Tuesday, March 30, 2010

Morgan StanleyStrategy Forum March 29, 2010

March 29, 2010

Morgan Stanley Strategy Forum

Introduction: This is a pivotal week for financial markets. Rates have backed up significantly but risky assets have continued to rally. The Fed ends its asset purchases this week. We think key US data, notably a 300,000 gain in March payrolls, will signal stronger and above-consensus growth. Today on the Strategy Forum we address four key market issues where we also differ from consensus.

(1) The consensus thinks the sovereign-debt crisis in Europe is ending; at Morgan Stanley we don't agree. Elga Bartsch talks about the challenges Europe still faces and why the fundamentals make us remain bearish on the euro.

(2) The consensus thinks interest rates will stay low; at Morgan Stanley, we don't. We think real rates are headed back to historical norms over 3% (see the Appendix, page 6). Dave Greenlaw and I reiterated our call in a March 26 report, US Economics: Reiterating the Case for Higher Real Rates. And Jim Caron discusses what's going on in swap spreads and why it is bearish for bo ds.

(3) The consensus thinks US housing activity will improve significantly; we have been bearish. We are still cautious, but Vishy Tirupattur explains why the Obama Administration's latest initiatives could be a game-changer to the plus side.

(4) And we are less optimistic than consensus about equity markets over the next six months. Teun

Draaisma offers his views on how to play that caution from a European perspective. — Dick Berner

Morgan Stanley Strategy Forum March 29, 2010

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