the time to talk. Sarah Wolfe: As always, it was great to speak with you, Ellen. Ellen Zentner: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review on Apple Podcasts and share the podcast with a friend or colleague today.

With the rising cost of oil comes concerns around economic growth, but the distinction between the impact in Europe and the US is important, presenting both challenges and opportunities for investors.Important note regarding economic sanctions. This research references country/ies which are generally the subject of comprehensive or selective sanctions programs administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the European Union and/or by other countries and multi-national bodies. Any references in this report to entities, debt or equity instruments, projects or persons that may be covered by such sanctions are strictly informational, and should not be read as recommending or advising as to any investment activities in relation to such entities, instruments or projects. Users of this report are solely responsible for ensuring that their investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions.-----Transcript-----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, March 9th at 1:00 PM in New York. This week, the United States closed its markets to imports of Russian oil as another measure in its response to the invasion of Ukraine. In anticipation of this announcement, the price of oil increased to as high as $129 per barrel, leading the average gas price in the United States to reach $4.25. Understandably, this has created a new burden for consumers and also has investors concerned about the macroeconomic impacts of higher fuel prices. Here’s the latest thinking from our economists.We expect the downside to economic growth to be felt more in Europe than the United States. Unlike the US, Europe is a net importer of energy, which means when fuel prices go up they have to pay the price but don’t earn the extra income from selling fuel at a higher price. Accordingly, our European economics team has revised down their expectations for GDP growth by nearly 1% for 2022. The impact in the US should be more muted, with our colleagues dropping their growth forecast by 30 basis points to 4.3%. Again, this is because the US enjoys substantial domestic energy production. So while higher prices at the pump might interfere with some consumer purchases, the income from those fuel purchases will drive consumption elsewhere in the economy. But these views aside, we have to acknowledge these conditions of elevated fuel and commodities prices drive uncertainty around the future economic and monetary impacts that markets will consider. Increasingly, clients want to discuss and debate the idea of stagflation, which is the combination of slowing growth and rising inflation, in both the US and Europe. And that sentiment could persist for some time, as our commodities research team thinks swings in the price of oil between $100 and $150 are possible in the near term.   We’ll have a lot more on that in future podcasts, but for now wanted to point out one tangible takeaway for investors: potential upside for equities in the energy exploration and production sector. Higher prices at the pump means potential for more revenue, yet the sector is valued at a discount to the S&P 500 when accounting for its prices relative to the cash flow of companies in that sector.  Bottom line, the global economy is changing quickly, presenting both challenges and opportunities. We’ll be keeping you in the loop on both. Thanks for listening! If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

As European markets price in slowing growth, increased inflation and geopolitical tensions, pricing power is a potential focus for European investors looking to weather the storm.-----Transcript-----Welcome to Thoughts on the Market. I'm Graham Secker, Head of Morgan Stanley's European Equity Strategy Team. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the impacts of recent geopolitical developments on European markets and why rising stagflation pressures point towards owning companies with good pricing power. It's Tuesday, March the 8th at 1:00 pm in London.Since our last podcast on European equities, the backdrop has changed considerably, with an escalation in geopolitical tensions putting upward pressure on inflation, downward pressure on growth and generally raising European risk premia as uncertainty spikes. Last week my colleague Jens Eisenschmidt, our Chief European Economist, cut his forecasts for European GDP growth for this year and next, while also raising his projections for inflation on the back of higher energy costs. While Jens is not predicting a European recession at this time, investors are becoming incrementally more worried about this possibility as geopolitical tensions extend and oil and gas prices continue to rise. Even if Europe does manage to avoid falling into an outright recession, the stagflationary conditions that are building in the region, namely slowing growth and rising inflation, have important implications for investors. Across the broader market it points to a more challenging backdrop for corporate profits as slowing top line momentum coincides with growing margin pressures from higher input costs. At the same time, heightened geopolitical uncertainty is putting downward pressure on equity valuations as investors rotate out of the region, thereby lowering the price to earnings ratio at the same time as profit expectations retrench. After a near 20% decline from their January highs, it's fair to say that European stocks are pricing in quite a lot of bad news here, with equity valuations now below long run averages and close to record lows vs. U.S. stocks. While we think this provides an attractive entry point for longer term investors, European markets will likely remain tricky in the short term as investor sentiment oscillates between hope and fear. Our experience suggests that markets rarely trough on valuation grounds alone, instead requiring a backdrop of broad capitulation, coupled with a more positive turn in the news flow - conditions that have not yet fallen into place. In many respects stagflation is the worst environment for asset allocators, as slow growth weighs on stocks at the same time as high inflation potentially undermines the case for bonds. Thankfully such an environment has been rare over the last 50 years, however we can still construct a ‘stagflation playbook’ for equity markets when it comes to picking stocks and sectors. Specifically, we identify prior periods when inflation was rising at the same time as growth indicators were falling. We then analyze performance trends over those periods. When we do this, we find that a stagflationary backdrop tends to favor commodity and defensive oriented stocks at the expense of cyclical and financial companies - a trend that has repeated itself over the last month here in Europe. An alternative strategy is to focus on companies that have strong pricing power, as they should have more ability to raise prices to offset higher input costs than other stocks. In a European context, sectors that are currently raising prices to expand their margins, even in the face of rising input costs, include airlines, brands, hotels, metals and mining companies, telecoms and tobacco. To be clear, not every stock in these sectors will enjoy superior pricing power, but we think these areas are a good place to start the search. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today. 

The year of the stock picker is in full swing as investors look towards a future of Fed tightening and geopolitical uncertainty, where some individual stocks will fare better than others.-----Transcript-----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, March 7th at 11:00 a.m. in New York. So let's get after it. Since publishing our 2022 outlook in November, we've taken a more bearish view of stocks for reasons that are now more appreciated, if not fully. First was the Fed's pivot last fall, something most suggested would be a small nuisance that stocks would easily navigate. Part of this complacency was understandable due to the fact that the Fed had never really administered tough medicine in the past 20 years. Furthermore, when things got rough in the markets, they often pivoted back - the proverbial Fed “Put”, or the safety net for markets. We argued this time was different, just like we argued back in April 2020 that this quantitative easing program was different than the one that followed the Great Financial Crisis, or GFC. In short, printing money after the GFC didn't lead to the inflation many predicted, because it was simply filling the holes created on bank and consumer balance sheets that were left over from the housing collapse. However, this time the money printing was used to massively expand the balance sheets of consumers and businesses, who would then spend it. We called it helicopter money at the time. In short, the primary difference between the post GFC Fed money printing and the one that followed the COVID lockdown, is that the money actually made it into the real economy this time and drove demand well above supply. This imbalance is what triggered the Fed to pivot so aggressively on policy. In fact, Chair Powell has admitted that one of the Fed's miscalculations was thinking supply, including labor, would be able to adjust to the higher levels of demand making this inflation transitory. This has not been the case, and now the Fed must be resolute in its determination to reduce money supply growth. Nowhere was this resolve more clear than during Chair Powell's congressional testimony last week, when he was asked if he would be willing to take draconian steps, as Paul Volcker did in the early 1980s to fight inflation. Powell confidently answered, "Yes". To us this suggests the Fed "Put" on stocks is well below current levels, and investors should consider this when pricing risk assets. The other reason most investors and strategists have remained more bullish than us is due to the path of earnings. So far, this positive view has been correct. Earnings have come through, and it's the primary reason why the S&P 500 has held up better than the average stock. Therefore, the key question continues to be whether earnings growth can continue to offset the valuation compression that is now in full swing. We think it can for some individual stocks, which is why the title of our outlook was the year of the stock picker. As regular listeners know, we have been focused on factors like earnings, stability and operational efficiency when looking for stocks to own. Growth stocks might be able to do a little better as earnings take center stage from interest rates, but only if the valuations have come down far enough and they can really deliver on growth that meets the still high expectations. The bottom line is that the terribly unfortunate events in Ukraine make an already deteriorating situation worse. If we achieve some kind of cease fire or settlement that both Russia and the West can live with, equity markets are likely to rally sharply. We would use such rallies to lighten up on equity positions, however, especially those that are vulnerable to the earnings disappointment we were expecting before this conflict escalated. More specifically, that would be consumer discretionary stocks and the more cyclical parts of technology that are vulnerable to the payback in demand experienced over the past 18 months. Another area to be careful with now is energy, with crude oil now approaching levels of demand destruction. On the positive side, stick with more defensively oriented sectors like REITs, healthcare and consumer staples. Thanks for listening! If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show.

