Morgan StanleyVisvanatha Tirupatur (Vishwanath tirupatur), global director of quantitative research, wrote: this has been an unusual week. The yield on the benchmark 10-year Treasury note fell to its lowest level since early February and stocks sold off sharply, just a week after the S & P 500 hit an all-time high and volatility soared. The popular explanation at that time was that the market was worried that due to the sharp increase in novel coronavirus infection caused by the mutation of Delta virus, economic growth would slow down. So where are we in key market debates and opinions?
We don't agree that economic growth is slowing down. In fact, our American economists tracked nearly 12% of GDP in the second quarter. Although they expect growth to slow, they are still seeing a strong economic recovery. Their basic forecasts for US and global economic growth in 2021 (7.1 per cent and 6.5 per cent, respectively) remain unchanged.
Although Delta variants are undoubtedly serious, evidence continues to show that vaccines are very effective in reducing serious illness, hospitalization and mortality. Delta is more contagious, but as our biotech analysts Matthew Harrison and Mark Purcell point out, we don't think the dynamics of the virus are different, and vaccination is still the key.
While the fundamentals of economic growth remain solid, our strategists remain concerned about valuations of various asset classes. As always, the market is forward-looking, reflecting not only expectations of a strong global economic recovery, but also uncertainty on the road to recovery.
As our chief US equity strategist, Mike Mike Wilson, cautioned, it is important to remember that while overall growth remains solid, the pace of change has peaked, as reflected in the continued underperformance of small-cap and low-quality stocks over the past few months. He favours stocks with stable returns rather than growth. He recently upgraded consumer necessities and downgraded materials, reflecting his more defensive stance on the US stock market.
We still believe that the recent collapse in Treasury yields is actually due to the unwinding of positions. In addition, the improved prospects for congressional approval of the infrastructure package will put upward pressure on yields. Our US interest rate strategist Guneet Dhingra still strongly recommends shorting 10-year Treasuries. We still expect the 10-year Treasury yield to be 1.8% by the end of the year.
On the currency side, we believe that the US dollar will continue to strengthen in the short term. James Lord (James Lord), our chief currency strategist, believes:
(1) the United States is less likely to have travel and other restrictions than several countries in Europe and Asia.
(2) the widening differences between the United States and other large economies over the trajectory of inflation and monetary policy are reasons to be bullish on the dollar.
In terms of corporate credit, we are most concerned about valuation. As our US investment-grade strategist Vishwas Patkar stresses, although investment-grade spreads have widened slightly, they are still close to post-global financial crisis levels, arguably the highest in decades. At this level, credit is priced perfectly, not only because of a strong economic background, but also because of long-term liquidity easing. In the credit sector, although valuations of both high-yield and leveraged loans are high, relative valuations show that investment-grade loans are much higher than high-yield loans. Therefore, we believe that the development direction of investment grade credit is to widen the spread slightly.
For institutional MBS, we maintain a long-term view of structural reduction. As Jay Bacow, strategist at our institution MBS, points out, the Fed's reduction in MBS purchases and the prospect of recovery, although starting from a lower level, bank loan growth means that demand for institutional MBS from both the Fed and banks is likely to decline at the same time, which supports his case for reduction.