The End of the U.S. Dollar’s Bull Run?

Our Chief Cross-Asset Strategist Serena Tang discusses the market’s shifting perception of risk and what’s behind some unusual patterns in fund flows among asset classes.Read more insights from Morgan Stanley. No investment recommendation is made with respect to any of the ETFs or mutual funds referenced herein. Investors should not rely on the information included in making investment decisions with respect to those funds. ----- Transcript -----Welcome to Thoughts on the Market. I’m Serena Tang, Morgan Stanley’s Chief Cross-Asset Strategist. Today I want to look at how investors are playing defense amid elevated macro uncertainty.It’s Tuesday, April 22, at 10am in New York.So, the last three weeks have brought intense volatility to global markets, and investors have had to reexamine their relationship with risk. Typically, in times like these, mutual fund and ETF flows from stocks into bonds serve as a clear gauge of investor defensiveness. But this pattern hasn’t really been informative this time around.Instead, flows to gold – rather than bonds – have been the clearest evidence of flight-to-quality most recently. Between April 3rd and 11th almost US$5 billion went into gold ETFs globally, one of the strongest seven-day net flow stretches ever. There's been US$22 billion of net inflows to gold ETFs with assets under management totaling about US$250 billion year-to-date. Of the 10 days of the highest net inflows to gold ETFs over the last 20 years, three occurred in the last month.Cash also benefited from the dash to defensives, with over US$100bn flowing into money market funds year-to-date. And we expect that reallocating to cash will be a theme for the rest of the year for many reasons. For one, our U.S. economists expect no Fed cuts in 2025 and back-loaded cuts in 2026 following a projected surge in core PCE inflation from tariffs. This means that money market fund yields should stay higher for longer. And with investors seeing the wild gyrations in safe government bonds in recent weeks, money market funds’ low volatility offer a strong risk/reward argument over holding Treasuries. For another, let's say our economists' base case is incorrect, and we do get steep cuts from the Fed sooner rather than later. That probably means we're on the brink of a recession; and in that situation, cash is king.You know what's been particularly surprising in the middle of this recent flight to quality? Outflows from high-grade US fixed income. These outflows are notable because U.S. Treasuries, Agency mortgages, and investment grade credit are usually seen as low-beta and defensives. But U.S. high-grade bonds saw net outflows of approximately US$1.4bn during the week of April 7th. These are the largest outflows since the pandemic; and we think that this trend can continue.So we need to ask ourselves if this is the end of American exceptionalism. And are we seeing a rotation from U.S. assets into rest-of-the-world?The answer may surprise you, but despite the outflows in U.S. bonds, there hasn’t really been a persistent rotation out of U.S. risk assets and into rest-of-world markets. At least not a lot of evidence in the data yet. U.S. equity investors still have a strong home bias, and we've seen continued net buying from Japanese and euro area investors of foreign equities – at least some of which are U.S. equities. We think investors should stay defensive amid the current uncertainty. But figuring out what's actually defensive has been challenging. This recent turmoil in the global markets suggests that the investors’ shifting idea of what's risky is a risk in itself. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

