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

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Morgan Stanley Strategy Forum 02.16.10

Introduction — On the heels of sovereign problems in Greece and peripheral Europe, we recently published a cross-asset report, Sovereign Crisis Roadmap (February 11, 2010) on selling risky assets into strength over the near term. The current problems are about much more than Greece alone, and our global economist Joachim Fels helps to frame the context. Huw van Steenis from our European banks team looks at the European banking system, which could be the transmission mechanism for potential contagion. And global equity strategist Jason Todd assesses the backdrop for global equities, reiterating our call to own the US over Europe.

Link here