Morgan Stanley's key prediction! Eye of the storm: The dollar bear market continues

According to Zhitong Finance APP, Morgan Stanley has released its global economic key forecast report "Morgan Stanley Research: Key Forecasts," maintaining a positive outlook on dollar assets. It recommends that investors overweight U.S. stocks, U.S. Treasury bonds, and U.S. investment-grade corporate credit, but is not optimistic about the dollar, believing that as the economic growth and yield differentials between the U.S. and other countries/regions narrow, the dollar may depreciate significantly.

The main asset forecasts under Morgan Stanley's bull and bear scenarios are as follows:

Outlook for the Next 12 Months: Our Confident View

Downward bias: The broad imposition of tariffs by the U.S. is a structural shock to the global trade order. The tariffs themselves and the associated uncertainties will significantly drag down economic growth, but given the strong starting point at the beginning of the year, we do not expect a global recession. Despite recent announcements related to tariffs, we still expect the benchmark tariff rates to align with our outlook, and we anticipate that the slowdown in U.S. economic growth will become evident in the fourth quarter of this year. In the U.S., the real GDP growth rate will gradually decline from a quarter-on-quarter rate of 2.5% in the fourth quarter of 2024 to 1.0% in 2025 and 2026. We expect global economic growth to decrease from a quarter-on-quarter rate of 3.5% in the fourth quarter of 2024 to 2.5% in 2025.

Focusing on the U.S.: Global economic growth is slowing, but macroeconomics is not synonymous with the market. In our view, changes in expectations are more critical for risk assets; for a market that has previously priced in the worst-case scenario, "not so bad" is a positive signal. Risk assets can overcome low growth and perform well, while U.S. Treasury bonds can be expected to rise in anticipation of multiple Federal Reserve rate cuts projected by our economists in 2026, especially in the U.S. market. That said, valuation conditions indicate that stocks and credit have completely excluded the possibility of a slowdown in growth, so we recommend a comprehensive focus on high-quality assets.

Positive outlook on dollar assets: We recommend that investors overweight U.S. stocks, U.S. Treasury bonds, and U.S. investment-grade corporate credit, while focusing on high-quality assets, and oppose the view that foreign investors should or will abandon U.S. assets. One significant U.S. asset we are not optimistic about is the dollar; we believe that as the economic growth and yield differentials between the U.S. and other countries/regions narrow, the dollar may depreciate significantly. Changes in public policy, such as the proposed 899 clause tax in the U.S., may trigger volatility in the next 12 months, but this means selling the dollar rather than U.S. assets.

Stocks: U.S. > Other Countries/Regions

The U.S. stock market has been repriced, but uncertainties regarding the comprehensive impact of tariffs remain; we prefer high-quality cyclical stocks, large-cap stocks, and defensive stocks with lower leverage and cheaper valuations In Japan, we continue to be optimistic about beneficiaries of domestic re-inflation and corporate reform, as well as companies affected by defense and economic security-related expenditures. Given our expectation of a significant appreciation of the yen, we remain cautious towards cyclical export companies.

In Europe, we recommend taking advantage of the recent weakening momentum of cyclical stocks relative to defensive stocks as an opportunity to continue shifting towards relatively resilient sectors in the market. Key sectors that require overweighting in Europe include defense, banking, software, telecommunications, and diversified finance.

Finally, our overweight direction in emerging markets leans towards the financial sector and companies with leading profitability. Overall, we prefer companies focused on domestic business compared to export companies and semiconductor/hardware companies.

Outlook for the Next 12 Months: Global Economic Growth Slows

Tariff shocks are suppressing global demand while also putting pressure on supply in the United States. In the U.S., immigration restrictions add another layer of drag. In the Eurozone, tariffs negatively impact exports and investment, while the boost from fiscal packages is insufficient to offset this drag. In China, the demand shock caused by tariffs is only partially offset by moderate policy stimulus, while structural deflation persists. In Japan, although the inflation rebound in nominal GDP has not been broken, the global economic slowdown has dragged down exports, thereby affecting investment.

Eye of the Storm: The Dollar Bear Market Continues

In the U.S., we expect Treasury yields to remain range-bound until the fourth quarter of 2025, when investors will be more convinced that rate cuts are imminent.

The Federal Reserve will cut rates by 175 basis points in 2026, exceeding current market pricing. The yield on the 10-year U.S. Treasury will reach 4.00% by the end of 2025. The European Central Bank will cut rates by 75 basis points, and the Bank of England will cut rates by 100 basis points by the end of the year. The yield on the 10-year German government bond will be 2.40% at year-end, while the yield on the 10-year British government bond will be 4.35% at year-end.

The U.S. Dollar Index (DXY) remains under pressure, expected to decline by 9% to 91 by mid-2026, due to U.S. interest rates and economic growth converging with other countries, along with increased foreign exchange hedging funds and rising risk premiums as investors focus on the dollar's safe-haven status. The continuation of defensive policies has led to strong performance in global safe-haven assets, with the euro and yen leading the rise.

Commodities: Increased Volatility, but No Clear Trend

Oil: Potential Supply Increase Pressures Prices: Over the weekend, the "Group of Eight" within OPEC+ announced an increase of approximately 411,000 barrels per day in production quotas for July. Since this aligns with market expectations, it may not impact oil prices in the short term. However, the outlook for a worsening supply surplus before the end of the year still exists, which could push Brent crude prices down to the range of over $50 per barrel by the first half of 2026.

Natural Gas: European Summer Storage Tasks Create Price Upside Potential: Europe's gas storage replenishment season started strongly in April, with record liquefied natural gas (LNG) and pipeline supplies, coupled with weak demand, disrupting the supply-demand balance. However, inventories remain 23% lower than the same period last year, with a significant amount of empty storage. We expect Europe will need to import 45% more LNG this summer to exceed an 80% storage rate. The competition for LNG cargoes between Europe and Asia this summer should drive the Dutch Title Transfer Facility (TTF) prices towards €40 per megawatt-hour as the global LNG market tightens.

Metals: Preparing for Volatility: Gold is our preferred choice, supported by strong central bank demand and a return of funds to exchange-traded funds (ETFs), while growth concerns and tariff uncertainties have also increased safe-haven demand. Industrial metals remain resilient but are more significantly affected by potential growth downside risks from U.S. tariff policies. During economic recessions, metal demand typically declines by 1-3%, pushing prices down to cost support levels; in our pessimistic scenario, major metal prices could fall another 10-25%.