Morgan Stanley IM: An October to Remember

The month of October is infamous for market volatility and this past October lived up to its reputation. Indeed, it has been referred to as “Red October.” Most surprising was the inability of U.S. Treasury yields to rally (move lower) despite the dislocations occurring in equity markets. While credit markets were not as negatively impacted as equities, they sold off in sympathy. Despite very weak asset markets and dire pronouncements about the impending end of the expansion, we are more sanguine. We do not think this is the beginning of a broader bear market in fixed income and we expect markets to improve, if gradually. U.S. Treasury yields are closing in on their likely peak; U.S. economic data is likely to remain firm, if a bit softer than the blistering pace of the last two quarters; the U.S. Federal Reserve (Fed) will continue to hike interest rates but is likely to stop tightening in 2019; Chinese stimulus will hit the global economy; and emerging market (EM) economies should stabilize. The U.S. dollar seems to have made a local peak (although we would emphasize the word “local” for now), also a good sign for EM and the global economy in general.

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