In a recent research report, Morgan Stanley sounded the alarm on the potential impact of tariff - related uncertainties on the global economic outlook. The report, released on March 30, 2025, covers a wide range of topics from macro - economic trends to specific investment strategies across different asset classes.
The constant stream of tariff - related news has been a major source of uncertainty for investors. As the April 2 deadline for some tariff - related decisions approached, the lack of clarity from the US administration regarding its tariff agenda has made investors increasingly nervous. This uncertainty reduces market visibility and erodes confidence. According to Morgan Stanley, unless the US clarifies its goals and the possible responses, investors will likely lose more faith in the global economic outlook.
Business leaders are also feeling the heat. A popular CEO confidence index dropped significantly, from 6.93 to 4.99 from January to March. This is the second - largest one - month drop in its history. The last time the index fell below 5 and stayed there for an extended period, the real GDP growth stalled, and initial unemployment claims rose. Such a decline in CEO confidence could further fuel investors' concerns about the labor market and overall economic activity.
Morgan Stanley constructed a G10 FX tariff risk ranking ahead of the April 2 deadline. The ranking is based on four indicators, including trade balances versus the US, reciprocal tariff rates, and sectoral tariff risk exposure (Exhibit 7 in the report). The results show that the euro (EUR) is the most exposed to US tariff risks, while the Australian dollar (AUD) is the least exposed. This information can be useful for FX investors to identify cross - trades. For example, shorting EUR/GBP, going long AUD/NZD, or shorting CAD/CHF could be potential trades based on different tariff risks. However, the ranking has its limitations. It does not account for subjective factors like political alignment and negotiating leverage.
In the face of these uncertainties, Morgan Stanley recommended that investors adjust their portfolios. In the rates market, the pre - April 2 information set should encourage investors to sacrifice some carry for more risk - off hedging exposure. The firm suggested increasing exposure to lower rates by adding an outright long position in 7 - year US Treasuries (or TY futures) while maintaining exposure to the 5 - year point on the 2s5s30s fly (page 186 of the original report).
In the currency market, the bank has a neutral stance on the US Dollar Index (DXY) going into April 2 but sees downside risks in the long run. It is bullish on the Japanese yen (JPY) and the Swedish krona (SEK), and believes there is upside potential for the euro (EUR) and the British pound (GBP). However, it is bearish on the Swiss franc (CHF). For example, it recommends selling USD/JPY into strength as Fed communication may allow the market to price in a lower US terminal rate, while the Bank of Japan's assessment of wage growth could keep its terminal rate pricing high.
Tariffs have also had an impact on the inflation market. US CPI inflation swaps show that investors are buying inflation protection with a 1 - year horizon due to tariffs. However, they are increasingly forgoing buying the same inflation insurance for the year after next. This change in behavior reflects investors' changing expectations about future inflation in the context of tariff uncertainties (Exhibit 5 and Exhibit 6 in the report).
In conclusion, as the global economic landscape remains clouded by tariff uncertainties, investors need to be vigilant and adjust their investment strategies accordingly. Morgan Stanley's insights provide valuable guidance for market participants to navigate these challenging times.
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.