22 Apr 20254min

Can the U.S. equity market break out of its expected range? Our CIO and Chief U.S. Equity Strategist Mike Wilson looks at whether the Trump administration’s shifting tariff policy and Fed uncertainty will continue weighing down stocks.Read more insights from Morgan Stanley. ----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Today, I will discuss what it will take for the US equity market to break out of the 5000-5500 range. It's Monday, April 21st at 11:30am in New York.So, let’s get after it.Last week, we focused on our view that the S&P 500 was likely to remain in a 5000-5500 range in the near term given the constraints on both the upside and the downside. First, on the upside, we think it will be challenging for the index to break through prior support of 5500 given the recent acceleration lower in earnings revisions, uncertainty on how tariff negotiations will progress and the notion that the Fed appears to be on hold until it has more clarity on the inflationary and growth impacts of tariffs and other factors. At the same time, we also believe the equity market has been contemplating all of these challenges for much longer than the consensus acknowledges. Nowhere is this evidence clearer than in the ratio of Cyclical versus Defensive stocks as discussed on this podcast many times. In fact, the ratio peaked a year ago and is now down more than 40 per cent.Coming into the year, we had a more skeptical view on growth than the consensus for the first half due to expectations that appeared too rosy in the context of policy sequencing that was likely to be mostly growth negative to start. Things like immigration enforcement, DOGE, and tariffs. Based on our industry analysts' forecasts, we were also expecting AI Capex growth to decelerate, particularly in the first half of the year when growth rate comparisons are most challenging. Recall the Deep Seek announcement in January that further heightened investor concerns on this factor. And given the importance of AI Capex to the overall growth expectations of the economy, this dynamic remains a major consideration for investors. A key point of today’s episode is that just as many were overly optimistic on growth coming into the year, they may be getting too pessimistic now, especially at the stock level. As the breakdown in cyclical stocks indicate, this correction is well advanced both in price and time, having started nearly a year ago. Now, with the S&P 500 closing last week very close to the middle of our range, the index appears to be struggling with the uncertainty of how this will all play out.Equities trade in the future as they try to discount what will be happening in six months, not today. Predicting the future path is very difficult in any environment and that is arguably more difficult today than usual, which explains the high volatility in equity prices. The good news is that stocks have discounted quite a bit of slowing at this point. It’s worth remembering the factors that many were optimistic about four-to-give months ago—things like de-regulation, lower interest rates, AI productivity and a more efficient government—are still on the table as potential future positive catalysts. And markets have a way of discounting them before it's obvious.However, there is also a greater risk of a recession now, which is a different kind of slowdown that has not been fully priced at the index level, in our view. So as long as that risk remains elevated, we need to remain balanced with our short-term views even if we believe the odds of a positive outcome for growth and equities are more likely than consensus does over the intermediate term. Hence, we will continue to range trade.Further clouding the picture is the fact that companies face more uncertainty than they have since the early days of the pandemic. As a result, earnings revisions breadth is now at levels rarely witnessed and approaching downside extremes assuming we avoid a recession. Keep in mind that these revisions peaked almost a year ago, well before the S&P 500 topped, further supporting our view that this correction is much more advanced than acknowledged by the consensus. This is why we are now more interested in looking at stocks and sectors that may have already discounted a mild recession even if the broader index has not. Bottom line, if a recession is averted, markets likely made their lows two weeks ago. If not, the S&P 500 will likely take those lows out. There are other factors that could take us below 4800 in a bear case outcome, too. For example, the Fed decides to raise rates due to tariff-driven inflation; or the term premium blows out, taking 10-year Treasury yields above 5 per cent without any growth improvement.Nevertheless, we think recession probability is the wildcard now that markets are wrestling with. In S&P terms, we think 5000-5500 is the appropriate range until this risk is either confirmed or refuted by the hard data – with labor being the most important. In the meantime, stay up the quality curve with your equity portfolio.Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