While the U.S. continues to see high valuations, rising inflation, and slow policy tightening, the story is quite different for many markets outside the U.S.Important note regarding economic sanctions. This research references country/ies which are generally the subject of comprehensive or selective sanctions programs administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the European Union and/or by other countries and multi-national bodies. Users of this report are solely responsible for ensuring that their investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions.-----Transcript-----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross Asset Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, March 4th at 3 p.m. in London. While Russia’s invasion of Ukraine has implications for financial markets, it has  bigger implications for people. Hundreds of thousands have already been displaced, numbers which are likely to grow in the coming weeks. These refugees deserve our compassion, and support. To those impacted by this tragedy, you have our sympathies. And to those helping them, our admiration.Our expertise, however, is in financial markets, and so that’s where we’ll be focusing today. For those that are most negative on the market right now, the refrain is pretty simple and pretty straightforward. Assets are still expensive relative to historical valuations. Inflation is still high and it's still rising. And central banks are still behind the curve, so to speak, with lots of interest rate increases needed to bring monetary policy back in line with the broader economy. What I want to discuss today, however, was how different some of these concerns can look when you move beyond the United States. Let's start with the idea that assets are expensive. Now, this clearly applies to some markets, but less to others. Stocks in Germany, for example, trade at less than 12 times next year's earnings, Korean stocks trade at 10 times next year's earnings, Brazil, it's 8 times. And many currencies trade at historically low valuations relative to the U.S. dollar. Next up is inflation. While inflation is high in the U.S. and Europe, it's low in Asia, a region that does account for roughly 1/3 of the entire global economy. What do I mean by low? U.S. consumer prices have increased 7.5% Relative to a year ago. Consumer prices in China and Japan, in contrast, are up less than 1%. My colleague Chetan Ahya, Morgan Stanley's Chief Asia Economist, notes that these differences aren’t just some mathematical illusion, but rather reflect real differences in Asia's economy and policy response. Finally, there's the idea that central banks are behind the curve, so to speak. Now, the hindsight here is a little tricky, as the Federal Reserve and the ECB were dealing with enormous uncertainty around the scope of the pandemic for much of last year. But what's notable is that not all central banks took that path. Central banks in Chile, Brazil, Poland and Hungary, just to name a few, have been raising interest rates aggressively for the better part of the last 12 months. In times of crisis, markets often try to simplify the story. But the challenges facing global markets, from valuations, to inflation, to monetary policy, really are different. As events unfold, it will be important to keep these distinctions in mind.Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We'd love to hear from you.

As the Fed continues to signal coming rate hikes this year, the housing market will face implications across home sales, mortgage rates, and fundamentals.-----Transcript-----Jay Bacow: Welcome to Thoughts on the Market. I'm Jay Bacow, Co-Head of U.S. Securitized Products Research here at Morgan Stanley. Jim Egan: And I'm Jim Egan, the other Co-Head of U.S. Securitized Products Research. Jay Bacow: And on this edition of the podcast, we'll be talking about changes in the Fed policy and what the possible implications are for mortgages and the housing market more broadly. It's Thursday, March 3rd at 11:00 a.m. in New York. Jim Egan: Okay, Jay, we've talked about affordability pressures as mortgage rates have moved higher a couple of other times in the past on this podcast, and we would encourage listeners to go back and listen to those prior podcasts for a deeper dive on affordability. But Jay Powell just testified this week that he'll support a 25 basis point hike in March. Furthermore, if inflation pressures are persistent, then he's gonna raise Fed funds by more than 25 basis points at later meetings. The markets priced in six hikes this year. What does that mean for mortgage rates going forward? When I think about affordability, am I gonna have to think of another 150 basis point increase in mortgage rates? Jay Bacow: No. So you saying the market has priced in six hikes is really important, because mortgage rates are based on generally sort of the belly of the Treasury curve. And the belly of the Treasury curve is effectively a function of what the market's expecting the Fed to do, along with how much risk premium there is. And if the market's expecting the Fed to hike six times this year, then if the Fed hikes six times this year and there's no change in risk premium, then mortgage rates aren't really going to move very much from where they are right now. Now, Powell said that he's worried about inflation and so if inflation comes in higher than expected or the market changes their demand for risk premium, then mortgage rates are gonna move. Jay Bacow: But Jim, mortgage rates have already moved a lot, they've gone up 100 basis points this year in just two months. What does this mean for affordability? Jim Egan: From the affordability perspective, it's a problem. But that also really depends on how we define what a problem is. The housing market's been doing very, very well. But when we think about this kind of move in mortgage rates, existing home sales, transaction volumes, they're going to have to fall. Jay Bacow: But haven't existing home sales gone up a lot already? Jim Egan: Yes, and that's where we think it's important to really look at historical experiences during times like this. If we look back to mortgage rates to 1990 we have five other instances of this kind of increase in mortgage rates. Now, one of those was during the housing crisis, so we're going to remove the experience there, but if I look at the other four instances existing home sales climbed very sharply during that first 6 month period, while mortgage rates were climbing by 100 basis points. That's where we are right now, we're seeing that climb. The 12 months after, the subsequent year, which we're going to start to enter March of this year going forward, that's where existing home sales tend to plateau and in a lot of instances come down. And they tend to come down further if mortgage rates continue to climb during that year, which is what we just discussed. So we think it's very likely, and if historical precedent holds, then we've already seen the peak of existing home sales for at least the next 12 months. Jay Bacow: What about home prices? Powell was asked if he thinks that home prices are going to fall and go back to pre-COVID levels, and he said he thought that raising mortgage rates would just slow down home prices, and he doesn't want to see home prices fall. What do we think? Jim Egan: Well, I'd like to believe he's reading our research because that's very much in line with how we think about things right now. We think that home price appreciation at a 19% rate right now is going to have to slow. And as we've said on this podcast before, affordability pressures are really one of, if not the key reason that the rate of HPA has to come down. Simply put, potential homebuyers cannot continue to afford to buy homes, at prices that would allow HPA to continue to climb at almost 20% year over year levels. However, if we think about the other factors that would come into play to bring home prices from a positive level to a negative level, we just do not see those characteristics in the market right now. Supply conditions are very constrained. We think they'll be alleviated somewhat this year, but that's not enough for there to be an overhang of supply that would weigh on home prices. We think that the credit availability in the market has been very conservative. We don't think we're at a risk of increased defaults and foreclosures. What we think happens is that transaction volumes fall, as we've stated, as home buyers aren't willing to pay the prices that home sellers want to sell at. But those sellers are not forced. And so you end up with a market that kind of doesn't trade, home price growth slows and we see it bottoming out kind of in a positive 5-6% percent range from here. So, long story short, we agree with that assessment from Jay Powell. Jim Egan: Now, the other side of the equation, mortgages. With rates backing up by that much, Jay, what do we think about the mortgage market here? Jay Bacow: So rates backing up means that there's going to be less people refinancing. And you said that there's going to be a slowdown in existing home sales as well. But, we're still worried about the supply to the agency mortgage market. And that's because the supply that we care about the most is the new supply coming from new home sales. And the thing about new home sales is that it's about an 8-month period from the time that the homebuilder gets the permit to start building the house, to when it actually gets sold. So we're going to have about 6 more months of supply from people that started to build their house when mortgage rates were a lot lower. And that's going to weigh on the market, particularly given that Powell said during his testimony that they're going to start balance sheet normalization in the coming months. So, we've got supply coming and we've got the biggest buyer stepping away from the market. Now, mortgage rates have gone up and mortgage spreads have widened, but we think there's a little bit more room for mortgages to underperform given the supply that's coming, and the lack of demand coming from the Fed. Jim Egan: Certainly interesting times. Jay, thanks for taking the time to talk today. Jay Bacow: Always great speaking with you, Jim. Jim Egan: As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show. 

