New yield forecast Greece still putting a lid on German yields

Greek woes still keep a lid on German yields despite increasing risk appetite and a better outlook for indicators in coming quarters.Short rates have range traded over the past month and the 2Y-10Y curve has remained unchanged. Going forward, we expect the curve to flatten.The first ECB rate hike will probably occur in Q1 2011, though the market is not discounting the first hike till Q3 11.We expect the Danish central bank to deliver another CD rate cut within the next month.The US recovery is leading the eurozone so the Fed will act before the ECB. We expect a first US hike in November 2010.Yields should rise on both sides of the Atlantic in 2010.Next yield forecast due 14 May 2010

INTERNATIONAL NEWS WRAP; Euro zone inflation; Eurozone growth outlook; Greece plans to sell a global bond in dollars in late April or early May

         Euro zone inflation was much higher than expected in March; Inflation in the 16-country area was 1.5 percent year-on-year, the highest since December 2008, after 0.9 percent in February; the 1.5% compares w/expectations of a 1.1% increase.  Reuters 

         Eurozone unemployment inline - The euro zone's 10 percent jobless rate in February was the highest since August 1998 and in line with market expectations.  Reuters

         German jobs #s surprise on upside - The number of people registered as unemployed dropped by 31,000 in March to 3.568 million, defying expectations for an increase by 10,000 (DJ)  

         Eurozone – new S&P report on the region's eco growth outlook; S&P views the overall recovery in member countries as still fragile, which calls into question the single currency zone's growth model, as detailed in the article "The Eurozone's Two Growth Models Collide," 

         ECB lends banks less than forecast; The European Central Bank will lend banks less than economists forecast in its final offer of unlimited funds over six months.  Sixty two banks bid for 17.9 billion euros ($24.1 billion).  Economists forecast that it would lend 60 billion euros – Bloomberg 

February 18, 2010 Investment Perspectives — Global

Limited spillover to the US. The European sovereign debt crisis may net to slower European growth from an already- tepid starting point. Although the European Council of gov-
ernment leaders has pledged “to take determined and coordi- nated action, if needed, to safeguard financial stability in the euro area as a whole,” that backstop is unlikely to immunize the eurozone economies completely. The crisis likely will tighten financial conditions and promote fiscal austerity, consisting of increased taxes and lower public-sector demand.

And the crisis hits a still-tender euro area economy, which we have expected to advance just 1.2% in 2010. Incoming data showing that growth rose just 0.1% in Q4 09 and a poor start
to Q1 10 underscore the downside risks.

The impact of even dramatically slower growth in Europe would only trim US growth fractionally; Asia is far more important for the US outlook. However, the European sovereign crisis does create a tail risk for US growth and markets: If the crisis spills over into broader risk aversion and a drying up of liquidity — the functional equivalent of the US subprime crisis — the consequences could be more dire. At the least, these unknown risks make us more cautious about risky ass

Full report here

Americas Equity Morning Summary 02.15.10

Companies Featured
AMAT.O, APD.N, BWLD.O, CRM.N, EVVV.O, GILD.O, GPS.N, JCP.N,
JWN.N, PNRA.O, PX.N, RHT.N, STR.N, ZION.O

Commodities/Commodity Market Report-

Energy prices increased last week, as did most commodities, as risk aversion eased slightly. Oil
led the pack, despite a bearish US DOE report which showed crude, gasoline and distillate
inventories registering weaker-than-expected. Base metals reversed the past couple of weeks’
weakness following a more upbeat mood in equity markets and benign Chinese inflation data.
Precious metals last week recovered from recent weakness after the dollar lost some ground
against the euro ahead of a meeting of Eurozone finance ministers, although concerns over
sovereign risk in the region may continue to support the US currency. Agriculturalprices finished
higher, following the general commodity rally on reduced risk aversion.

US Economics/A European Slowdown Would Only Nick the US

The European sovereign debt crisis may net to slower European growth. Rising risk premiums on
the region’s sovereign debt, constraints on its banks, and fiscal tightening will weigh on growth in
peripheral economies and may spill into the core countries. A weaker euro will be an offset. We
estimate that a one-percentage-point slowdown in European growth might shave 0.2% from that
in the US. Three channels matter: exports, earnings and financial linkages. Europe accounts for
about 29% of our exports, 8% of S&P revenues, and 4.6% of US banks’ totals assets. Contagion
spreading from the European banking system is the biggest tail risk. If the crisis spills over into
broader risk aversion and a drying up of liquidity — the functional equivalent of the US subprime
crisis — the consequences could be more dire.

STEP Commentary/Changes to the Growth STEP

We are adding a 4% position in Express Scripts ($86.43), Ricky Goldwasser’s top pick in her
recently launched coverage of the Healthcare Services group and also one of five top global
picks highlighted by Morgan Stanley's healthcare analysts around the world. Express Scripts
looks well positioned to benefit from the shift to generics from branded drugs over the next five
years, increased exposure to specialty drugs, and meaningful earnings accretion from the NetRx
acquisition, and Ricky sees earnings more than doubling over the next three years. We are
removing the portfolio’s 4% position in Amgen ($56.48). There is no change to Steve Harr’s OW
rating on Amgen, but for the purposes of the Growth STEP, we prefer to move to the sidelines
and shift the portfolio’s position into what we view as a more robust growth story.

Economics Calendar

02/17: Housing Starts (January), forecast: 540,000
02/17: Industrial Production / Capacity Utilization (January), forecast: + 1.1 % / 72.9%
02/18: Producer Price Index/ Core (January), forecast: +0.8 % / +0.1%
02/18: Leading Indicators (January), forecast: +0.3 %

FULL REPORT HERE
02/19: Consumer Price Index/ Core (January), forecast: +0.3 % / +0.1%


M O R G A N S T A N L E Y R E S E A R C H
N O R T H A M E R I C A

Economics Group MONTHLY OUTLOOK February 10, 2010

Sovereign Debt Concerns in Southern Europe

In response to market concerns over its indebtedness, the Greek government has proposed an ambitious fiscal adjustment plan over the next few years. In order to help stabilize the government’s debt-to-GDP ratio, however, nominal GDP growth in Greece needs to rebound. But the common currency that Greece shares with the other members of the euro area precludes strong export growth via real exchange rate depreciation, which will hamper its ability to achieve strong growth in nominal GDP. In our view, there is a significant probability that Greece will need financial support from the European Union (EU) and/or the IMF to help the government smooth out its fiscal adjustment. The fiscal situations in both Portugal and Spain are not as dire as they are in the Hellenic Republic, but these two countries may also need financial support if investors remain spooked.

Growth Is Not Nearly as Strong Beneath the Surface

Expectations for near-term growth have been ratcheted up, following the fourth quarter’s robust 5.7 percent real GDP growth. While that number came in almost precisely in line with our forecast, we have raised our estimate for first quarter growth and slightly reduced our expectations for growth during the second and third quarters. The adjustments were necessary because inventories are correcting much more quickly than originally thought. Inventories added 3.4 percentage points to fourth quarter GDP growth and are expected to add another 1.2 percentage points to growth during the first quarter.


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