21 Apr 20255min

Our analysts Michael Zezas and Erik Woodring discuss the ways tariffs are rewiring the tech hardware industry and how companies can mitigate the impact of the new U.S. trade policy.Read more insights from Morgan Stanley. ----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Public Policy Research.Erik Woodring: And I'm Erik Woodring, Head of the U.S. IT Hardware team.Michael Zezas: Today, we continue our tariff coverage with a closer look at the impact on tech hardware. Products such as your smartphone, computers, and other personal devices.It's Thursday, April 17th at 10am in New York.President Trump's reciprocal tariffs announcements, followed by a 90 day pause and exemptions have created a lot of turmoil in the tech hardware space. People started panic buying smartphones, worried about rising costs, only to find out that smartphones may or may not be exempted.As I pointed out on this podcast before, these tariffs are also significantly accelerating the transition to a multipolar world. This process was already well underway before President Trump's second term, but it's gathering steam as trade pressures escalate. Which is why I wanted to talk to you, Erik, given your expertise.In the multipolar world, IT hardware has followed a China+1 strategy. What is the strategy, and does it help mitigate the impact from tariffs?Erik Woodring: Historically, most IT hardware products have been manufactured in China. Starting in 2018, during the first Trump administration, there was an effort by my universe to diversify production outside of China to countries friendly with China – including Vietnam, Indonesia, Malaysia, India, and Thailand. This has ultimately helped to protect from some tariffs, but this does not make really any of these countries immune from tariffs given what was announced on April 2nd.Michael Zezas: And what do the current tariffs – recognizing, of course, that they could change – what do those current tariffs mean for device costs and the underlying stocks that you cover?Erik Woodring: In short, device costs are going up, and as it relates to my stocks, there's plenty of uncertainty. If I maybe dig one level deeper, when the first round of tariffs were announced on April 2nd, the cumulative cost that my companies were facing from tariffs was over $50 billion. The weighted average tariff rate was about 25 per cent. Today, after some incremental announcements and some exemptions, the ultimate cumulative tariff cost that my universe faces is about $7 billion. That is equivalent to an average tariff rate of about 7 per cent. And what that means is that device costs on average will go up about 5 per cent.Of course, there are some that won't be raised at all. There are some device costs that might go up by 20 to 30 per cent. But ultimately, we do expect prices to go up and as a result, that creates a lot of uncertainties with IT hardware stocks.Michael Zezas: Okay, so let's make this real for our listeners. Suppose they're buying a new device, a smartphone, or maybe a new laptop. How would these new tariffs affect the consumer price?Erik Woodring: Sure. Let's use the example of a smartphone. $1000 smartphone typically will be imported for a cost of maybe $500. In this current tariff regime, that would mean cost would go up about $50. So, $1000 smartphone would be $1,050.You could use the same equivalent for a laptop; and then on the enterprise side, you could use the equivalent of a server, an AI server, or storage – much more expensive. Meaning while the percentage increase in the cost will be the same, the ultimate dollar expense will go up significantly more.Michael Zezas: And so, what are some of the mitigation strategies that companies might be able to use to lessen the impact of tariffs?Erik Woodring: If we start in the short term, there's two primary mitigation strategies. One is pulling forward inventory and imports ahead of the tariff deadline to ultimately mitigate those tariff costs. The second one would be to share in the cost of these tariffs with your suppliers. For IT hardware, there's hundreds of suppliers and ultimately billions of dollars of incremental tariff costs can be somewhat shared amongst these hundreds of companies.Longer term, there are a few other mitigation strategies. First moving your production out of China or out of even some of these China+1 countries to more favorable tariff locations, perhaps such as Mexico. Many products which come from Mexico in my universe are exempted because of the USMCA compliance. So that is a kind of a medium-term strategy that my companies can use.Ultimately, the medium-term strategy that's going to be most popular is raising prices, as we talked about. But some of my companies will also leverage affordability tools to make the cost ultimately borne out over a longer period of time. Meaning today, if you buy a smartphone over two-year of an installment plan, they could extend this installment plan to three years. That means that your monthly cost will go down by 33 per cent, even if the price of your smartphone is rising.And then longer term, ultimately, the mitigation tool will be whether you decide to go and follow the process of onshoring. Or if you decide to continue to follow China+1 or nearshoring, but to a greater extent.Michael Zezas: Right. So, then what about onshoring – that is moving production capacity to the U.S.? Is this a realistic scenario for IT hardware companies?Erik Woodring: In reality, no. There is some small volume production of IT hardware projects that is done in the United States. But the majority of the IT hardware ecosystem outside of the United States has been done for a specific reason. And that is for decades, my companies have leveraged skilled workers, skilled in tooling expertise. And that has developed over time, that is extremely important. Tech CEOs have said that the reason hardware production has been concentrated in China is not about the cost of labor in the country, but instead about the number of skilled workers and the proximity of those skilled workers in one location. There's also the benefit of having a number of companies that can aggregate tens of thousands, if not hundreds of thousands of workers, in a specific factory space. That just makes it much more difficult to do in the United States. So, the headwinds to onshoring would be just the cost of building facilities in the United States. It would be finding the skilled labor. It would be finding resources available for building these facilities. It would also be the decision whether to use skilled labor or humanoids or robots.Longer term, I think the decision most of my companies will have to face is the cost and time of moving your supply chain, which will take longer than three years versus, you know, the current presidential term, which will last another, call it three and a half years.Michael Zezas: Okay. And so how does all of this impact demand for tech hardware, and what's your outlook for the industry in the second half of this year?Erik Woodring: There's two impacts that we're seeing right now. In some cases, more mission critical products are being pulled forward, meaning companies or consumers are going and buying their latest and greatest device because they're concerned about a future pricing increase.The other impact is going to be generally lower demand. What we're most concerned about is that a pull forward in the second quarter ultimately leads to weaker demand in the second half – because generally speaking, uncertainty, whether that's policy or macro more broadly, leads to more concerns with hardware spending and ultimately a lower level of spending. So any 2Q pull forward could mean an even weaker second half of the year.Michael Zezas: Alright, Erik, thanks for taking the time to talk.Erik Woodring: Great. Thanks for speaking, Mike.Michael Zezas: And thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