The recent crisis in Ukraine has caused a great deal of uncertainty in the economy and markets. To cut through the noise, we take a look at the three key questions we are hearing from investors.Important note regarding economic sanctions. This research references country/ies which are generally the subject of comprehensive or selective sanctions programs administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the European Union and/or by other countries and multi-national bodies. Any references in this report to entities, debt or equity instruments, projects or persons that may be covered by such sanctions are strictly informational, and should not be read as recommending or advising as to any investment activities in relation to such entities, instruments or projects. Users of this report are solely responsible for ensuring that their investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions.-----Transcript-----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bring you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, March 2nd at 3pm in New York. As an analyst focusing on the interaction between geopolitical events and financial markets, I'm accustomed to dealing with uncertainties evolving at a rapid pace. But even by those standards, nothing in my career compares to the events of the past two weeks: the Russian invasion of Ukraine and the sanctions response by the US, the UK and Europe. To help cut through the noise, here's answers to the three most frequently asked questions by our investor clients. First, do sanctions mean higher energy costs? In the short term, the answer is likely yes. While sanctions on Russian banks currently permit payments for various energy commodities, there's still restrictions on, and disruptions to, their transportation. With Russia being a key producer of several commodities, including 10% of the world's oil, it's not surprising that global oil inventories have declined and the price of a barrel of oil is sitting above $100. This dovetails with the second question. Should we expect the Fed will shy away from hiking rates? In short, we don't think so, at least at the Fed's March meeting, but it certainly creates substantial uncertainty in the outlook. This conflict seems to be affecting both parts of the Fed's dual mandate in opposite directions. It risks dampening economic growth, but for the reasons we just described, it can also boost inflation. Accounting for both, our economists still expect the Fed to hike 0.25% in March but the conflict adds another layer to an already unprecedented level of complexity for the Fed. This is actually the key point for fixed income markets, in our view, where investors should prepare for ongoing volatility in Treasury and credit markets as the Fed may have to regularly tinker with their own assessment of growth and inflation. Finally, what are the long-term implications for investors? To answer this question, we refer you back to our framework for 'Slowbalization,' or the idea that companies will have to, in certain industries, spend more to adjust supply chains and exit certain businesses as governments create policies that prioritize economic and national security over short term profits. You can see how this trend may already be accelerating after the onset of the Ukraine crisis, with several multinational companies announcing they'll sell stakes in, exit joint projects with or pause sales to Russian companies. But some equity sectors may see upside. Defense and software, for example, could see bigger spending as governments reorient their budgets towards these efforts, most notably Germany announcing it will boost its defense spending to 2% of GDP. Of course, the situation remains fluid, and we'll continue to track it and keep you in the loop on what it means for the economy and markets. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show. 

As the conflict between Russia and Ukraine continues to unfold, implications for the oil and gas sector in Europe are beginning to take shape.Important note regarding economic sanctions. This research references country/ies which are generally the subject of comprehensive or selective sanctions programs administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the European Union and/or by other countries and multi-national bodies. Any references in this report to entities, debt or equity instruments, projects or persons that may be covered by such sanctions are strictly informational, and should not be read as recommending or advising as to any investment activities in relation to such entities, instruments or projects. Users of this report are solely responsible for ensuring that their investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions.-----Transcript-----Welcome to Thoughts on the Market. I'm Martijn Rats, Global Commodity Strategist and Head of the European Energy Research Team for Morgan Stanley. Along with my colleagues bringing you a global perspective, I'll be talking about developments in the oil and gas sector amidst geopolitical tensions. It's Tuesday, March 1st at 2:00 p.m. in London. As the situation between Russia and the Ukraine continues to develop, implications for commodity markets are beginning to take shape. Russia is a major commodity producer, playing in an especially important role in providing energy for Europe through oil and natural gas imports. With a new round of sanctions announced over the weekend, the precise impact on prices remains to be seen, but we can begin to forecast the direction. First, there is no sign at this stage that, at least at the aggregate level, the flow of commodities has been impacted yet. All of the pipeline and tanker tracking data that we've seen suggests that they continue to be shipped. That shouldn't be too surprising, it's still early days and the sanctions that have been announced so far have been carefully crafted to reduce the impacts on energy flows from Russia. Second, trade patterns will nevertheless likely shift. We can already see this in the oil markets. European refiners are traditionally big buyers of Russian crudes, and even though technically they have continued to be able to buy these grades, they are increasingly reluctant to do so. There have been indications that ship owners are reluctant to send vessels to Russian ports, and that European buyers are uncertain about where sanctions will ultimately go. This is requiring increasingly large discounts. As many buyers already move away from Russian crudes, this also creates more demand for others, including North Sea crudes, which therefore drives up the price of Brent. Third, all of this is happening against the backdrop of tightness in both global oil markets and the European gas markets. We are seeing low and falling inventories, low and falling spare capacity and low levels of investment across both. At the same time, there is a healthy demand recovery ongoing as the world emerges from COVID. Given this tightness, even a modest disruption can have large price impacts. Now, with that in mind, risks to oil and gas prices are still firmly skewed higher, at least in the short term. Finally, I want to point at the growing tension in Europe between diversification and decarbonization. Several key politicians have said over the last several days that Europe should reduce its dependance on Russian oil and gas, and diversify its sources of supply. At the same time, Europe has set ambitious targets to decarbonize. Diversification requires investment in new supply, while decarbonization then requires that those supplies, in the end, will not be used. How that tension will be resolved is hard to know, but this is an issue that at some point will need to be addressed. Bottom line, there is still a lot of uncertainty for commodity markets in the coming weeks and months. We will keep you posted, of course, as new developments take shape. Thanks for listening. If you enjoy Thoughts on the Market, please leave us a review on Apple Podcasts and share the podcast with a friend or colleague today. 

Like many markets, Corporate Credit has faced a rocky start to 2022. For investors, understanding the difference between default and duration risk will be key to positioning for the rest of the year.-----Transcript-----Welcome to Thoughts on the Market. I am Vishy Tirupattur, Global Director of Fixed Income Research. Along with my colleagues bringing you a variety of perspectives, I'll be talking about corporate credit markets against the background of policy tightening and heightened geopolitical tensions. It's Monday, February 28th at 10 a.m. in New York. It's been a rough start for the year for the markets. Central banks' hawkish shift towards removing policy accommodation, the significant flattening of yield curves that followed, rising geopolitical tensions, fading prospects for fiscal support, and growing concerns about stretched valuations have all combined to spawn jitters in financial markets. Corporate credit has been no exception. After two years of abundant inflows, the narrative has turned outflows from credit funds in conjunction with negative total returns. These outflows conjure up painful memories of 2018, the last time the credit markets had to deal with substantial policy tightening. Let us focus on the source - sharply higher interest rates and duration versus credit quality and default concerns. Consider leverage loans, floating rate instruments that have credit ratings comparable to high yield bonds which are fixed rate instruments. Since the beginning of the year, high yield bond spreads have widened almost three and half times more than leverage loan spreads. If you limit the comparison just to fixed rate bonds, the longer duration investment grade bonds have significantly underperformed the lower quality high yield bonds. Clearly, it is duration and not a fear of a spike in defaults that is at the heart of credit investor angst. My credit strategy colleagues, Srikanth Sankaran and Taylor Twamley, have analyzed the impact of rate hikes on interest coverage ratios for leveraged loan borrowers. This ratio is a measure of a company's ability to make interest payments on its debt, calculated by dividing company earnings by interest on debt expenses during a given year. The key takeaway from their work is this - What matters more for interest coverage is the point at which higher rates become a headwind for earnings growth. Loan interest coverage ratios have historically improved early in the hiking cycle as interest expenses are offset by growth in earnings. I draw comfort from the evidence that as long as earnings growth holds up and does not turn negative, corporate credit fundamentals measured in interest coverage ratios are positioned well enough to withstand our economists base case of six 25 basis point rate hikes in this year. While credit fundamentals look fine, valuations are not. Since the beginning of the year, we have seen spread widening, the pace of which has picked up in the last couple of weeks. So, we still prefer taking default risk over duration and spread risk. The risk to this view has increased in the last few weeks. Specifically, if central bank reaction to the heightened geopolitical risk is to control inflation at the expense of growth, lower quality credit may be more exposed. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

As markets react to the conflict between Russia and Ukraine, price moves for corn, wheat, oil and metals may mean new inflationary pressures for central banks to contend with in the coming months.Important note regarding economic sanctions. This research references country/ies which are generally the subject of comprehensive or selective sanctions programs administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the European Union and/or by other countries and multi-national bodies. Users of this report are solely responsible for ensuring that their investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions.This recording references actual or potential sanctions, which may prohibit U.S. persons from buying certain securities, making certain investments and/or engaging in other activities in or pertaining to Russia.The content of this recording is for informational purposes and does not represent Morgan Stanley’s view as to whether or not any of the Persons, instruments or investments discussed are or will become subject to sanctions. Any references in this presentation to entities, debt or equity instruments that may be covered by such sanctions should not be read as recommending or advising as to any investment activities in relation to such entities or instruments. Audience members are solely responsible for ensuring that their investment activities in relation to any sanctioned entities and/or securities are carried out in compliance with applicable sanctions.-----Transcript-----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross Asset Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape, and how we put those ideas together. It's Friday, February 25th at 3 p.m. in London. Russia's invasion of Ukraine has grabbed the headlines. There are other commentators and podcasts that are far more knowledgeable and better placed to comment on that conflict. Rather than offer assessment on geopolitics, I want to try to address one small tangent of these developments- the potential impact on prices and inflation. Russia and Ukraine are both major commodity producers. Russia produces about 10% of the world's oil, and Russia and Ukraine together account for 1/3 of the world's wheat and 1/5 of the world's corn production, according to the U.S. Department of Agriculture. So, if one is wondering why the price of wheat is up about 18% since the end of January, look no further. These commodities are traded around the world, but specific exposure can be even more acute. Morgan Stanley analysts estimate that Russia supplies roughly 1/3 of Europe's natural gas, while analysis by the Financial Times estimates that Ukraine supplies roughly 1/3 of China's corn. There are also second order linkages. Russia produces about 40% of the world's palladium, a key component for catalytic converters, and about 6% of the world's aluminum. But because Russia also provides the energy for a good portion of Europe's aluminum production, the impact could be even larger on aluminum prices than Russia's market share would indicate. Central banks will need to look at these changing prices and weigh how much they should factor into their medium term inflation outlook, which ultimately determines their monetary policy. For now, we think three elements will guide central bank thinking, especially at the U.S. Federal Reserve. First, higher policy rates are still necessary, despite international developments, given how low interest rates in the U.S. and Europe still are relative to the health of these economies. Slowing demand, which is the point of interest rate hikes, is still important to contain medium term inflationary pressures. Second, these developments may reduce the odds of an aggressive start to central bank action. A few weeks ago, markets implied that the Fed would begin with a large .5% interest rate increase. Our economists did not think that was likely, and continue to believe that the Fed will hike by a smaller .25% at its March meeting. Third and finally, the duration and scale of these commodity price impacts are uncertain. Indeed, I haven't even mentioned the prospect of further sanctions or other interventions that could further impact commodity prices. In the view of my colleagues who forecast interest rates, that should mean higher risk premiums, and therefore higher interest rates on government bonds in the U.S. and Europe. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We'd love to hear from you. 