17 Apr 20258min

The ever-evolving nature of the U.S. administration’s trade policy has triggered market uncertainty, impacting corporate and consumer confidence. But our Head of Corporate Credit Research Andrew Sheets explains why he believes this volatility could present a silver lining for credit investors.Read more insights from Morgan Stanley. ----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Today I’m going to talk about how high uncertainty can be a risk for credit, and also an opportunity.It's Wednesday, April 16th at 9am in New York.Markets year-to-date have been dominated by questions of U.S. trade policy. At the center of this debate is a puzzle: What, exactly, the goal of this policy is?Currently, there are two competing theories of what the U.S. administration is trying to achieve. In one, aggressive tariffs are a negotiating tactic, an aggressive opening move designed to be bargained down into something much, much lower for an ultimate deal.And in the other interpretation, aggressive tariffs are a new industrial policy. Large tariffs, for a long period of time, are necessary to encourage manufacturers to relocate operations to the U.S. over the long term.Both of these theories are plausible. Both have been discussed by senior U.S. administration officials. But they are also mutually exclusive. They can’t both prevail.The uncertainty of which of these camps wins out is not new. Market strength back in early February could be linked to optimism that tariffs would be more of that first negotiating tool. Weakness in March and April was linked to signs that they would be more permanent. And the more recent bounce, including an almost 10 percent one-day rally last week, were linked to hopes that the pendulum was once again swinging back.This back and forth is uncertain. But in some sense, it gives investors a rubric: signs of more aggressive tariffs would be more challenging to the market, signs of more flexibility more positive. But is it that simple? Do signs of a more lasting tariff pause solve the story?The important question, we think, is whether all of that back and forth has done lasting damage to corporate and consumer confidence. Even if all of the tariffs were paused, would companies and consumers believe it? Would they be willing to invest and spend over the coming quarters at similar levels to before – given all of the recent volatility?This question is more than hypothetical. Across a wide range of surveys, the so-called soft data, U.S. corporate and consumer confidence has plunged. Merger activity has slowed sharply. We expect intense investor focus on these measures of confidence over the coming months.For credit, lower confidence is a doubled edged sword. To some extent, it is good, keeping companies more conservative and better able to service their debt. But if it weakens the overall economy – and historically, weaker confidence surveys like we’ve seen recently have indicated much weaker growth in the future; that’s a risk. With overall spread levels about average, we do not see valuations as clearly attractive enough to be outright positive, yet.But maybe there is one silver lining. Long term Investment grade corporate debt now yields over 6 percent. As corporate confidence has soured, and these yields have risen, we think companies will find it unattractive to lock in high costs for long-term borrowing. Fewer bonds for sale, and attractive all-in yields for investors could help this part of the market outperform, in our view.Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

16 Apr 20253min

As gold prices reach new all-time highs, Metals & Mining Commodity Strategist Amy Gower discusses whether the rally is sustainable.Read more insights from Morgan Stanley. ---- Transcript -----Welcome to Thoughts on the Market. I’m Amy Gower, Morgan Stanley’s Metals & Mining Commodity Strategist. Today I’m going to talk about the steady rise we’ve had in gold prices in recent months and whether or not this rally can continue. It’s Tuesday, April 15th, at 2pm in London.So gold breached $3000/oz for the first time ever on 17th of March this year, and has continued to rise since then; but we would argue it still has room to run. First of all, let’s look back at how we got here. So, gold already rallied 25 percent in 2024, which was driven largely by strong central bank demand as well as the start of the US Fed rate cutting cycle, and strong demand for bars and coins as geopolitical risk remained elevated. And arguably, these trends have continued in 2025, with gold up another 22 percent, and now rising tariff uncertainty also contributing. This comes in two ways – first, demand for gold as a safe haven asset against this current macro uncertainty. And second as an inflation hedge. Gold has historically been viewed by investors as a hedge against the impact of inflation. So, with the U.S. tariffs raising inflation risks, gold is seeing additional demand here too. But, of course, the question is: can this gold rally keep going? We think the answer is yes, but would caveat that in big market moves -- like the ones we have seen in recent weeks -- gold can also initially fall alongside other asset classes, as it is often used to provide liquidity. But this is often short-lived and already gold has been rebounding. We would expect this to continue with the price of gold to rise further to around $3500/oz by the third quarter of this year. There are three key drivers behind this projection: First, we see still strong physical demand for gold, both from central banks and from the return of exchange-traded funds or ETFs. Central banks saw what looks like a structural shift in their gold purchases in 2022, which has continued now for three consecutive years. And ETF inflows are returning after four years of outflows, adding a significant amount year-to-date, but still well below their 2020 highs, suggesting there’s arguably much more room to go here. Second, macro drivers are also contributing to this gold price outlook. A falling U.S. dollar is usually a tailwind for commodities in general, as it makes them cheaper for non-dollar holders; while a stagflation scenario, where growth expectations are skewed down and inflation risks are skewed up, would also be a set-up where gold would perform well. And third, continued demand for gold as a safe-haven asset amid rising inflation and growth risks is also likely to keep that bar and coin segment well supported. And what would be the bullish risks to this gold outlook? Well, as prices rise, you tend to start ask questions about demand destruction. And this is no different for gold, particularly in the jewelry segment where consumers would go with usually a budget in mind, rather than a quantity of gold. And so demand can be quite price sensitive. Annual jewelry demand is roughly twice the size of that central bank buying and we already saw this fall around 11 percent year-on-year in 2024. So, we would expect a bit of weakness here. But offset by the other factors that I mentioned. So, all in all, a combination of physical buying, macro factors and uncertainty should be driving safe haven demand for gold, keeping prices on a rising trajectory from here. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