Water scarcity brings unique challenges in the path to a more sustainable future. Solving for them will mean both risk and opportunity for governments, corporates, and investors.-----Transcript-----Jessica Alsford Obviously, everyone's minds today are rightly on news out of Europe. We will have an episode to cover this in the coming days, but today we are thinking more long term on sustainability. Jessica Alsford Welcome to Thoughts on the Market. I'm Jessica Alsford, Global Head of Sustainability Research at Morgan Stanley, Connor Lynagh And I'm Connor Lynagh, an equity analyst covering energy and industrials here at Morgan Stanley. Jessica Alsford And on this episode of the podcast, we'll be discussing one of the leading sustainability challenges of the near future, water scarcity, as well as potential solutions that are likely to emerge. It's Thursday, February, the 24th at 3 p.m. in London, Connor Lynagh and it's 10:00 am in New York. Connor Lynagh So Jess, we recently collaborated on the report, 'Changing Tides, Investing for Future Water Access.' Maybe the best place to start here is the big picture. Can you walk us through the demand picture and how challenges are expected to change in the industry? Jessica Alsford So the key issue really is that water is a critical but finite resource, and there's already huge inequality in access to water globally. So over the last century, we've seen water use rising about six fold, and yet there are still around 2 billion people without access to safely managed drinking water and around 3.6 billion without safely managed sanitation. Then add to this the fact that demand is likely to increase by around another 30% by 2050, about 70% of total demand comes from agriculture withdrawals, and clearly we need to increase the amount of food we're producing due to growing population, and there's also going to be incremental water needs from industry and municipalities. A third element to also think about is that this is all happening at the same time that climate change is going to alter the hydrological cycle. And so, this is going to increase the risk of floods in some areas and drought in others. Eight of the 10 largest economies actually have either the same or higher water risk scores than the global average. And so clearly what is already a challenge in terms of providing access to water is only going to become more complicated going forward. Connor Lynagh So Jess, water is pretty unique when you look at the different challenges that the sustainability community is facing. What do you think is particularly unique and noteworthy about the challenge we're facing here? Jessica Alsford So the three really big sustainability megatrends that we look at our climate, food and then water. They're all interrelated and they're all really tricky to solve for. But I think there are some unique characteristics about water that do add some complexities to it. First of all, it is finite. So, in theory, we can produce more food, but it's very difficult to make more water. In addition, it's incredibly difficult and costly to transport water around. So, if you think about energy and food, these can be moved over pretty large distances, but water is really a regionally specific commodity. And then the third element really is that water is underpriced if you compare to the actual cost of providing it. There aren't any free markets really to set prices according to supply and demand and because water is essential to life, it's really not straightforward when it comes to thinking about pricing. Jessica Alsford So Connor, from your perspective, covering some of the stocks exposed to the water theme, what are your thoughts on how water might be priced going forward? Connor Lynagh Yeah, I mean, I think you really hit on a lot of the big issues, which is that pricing is very heavily regulated relative to a lot of commodities out there. You know, a lot of utilities are not really able to cover their costs without subsidies from the government. And so, you know, I think as a base case, there does need to be an increase in pricing to solve for some of this shortfall that we see out there. But that has to be done delicately. We can't disadvantage members of society that are already struggling. And so, I think what we're going to need to see is some sort of market-based pricing, but in select instances. So, Australia already has a relatively well-developed water market. You're seeing some moves in that direction in California as well. But I think as a first step, I think there's going to be increased focus on larger industrial users paying more than their share and allowing consumers to have a relatively advantaged position on the cost structure. Jessica Alsford So pricing is clearly one issue, but we also need to see huge investment in global water infrastructure. What are your thoughts on how this develops over the next few years? Connor Lynagh It’s interesting if you look at a cross-section of countries globally, we tend to spend about 1% of GDP on our water resources. So, I think it's a fair starting point to say that water spending is going to grow in line with GDP. But, as we look at the world today and as you've covered previously, the spending is already not sufficient. It's probably hard to quantify exactly how much we, quote, 'should' spend. But I'll point out a couple of data points here. So globally, we spend about $300 billion per year on water capex. In order to get global water access to those that currently don't have it, this would cost an incremental $115 billion a year. And even in countries like the U.S., where our infrastructure is relatively well developed, we are currently facing a spending shortfall of about $40 billion per year. So, we do think this is going to need to rise significantly. Jessica Alsford So if we look at climate, for example, we have seen a really big step up in terms of regulation and policy support to really try to drive investment into green infrastructure. And so just picking up on that, for investors who are looking at this theme, where can capital be deployed to help solve this issue? Connor Lynagh I think that there's obviously just a major infrastructure investment need, but I think that absent major changes in policy, there's a few areas that we still think are relative areas of excess spending growth, if you will, within the sector. So, the first is emerging markets. As countries climb the wealth curve, we do think that their investment is going to increase significantly. I'd point to areas like India and China as areas of significant growth over the next few years. Wastewater management globally I really think that there is going to be increasing regulation and corporate-level focus on this. And then the final thing is applying digital technologies. So, as it stands right now, only about 70% of water globally is connected to a meter. So first and foremost, we need to get a better sense of how we're using our water, where we're using our water. But we can also use cellular technology, digital technologies to better monitor who's using this water in real time, and I think that's going to be a major area of investment, particularly in the US and Europe. Connor Lynagh So, Jess, obviously there's opportunities for companies that can offer solutions to the water industry, but water access is also a risk for many companies around the world. How should investors think about this? Jessica Alsford Absolutely. Energy and power generation are the most water intensive sectors. But actually, what's really critical with this theme is access to water on a local level. So actually, our analysis has shown that companies across a wide variety of sectors can really be impacted, whether that be datacenters, pharmaceuticals, apparel or beverages. One of the sectors most at risk is actually copper. So copper is a very water intensive commodity, and a lot of copper just happens to be mined in Chile, which is a country unfortunately already suffering from water scarcity. Now, desalination plants are becoming the norm in Chile as there are competing demands for water between copper mines and also the local population. If we look ahead, we actually think that demand for copper could increase by around 25% per annum. And this is due to the vital role that it's playing in the energy transition, whether it be for renewables or EVs, for example. And with this incremental demand for copper comes incremental demands for water. I'd also point to hydrogen, again, a key piece of the decarbonization puzzle. So, water is needed for hydrogen, whether for cooling, for gray or blue hydrogen, or for the electrolysis process with green hydrogen. And our analysis suggests that almost 60% of future hydrogen projects are located in countries with water stress. So again, this is going to require inventive solutions to ensure that there really is sufficient access to water for all users. Connor Lynagh Jess, thanks for taking the time to talk.Jessica Alsford Great speaking with you too Connor. Jessica Alsford And as a reminder, if you enjoy Thoughts on the Market, please do take a moment to rate and review on the Apple Podcasts app. It helps more people to find the show. 

While geopolitical tensions currently weigh on markets, investors should look to the fundamentals in order to anticipate the depth and duration of the ongoing correction.Important note regarding economic sanctions. This research references country/ies which are generally the subject of comprehensive or selective sanctions programs administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the European Union and/or by other countries and multi-national bodies. Users of this report are solely responsible for ensuring that their investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions.-----Transcript-----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Wednesday, February 23rd at 11 a.m. in New York. So let's get after it. This past week tensions around Russia/Ukraine dominated the headlines. When unpredictable events like this occur, it's easy to simply throw up one's arms and blame all price action on it. However, we're not so sure that's a good idea, particularly in the current environment of Fed tightening and slowing growth. From here, though, the depth and duration of the ongoing correction will be determined primarily by the magnitude of the slowdown in the first half of 2022. While the Russia/Ukraine situation obviously can make this slowdown even worse, ultimately, we think that preexisting fundamental risks we've been focused on for months will be the primary drivers, particularly as geopolitical concerns are now very much priced. While most economic and earnings forecasts do reflect the slowdown from last year's torrid pace, we think there's a growing risk of greater disappointment in both. We've staked our case primarily on slowing consumer demand as confidence remains low thanks to the generationally high inflation in just about everything the consumer needs and wants. Many investors we speak with remain more convinced the consumer will hold up better than the confidence surveys suggest. After all, high frequency data like retail sales and credit card data remain robust, while many consumer facing companies continue to indicate no slowdown in demand, at least not yet. However, most of our leading indicators suggest that the risk of consumer slowdown remains higher than normal. Secondarily, but perhaps just as importantly, is the fact that supply is now rising. While this will alleviate some of the supply shortages, it could also lead to a return of price discounting for many goods where inflationary pressures have been the greatest. That's potentially a problem for margins. It's also a risk to demand, in our view, if the improved supply reveals a much greater level of double ordering than what is currently anticipated. In short, the order books - i.e. the demand picture - may not be as robust as people believe. Overall, the technical picture is mixed also within U.S. equities. Rarely have we witnessed such weak breath and havoc under the surface when the S&P 500 is down less than 10%. In our experience, when such a divergence like this happens, it typically ends with the primary index catching down to the average stock. In short, this correction looks incomplete to us. Nevertheless, we also appreciate that equity markets are very oversold and sentiment is bearish even if positioning is not. With the Russia Ukraine situation now weighing heavily on equity markets, relief would likely lead to a tactical rally, but we acknowledge that uncertainty remains extremely high. The bottom line for us is that we really don't have a strong view on the Russia/Ukraine situation as it relates to the equity markets. However, we think a lot of bad news is priced at this point. Therefore, we would look to sell strength into the end of the month if markets rally on the geopolitical risk failing to escalate further. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show.

The challenges of inflation can be felt around the world, but understanding the regional differences is key to an effective 2022 for both central banks and investors.----- Transcript -----Andrew Sheets Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross Asset Strategist for Morgan Stanley Research.Seth Carpenter And I'm Seth Carpenter, Morgan Stanley's Chief Global Economist.Andrew Sheets And on part 2 of this special episode of Thoughts on the Market, we'll be continuing our discussion on central banks, inflation, and the outlook for markets. It's Tuesday, February 22nd at 1:00 p.m. in London.Seth Carpenter And 8:00 a.m. in New York.Andrew Sheets So Seth, you lay out the challenge that central banks face because they are being pulled in two directions. If they raise rates too quickly, the economy could slow too quickly. That means real people lose their jobs, real businesses have trouble getting loans. On the other hand, if they don't raise rates quickly enough, there's a risk that inflation would be higher and that has a real impact on the economy and people's lives. When it comes to, kind of, which side of caution to air on, how do you think central banks are thinking about that at the moment? And what would you be watching to indicate which side of that debate they're starting to come down on?Seth Carpenter I think if we're looking at the developed market, central banks, the Fed, the ECB, the Bank of England right now, I think they have a high conviction that the current stance of policy is just too accommodative given the state of the real economy and where inflation is. So I think right now all of them believe they need to get going, that starting now is fine. That mindset I don't think though will last too terribly long because over time we will start to see some outright tightening. So for the Fed, where does that point change? I think once they start to run off their balance sheet, probably sometime around the middle of this year, they're going to start to get much more cautious, they're going to look at markets and say how much of this tightening is being transmitted first through financial markets and then to the economy. So they'll be looking at credit spreads, they'll be looking at risk markets to ask, are we getting some traction? We think, especially if we're right and a bunch of the inflation that we're seeing now is this frictional inflation, that comes down in the latter half of the year. We think that hiking cycle is going to slow down over time. And so much like the Bank of England's forecast based on market pricing, we think there's probably a bit too much that's baked into markets in terms of how much hiking they do. They start off reasonably swiftly, knowing that they were too far away, knowing that they were being very accommodative. But in the latter half of the year, the pace of tightening starts to slow down.Andrew Sheets Seth, another question that I get quite a bit is at what point will market volatility cause the Fed or another central bank to change their policy? There's an idea in the market that if stocks drop or if credit spreads widen, or if there's higher volatility, then central banks would look at that and respond to that. From a central bank standpoint, how do you think central banks think about market volatility? And what are some important ways that you think investors either correctly or kind of incorrectly think about that reaction function?Seth Carpenter I can say over the 15 years that I spent at the Fed drafting policy documents, briefing the committee on policy options, thinking about how markets are affecting the economy, I can tell you the following. The market tends to have an overdeveloped sense of how sensitive central banks are to equity market reactions in particular. Equity market changes are important, it can be a very high frequency signal that there is cause to investigate what's going on in the economy. But they give many, many, many false signals as well, and so I would say that a sharp drop in equity prices would be the sort of thing that would get the attention of central bankers but would not force their hand to make a change. Instead, there would be further investigation. In addition, the whole point of tightening monetary policy is to tighten financial conditions and thereby slow the economy. So, it is not a question of are we getting credit spread widening? Are we getting softer asset prices? The answer to that is that's part of the plan. I think the real question is how large is the move in asset prices and how quick is the move in asset prices? If we have a very orderly tightening of financial conditions that plays out over several months, I don't think that's the sort of thing that causes the central bank to reverse course. If instead, over the course of a month you get a very sharp and disruptive widening and spreads, I think that really does cause a substantial reconsideration of the plan.Andrew Sheets So, Seth, I think it's fair to say one of the challenges of your job at Morgan Stanley is you only have the entire global economy to look after. This is an inflation story that does look similar in some ways around the world, but also looks different. Your global economics team has done some interesting research recently on Asia and how Asia, which is an enormous economy in its own right, is seeing quite different, you know, inflation dynamics and labor market dynamics. I was hoping you could touch a little bit on that and how the regional differences can actually be pretty significant.Seth Carpenter Absolutely. And I think Asia is very much the counterpoint to what we've seen in the rest of the globe in terms of the inflationary process. So inflation in Asia has been quite subdued, and I think there's some very clear reasons for that. First, when we think about food and energy inflation in Asia, many of the countries there have much more direct government intervention in those markets, and that has been helping to keep those inflation rates low. Second, when it comes to core consumer spending, there's been a bigger lag in consumer spending recovery in a lot of Asian economies than there have been in the developed market economies, which I think reflects two issues. One, aggressive COVID response, and second, much less fiscal transfers to the household sector, that is in the United States and in some other countries really helped to support consumer spending, especially on goods. And finally, in many Asian economies, there's been a bit less in the way of supply chain disruptions for the local market. So there really has been a big difference. I'll go you one further, when we think about the central bank's response, not only do we have the large developed market economy central bank starting to hike, the PBOC is going in exactly the opposite direction. The Chinese economy slowed aggressively for reasons that we can get into on another podcast, but the PBOC has eased. So, it is very much a differential outlook for both inflation and central banking in Asia versus the rest of the world.Seth Carpenter But I have to say, Andrew, let me turn it around to you because inflation is clearly the key story this year. The change in developed market, central banks towards hiking is huge this year. How is all of this debate affecting your views on strategy as it markets across assets across the globe?Andrew Sheets So I think there are a couple of important elements that are driving the way we're thinking about markets. The first is one key output of higher inflation is higher interest rates, or certainly investor concern around higher interest rates, if we look at how the market has historically performed as interest rates go up, what really matters, maybe simplistically, is how good the economy is. If interest rates are going up, but the underlying economy is still ultimately solid and strong, a lot of assets end up doing OK. And so if I think about, you know, the base case that you and the Morgan Stanley Global Economic Team have laid out where we have some maybe growth softness in the first quarter of this year, but overall 2022 is a pretty solid year for growth. I think that still means that overall, markets can avoid some of the more negative scenarios that would otherwise come with higher rates. But the second issue here that I think is important, and I think this dovetails nicely with your discussion on Asia relative to say the U.S., is that the challenges around inflation and rate hikes also have a lot of global differences. The more expensive your market is, the higher your rate of inflation, the less your central bank has done to this point. Which describes the U.S. pretty accurately, it's a more expensive market, the inflation rate is higher, the Fed has not made its first rate hike yet. I think that's a market where there's more uncertainty and where my colleague Mike Wilson, our Chief U.S. Equity Strategist, is forecasting a more difficult year for returns. You know, in contrast, in Europe the valuations aren't as expensive, the inflation rate isn't as high. I actually think it's OK for investors to kind of have different views on the impact of inflation, different views for 2022, because these trends are very different globally. And I think we're going to see a market that has much more diverse performance, it's going to be less one direction, it's going to be less unified. And I think that's OK, I think that would reflect a global backdrop for inflation and monetary policy and valuations that is quite different depending on where you look. Seth Carpenter Great. Well, you know, as the saying goes, forecasting is hard, especially about the future. But I have very high conviction in the following forecast: you and I are going to have a lot to talk about over the balance of this year. It's been great talking to you, Andrew.Andrew Sheets It's been great talking to you, Seth. As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people find the show.