15 Apr 20254min

Our CIO and Chief U.S. Equity Strategist Mike Wilson probes whether market confidence can return soon as long as tariff policy remains in a state of flux.Read more insights from Morgan Stanley. ---- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Today on the podcast I’ll be discussing last week’s volatility and what to expect going forward.It's Monday, April 14th at 11:30am in New York.So, let’s get after it.What a month for equity markets, and it's only halfway done! Entering April, we were much more focused on growth risks than inflation risks given the headwinds from AI Capex growth deceleration, fiscal slowing, DOGE and immigration enforcement. Tariffs were the final headwind to face, and while most investors' confidence was low about how Liberation Day would play out, positioning skewed more toward potential relief than disappointment.That combination proved to be problematic when the details of the reciprocal tariffs were announced on April 2nd. From that afternoon's highs, S&P 500 futures plunged by 16.5 per cent into Monday morning. Remarkably, no circuit breakers were triggered, and markets functioned very well during this extreme stress. However, we did observe some forced selling as Treasuries, gold and defensive stocks were all down last Monday. In my view, Monday was a classic capitulation day on heavy volume. In fact, I would go as far as to say that Monday will likely prove to be the momentum low for this correction that began back in December for most stocks; and as far back as a year ago for many cyclicals. This also means that we likely retest or break last week's price lows for the major indices even if some individual stocks have bottomed. We suspect a more durable low will come as early as next month or over the summer as earnings are adjusted lower, and multiples remain volatile with a downward bias given the Fed's apprehension to cut rates – or provide additional liquidity unless credit or funding markets become unstable. As discussed last week, markets are now contemplating a much higher risk of recession than normal – with tariffs acting as another blow to an economy that was already weakening from the numerous headwinds; not to mention the fact that most of the private economy has been struggling for the better part of two years. In my view, there have been three factors supporting headline GDP growth and labor markets: government spending, consumer services and AI Capex – and all three are now slowing.The tricky thing here is that the tariff impact is a moving target. The question is whether the damage to confidence can recover. As already noted, markets moved ahead of the fundamentals; and markets have once again done a better job than the consensus in predicting the slowdown that is now appearing in the data. While everyone can see the deterioration in the S&P 500 and other popular indices, the internals of the equity market have been even clearer. First, small caps versus large caps have been in a distinct downtrend for the past four years. This is the quality trade in a nutshell which has worked so well for reasons we have been citing for years — things like the k-economy and crowding out by government spending that has kept the headline economic statistics higher than they would have been otherwise. This strength has encouraged the Fed to maintain interest rates higher than the weaker cohorts of the economy need to recover. Therefore, until interest rates come down, this bifurcated economy and equity markets are likely to persist. This also explains why we had a brief, yet powerful rally last fall in low quality cyclicals when the Fed was cutting rates, and why it quickly failed when the Fed paused in December. The dramatic correction in cyclical stocks and small caps is well advanced not only in price, but also in time. While many have only recently become concerned about the growth slowdown, the market began pricing it a year ago.Looking at the drawdown of stocks more broadly also paints a picture that suggests the market correction is well advanced, but probably not complete if we end up in a recession or the fear of one gets more fully priced. This remains the key question for stock investors, in my view, and why the S&P 500 is likely to remain in a range of 5000-5500 and volatile – until we have a more definitive answer to this specific question around recession, or the Fed decides to circumvent the growth risks more aggressively, like last fall.With the Fed saying it is constrained by inflation risks, it appears likely to err on the side of remaining on hold despite elevated recession risk. It's a similar performance story at the sector and industry level, with many cohorts experiencing a drawdown equal to 2022. Bottom line, we've experienced a lot of price damage, but it's too early to conclude that the durable lows are in – with policy uncertainty persisting, earnings revisions in a downtrend, the Fed on hold and back-end rates elevated. While it’s too late to sell many individual stocks at this point, focus on adding risk over the next month or two as markets likely re-test last week’s lows. Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