Inflation has reached levels not seen in years, but there is an important distinction to be made between frictional and cyclical inflation, one that has big implications for central banks this year.----- Transcript -----Andrew Sheets Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross Asset Strategist for Morgan Stanley Research.Seth Carpenter And I'm Seth Carpenter, Morgan Stanley's Chief Global Economist.Andrew Sheets And on this episode of Thoughts on the Market, we'll be discussing inflation, central banks and the outlook for rate hikes ahead. It's Friday, February 18th at 1:00 p.m. in LondonSeth Carpenter and 8:00 a.m. in New York.Andrew Sheets So, Seth, it's safe to say there's focus on inflation at the moment in markets because we're seeing some of the highest inflation rates in 30 or 40 years. When we think about inflation, though, it's really two stories. There is inflation being driven by more temporary supply chain and COVID related disruptions. And then there is a different type of inflation, the more permanent stickier type of traditional inflation you get as the economy recovers and there's more demand than supply can meet. How important is this distinction at the moment and how do you see these two sides of inflation playing out?Seth Carpenter Andrew, I think you've laid out that framework extraordinarily well, and I think the distinction between the two types of inflation is absolutely critical for central banks and for how the global economy is likely to evolve from here. My take is that for the US, for the Euro area, for the UK, most of the excess inflation that we're seeing is in fact, COVID-related and frictional. And so, what we can see in the data is that we have an easing now in supply chain disruptions. Supply chain disruptions are still at a very high level, but they're coming down and they're getting better. Similarly, in the US and to some degree in the UK, there have been some labor market frictions because of COVID that have meant that some of the services inflation has also been higher than it might be otherwise. I don't want to diminish completely the idea that there's some good old fashioned cyclical macroeconomic inflation there, because that's also very important. But I think the majority of it is in the frictional type of COVID-related inflation. The key reason why that matters is what has to get done to bring that inflation back down to central bank targets. If the majority of this excess inflation is standard macro cyclical inflation, central banks are going to have to engage in sufficiently tight policy to slow the economy to create slack and bring down inflation. Now, the estimates are always imprecise, but estimates in the United States for, say, the Phillips curve, and when I say the Phillips curve, I mean either the relationship between the unemployment rate and inflation or more generally, the relationship between where the economy is relative to its potential to produce and how much there's currently aggregate demand in the economy. If we have three percentage points of excess inflation that has to be dealt with by creating slack, you're probably going to have to either cause a recession or wait many, many years to gradually chip away things to bring it down over time. It's just too large of an amount of excess inflation if it is truly that standard macro cyclical inflation.Andrew Sheets So, Seth, it's been a while since we've had to deal with rate hikes in the market. And as you just laid out, there are estimates of how much the Fed would have to raise interest rates to address inflation, these so-called Phillips Curve models and other models. But there's a lot of uncertainty around these things. How much uncertainty do you think there is around how rate hikes will act with inflation? And how do you think central banks think about that uncertainty?Seth Carpenter So I would completely agree there's uncertainty right now, and I think there are at least two important chains in that transmission mechanism, the first one that we're just talking about is how much of the inflation is cyclical and as a result, how much is going to respond to a slower economy. But the main part that I think you're getting at is also how do rate hikes - or any sort of monetary policy tightening - how does that affect the real economy? How much does that slow the economy? And I think there, it's a very open question. What we know is that over the past several decades there has been a long run downward trend in real interest rates and nominal interest rates. As a result, there's going to be a real tension for central banks trying to find just that sweet spot. How much do you need to raise interest rates to slow the economy without raising it so much that you actually tip things over into a recession? I think it's going to be difficult. And central bankers justifiably then take things very cautiously. Take the Fed as a particular example, they're tightening with two policy tools right now. They are going to both start raising interest rates and they're going to let their balance sheet runoff. We saw in 2018 that that was a tricky proposition, initially that everything went smoothly but by the time we got into late 2018, risk markets cracked, the economy slowed. Part of that was because of monetary policy tightening, and we saw the Federal Reserve in fact reverse course with those rate hikes. So it's going to be a very delicate proposition for central banks globally.Andrew Sheets So, Seth, you talked about some of the uncertainty central banks are dealing with, how do they calibrate the level of interest rates with the effect it's going to have on the economy and maybe how that's changed relative to history. And there's another question obviously around timing. If you take a step back and kind of think about those challenges that the Fed or the ECB or the Bank of England are facing. how much into the future are they trying to aim with the monetary policy decisions they make today?Seth Carpenter We're really talking about at least a year between monetary policy tightening and the effect it's going to have on that fundamental cyclical type of inflation. As a result, central bankers have to do forecasts, central bankers do forecasts all the time. And part of the judgment then will get back to that uncertainty that I mentioned before. How much of this inflation is temporary/frictional, how much of it is underlying, truly cyclical inflation? If all of this inflation that we're seeing is truly underlying cyclical inflation, then not only are they behind the curve, they're not going to be able to have any material effect on inflation until the beginning of next year. That's a really important distinction.Andrew Sheets Well, and I think, you know, I think your answers there Seth raise such an interesting question and debate that's going on in markets that the market believes that the Federal Reserve won't be able to raise interest rates for very long before they'll have to stop raising rates next year. But then you also mention that the impacts of the rate increases they'll make today may not be felt for some time. These are really interesting kind of pushes and pulls. And I'm wondering if you think back through different monetary policy cycles, do you think there's a good historical precedent to help guide investors as they think about what these central banks are about to start doing?Seth Carpenter I do, I do. And as you are comparing what central bankers may do to how the market is pricing things, I think there's a very interesting set of observations to make here. First, the last Bank of England report, where they provide their forecasts for inflation predicated on current market pricing. Under those forecasts the bank put out, the market has priced in so many rate hikes that it would cause inflation to be too low and go below their target. That's a reflection of the Bank of England's judgment that maybe the market has too much tightening baked into the outlook. But to your specific question about a previous historical precedent, I would look for the 1990s in the United States. During the 1990s hiking cycle, or should I say, just over the whole of the 1990s because it wasn't just one hiking cycle and that for me is the key historical precedent to look for. We saw hikes start in the early 90s, was not at a consistent pace. There was a time where the hikes were bigger, they were smaller, then the hiking cycle paused for a while. We got a reversal, we got a pause, we got more rate hikes and then we got a pause again and it came back down. That sort of very reactive policy is exactly what I think we're going to be seeing this time around in the United States, in the U.K., in the developed market economies where we have high inflation and central bankers are trying to sort out how much of that inflation is cyclical, how much of it is temporary. Andrew Sheets Thanks for listening. We’ll be back in your feed soon for part two of my conversation with Seth Carpenter on central banks, inflation, and the outlook for markets. As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people find the show.