14 Apr 20255min

Our Head of Corporate Credit Research analyzes the market response to President Trump’s tariff reversal and explains why rallies do not always indicate an improvement in the overall environment.Read more insights from Morgan Stanley. ---- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley. Today I’m going to talk about the historic gains we saw this week in markets, and what they may or may not tell us. It's Friday April 11th at 2pm in London. Wednesday saw the S&P 500 gain 9.5 percent. It was the 10th best day for the U.S. equity market in the last century. Which raises a reasonable question: Is that a good thing? Do large one-day gains suggest further strength ahead – or something else? This is the type of Research question we love digging into. Pulling together the data, it’s pretty straightforward to sort through those other banner days in stock market history going back to 1925. And what they show is notable. I’m now going to read to you when those large gains occurred, in order of the gains themselves. The best day in market history, March 15th 1933, when stocks soared over 16 per cent? It happened during the Great Depression. The 2nd best day, Oct 30th 1929. During the Great Depression. The 3rd best day – Great Depression. The fourth best – the first trading day after Germany invaded Poland in 1939 and World War 2 began. The 5th best day – Great Depression. The 6th Best – October 2008, during the Financial Crisis. The 7th Best – also during the Financial Crisis. The 8th best. The Great Depression again. The 9th best – The Great Depression. And 10th best? Well, that was Wednesday. We are in interesting company, to say the least. Incidentally, we stop here in the interest of brevity; this is a podcast known for being sharp and to the point. But if we kept moving further down the list, the next best 20 days in history all happen during either COVID, the 1987 Crash, a Recession, or a Depression. So why would that be? Why, factually, have some of the best days in market history occurred during some of the very worst of possible backdrops. In some cases, it really was a sign of a buying opportunity. As terrible as the Great Depression was – and as the grandson of a South Dakota farmer I heard the tales – stocks were very cheap at this time, and there were some very large rallies in 1932, 1933, or even 1929. During COVID, the gains on March 24th of 2020, which were associated with major stimulus, represented the major market low. But it can also be the case that during difficult environments, investors are cautious. And they are ultimately right to be cautious. But because of that fear, any good news – any spark of hope – can cause an outsized reaction. But it also sometimes doesn't change that overall challenging picture. And then reverses. Those two large rallies that happened in October of 2008 during the Global Financial Crisis, well they both happened around hopes of government and central bank support. And that temporarily lifted the market – but it didn’t shift the overall picture. What does this mean for investors? On average, markets are roughly unchanged in the three months following some of these largest historical gains. But the range of what happens next is very wide. It is a sign, we think, that these are not normal times, and that the range of outcomes, unfortunately, has become larger. Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