The ongoing situation around Ukraine has captivated headlines and investors alike. While the resolution remains unclear, we can begin to predict how markets would react to possible outcomes.This presentation references actual or potential sanctions, which may prohibit U.S. persons from buying certain securities, making certain investments and/or engaging in other activities in or pertaining to Russia. The content of this presentation is for informational purposes and does not represent Morgan Stanley’s view as to whether or not any of the Persons, instruments or investments discussed are or will become subject to sanctions. Any references in this presentation to entities, debt or equity instruments that may be covered by such sanctions should not be read as recommending or advising as to any investment activities in relation to such entities or instruments. Audience members are solely responsible for ensuring that their investment activities in relation to any sanctioned entities and/or securities are carried out in compliance with applicable sanctions.----- Transcript -----Michael Zezas Welcome to Thoughts on the Market. I'm Michael Zezas Head of U.S. Public Policy Research and Municipal Strategy for Morgan Stanley.Marina Zavolock And I'm Marina Zavalock, Head of Emerging Europe, Middle East, and Africa Equity Strategy at Morgan Stanley.Michael Zezas And on this special edition of the podcast, we'll be discussing ongoing developments around Ukraine and how markets might react to various outcomes. It's Thursday, February 17th at 9:00 a.m. in New York.Marina Zavolock And it's 2:00 p.m. in London.Michael Zezas So, Marina, we've spent a lot of time in recent weeks tracking developments in the ongoing situation around Ukraine, on whose border Russia's amassed a substantial military presence and there are warnings of a potential invasion. This would be no small event, potentially the largest military action in Europe since World War Two, with great risk to many people. Recent news has all sides continuing to express hope for a diplomatic solution, and let's hope that can be achieved. But for this podcast, we want to focus narrowly on the market's impact because this situation has been a key driver of recent moves in many global markets. So, let's keep it simple to start, which markets are most vulnerable to a military confrontation and why?Marina Zavolock So, of course, we see Ukrainian and Russian markets as most directly vulnerable. Ukraine is directly exposed from an economic perspective, and the Ukrainian market has more downside risks due to this direct fundamental exposure and the country's reliance on external financing as well. The risk for Russian markets are more related to sanctions, given the strong economic backdrop. There are various sanctions under discussion aimed firstly at deterring a Russian invasion of Ukraine. Should Russia invade, we would expect the U.S. and Europe to act quickly to impose new sanctions, both to impact Russia’s decision making and ability to sustain any invasion, while at the same time limiting the impact on global commodities and supply chains to the extent possible.Marina Zavolock The situation is, of course, very fluid, as you described. Sanctions have not yet been finalized, but I'll mention three of the material sanctions that are reportedly under discussion. First, SDN list sanctions on a number of Russian banks and possibly other Russian companies. This would mean US persons would be prohibited from dealing with these companies, be it in business transactions or trading of securities. Second, Export controls restricting the export of technology products containing U.S. made components or software to Russia. Third, New sovereign debt sanctions on the secondary market – adding to the primary market sanctions already in place – this could mean exclusion from large fixed income indices in a worst case. Overall, from a Russian stock market perspective, we see the Russian banking sector as potentially most exposed, given a number of banks appear targeted by SDN list sanctions, and would also be affected meaningfully by any ban on U.S. technology. Michael Zezas So those outcomes seem pretty substantial here in terms of their impact. So obviously the outcome of this confrontation matters quite a bit. How do you think the stock markets you're tracking are set up to react to various outcomes, whether it be de-escalation from here or some form of further escalation?Marina Zavolock So to assess the risk reward for different Russian and Ukraine related assets and commodities, we published a framework earlier this year to outline these scenarios: de-escalation, limbo (where uncertainty persists), partial escalation, and material escalation. For Russian equities in particular, we use two key variables that investors tend to focus on: the market's implied cost of equity and dividend yield. On implied cost of equity, Russia currently trades at 19%, which is about in line with the peak seen around many prior escalation periods in geopolitics, such as during the 2018 probe into U.S. election interference. But it is below the 26% level reached following Crimea annexation in 2014. On dividend yield, Russia trades at extraordinary levels of 16% at current commodity prices. We've never seen such levels before for any major country, or Russia, historically. Marina Zavolock So coming back to the scenarios. Using these two variables I outlined, analyzing historical geopolitical escalation periods for Russia, we see about 50% potential upside to Russian stocks in a de-escalation scenario and at least 30% downside in the event of material escalation. Russian equities are currently trading roughly in line with our 'limbo' scenario, meaning the market is assuming continued talks and uncertainty without a breakthrough agreement. It's also worth noting here that although Russian equities are down about 20% from their pre-geopolitical escalation highs in October, they have also recovered 20% from their recent lows. And at the lows, the Russian market was already pricing in a partial escalation in Ukraine.Michael Zezas So those are some pretty substantial differences based on different outcomes. What are some of the signposts or signals that you're watching for that might tell us what direction we're headed in?Marina Zavolock So for the de-escalation scenario to become evident, the key signpost we're watching for is a meaningful reduction in Russian troops on Ukraine's border. Earlier this week, Russia’s defense ministry announced that Russia would start a pullback of some ot its forces after completing military drills – we are watching whether troops are actually being withdrawn, and to what extent. The reason we're watching troop movements particularly closely is that when there was a related buildup of Russian troops on Ukraine's borders last spring, it was Russia's announcement of a meaningful troop removal and the subsequent move of troops that allowed the market to recover by about 40% over the following months.Marina Zavolock As for the escalation scenarios, of course, a further buildup of troops, any movement of troops across the border, any breakdown of ongoing talks with the West, these are all key signposts we're watching. We're also watching both local and international key government official commentary and news flow, which cover the situation differently. I'd also note that for those that aren't following all of these signposts very closely, the Russian equities market is rapidly reacting to developments, we think a step ahead of global markets, which have only recently begun to react to these risks.Michael Zezas And Marina, outside of Russian equities, are there other markets you're watching that could experience spillover effects?Marina Zavolock From a broader perspective, Russia is a key global exporter of various commodities. It's not just the well-known oil and European gas, but Russia also produces 37% of the world's palladium, which is essential for global autos manufacturing. It's a meaningful producer of nickel, aluminum, and a dozen other commodities. Many of these commodities recently started to rally, pricing in some risk premium on the back of the rise in global focus on these geopolitical risks. Our European equity strategist, Graham Secker, also anticipates European equities may be vulnerable to mid-single digit underperformance versus global equities in the case of escalation. That said, as I mentioned before, we see a low probability of spillover to these markets from a fundamental perspective. So, the impact is likely to be short term and more market sentiment driven in the case of escalation.Michael Zezas Alright so, even if we assume that perhaps the diplomatic solution takes hold. What are the risks that this could repeat itself again as an escalation and then de-escalation cycle? And what would that mean for your coverage universe?Marina Zavolock Even in a de-escalation scenario, long-term geopolitical risk to Russia will remain. I don't think the market will price these risks out quickly, and we've had increases in geopolitical risk and then de-escalation many times before since the 2014 Crimea invasion, and even before that. Regular investors in Russian markets have grown accustomed to these geopolitical risks. And there have been, over recent years, windows when Russian equities can have material returns, followed by sell offs on the back of increases in geopolitical tensions and incremental sanctions. That said, from 2014 lows to the recent peak in Russian equities, the Russian Equities Index has outperformed emerging markets by about 13% per year and returned 15% total, including dividends, per year. This is on the back of many structural drivers, like a tripling in dividend payout ratios over this time. In fact, recently, the Russian stock market has seen record levels of buybacks, dividend levels, and retail inflows.Michael Zezas Marina, thank you. This has been really insightful. Thank you for taking the time to talk.Marina Zavolock Thank you, Michael.Michael Zezas And thanks for listening. If you enjoy Thoughts on the Market, please be sure to rate and review us on the Apple Podcasts app. It helps more people find the show.