11 Apr 20254min

Our analysts Vishy Tirupattur and Martin Tobias explain how the announcement of new tariffs and the subsequent pause in their implementation affected the bond market.Read more insights from Morgan Stanley. ---- Transcript -----Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's, Chief Fixed Income Strategist.Martin Tobias: And I'm Martin Tobias, from the U.S. Interest Rate Strategy Team.Vishy Tirupattur: Yesterday the U.S. stock market shot up quite dramatically after President Trump paused most tariffs for 90 days. But before that, there were some stresses in the funding markets. So today we will dig into what those stresses were, and what transpired, and what investors can expect going forward.It's Thursday, April 10th at 11:30am in New York.President Trump's Liberation Day tariff announcements led to a steep sell off in the global stock markets. Marty, before we dig into that, can you give us some Funding Markets 101? We hear a lot about terms like SOFR, effective fed funds rate, the spread between the two. What are these things and why should we care about this?Martin Tobias: For starters, SOFR is the secured overnight financing rate, and the effective fed funds rate – EFFR – are both at the heart of funding markets.Let's start with what our listeners are most likely familiar with – the effective fed funds rate. It's the main policy rate of the Federal Reserve. It's calculated as a volume weighted median of overnight unsecured loans in the Fed funds market. But volume in the Fed funds market has only averaged [$]95 billion per day over the past year.SOFR is the most important reference rate for market participants. It's a broad measure of the cost to borrow cash overnight, collateralized by Treasury securities. It's calculated as a volume weighted median that covers three segments of the repo market. Now SOFR volumes have averaged 2.2 trillion per day over the past year.Vishy Tirupattur: So, what you're telling me, Marty, is that the, the difference between these two rates really reflects how much liquidity stress is there, or the expectations of the uncertainty of funding uncertainty that exists in the market. Is that fair?Martin Tobias: That's correct. And to do this, investors look at futures contracts on fed funds and SOFR.Now fed funds futures reflect market expectations for the Fed's policy rate, SOFR futures reflect market expectations for the Fed policy rate, and market expectations for funding conditions. So, the difference or basis between the two contracts, isolates market expectations for funding conditions.Vishy Tirupattur: So, this basis that you just described. What is the normal sense of this? Where [or] how many basis points is the typical basis? Is it positive? Is it negative?Martin Tobias: In a normal environment over the past three years when reserves were in Abundancy, the three-month SOFR Fed funds Futures basis was positive 2 basis points. This reflected SOFR to set 2 basis points below fed funds on average over the next three months.Vishy Tirupattur: So, what happened earlier this week is – SOFR was setting above effective hedge advance rate, implying…Martin Tobias: Implying tighter funding conditions.Vishy Tirupattur: So, Marty, what actually changed yesterday? How bad did it get and why did it get so bad?Martin Tobias: So, three months SOR Fed funds tightened all the way to -4 basis points. And we think this was a reflection of investors’ increased demand for cash; whether it was lending more securities outright in repo to raise cash, or selling securities outright, or even not lending excess cash in repo. This caused dealer balance sheets [to] become more congested and contributed to higher SOFR rates.Vishy Tirupattur: So, let's give some context to our listeners. So, this is clearly not the first time we've experienced stress in the funding markets. So, in previous episodes – how far did it get and gimme some context.Martin Tobias: Funding conditions did indeed tighten this week, but the environment was far from true funding stress like in 2019 and certain periods in 2020. Now, in 2019 when funding markets seized, and the Fed had to intervene and inject liquidity, three months SOFR fed funds basis averaged -9 basis points. And that compares to -4 basis points during the peak macro uncertainty this week.Vishy Tirupattur: So, Marty, what is your assessment of the state of the funding markets right now?Martin Tobias: Right. Funding conditions have tightened, but I think the environment is far from true funding stress. Thus far, the repricing has occurred because of a higher floor for funding rates and not a scarcity of reserves in the banking system.Vishy Tirupattur: So, to summarize, so the funding stress has been quite a bit earlier this week. Not as bad as the worst conditions we saw say in 2019 or during the peak COVID periods in 2020. but still pretty bad. And relative to how bad it got, today we are slightly better than what we were two days ago. Is that a fair description?Martin Tobias: Yes. That's good. Now, Vishy, what is your view on why the longer end of the bond market sold off.Vishy Tirupattur: So longer end bond markets, as you know, Marty, while safe from a credit risk perspective, do have interest rate sensitivity. So, the longer the bonds, the greater the interest rate sensitivity. So, in periods of uncertainty, such as the ones we are in now, investors prefer to be in ultra short-term funds or cash – to minimize that interest rate sensitivity of their portfolios. So, what we saw happening in some sense, we can call it dash for cash.I think we both agree that this demand for safety will persist, and we will continue to see inflows into money market funds, which you covered in your research. So, your insights Marty will be very helpful to clients as we navigate these choppy waters going forward.Thanks a lot, Marty, for joining this webcast today.Martin Tobias: Great speaking with you, Vishy,Vishy Tirupattur: And thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.DisclaimerVishy Tirupattur: Yesterday all my troubles were so far away. I believe in yesterday.

10 Apr 20256min