Summary of Key Points from the Conference Call Industry and Company Involvement - The conference call primarily discusses the economic outlook and investment strategies related to various sectors, including US Financials, Asia Economics, and Latin America Equity Strategy, as presented by Morgan Stanley Research. Core Insights and Arguments US Economics - There is no expectation for a significant acceleration in core inflation due to oil prices, with a 10% rise in oil prices resulting in only a 3 basis point increase in core prices over three months [6][9] - Headline prices may increase by 35 basis points after a similar shock, primarily affecting the energy component of the Consumer Price Index (CPI) [6][9] Asia Economics - Asia's oil burden is below its long-term average, suggesting that the impact of oil price spikes should be manageable [10][12] - If oil prices exceed US$85 per barrel, there may be risks of delayed rate cuts by policymakers in Asia [10][12] US Financials - The forecast for capital markets activity has been raised due to strengthening market conditions, with M&A, Equity Capital Markets (ECM), and Debt Capital Markets (DCM) expected to return to three-decade averages by 2027 [18][20] - The new forecasts indicate a multi-year increase in capital market volumes even under bear case scenarios [18][20] US Strategy - A moderate slowdown in US GDP growth is already priced into the equity market, and soft macro data should not disrupt equity prices unless labor market data deteriorates sharply [23][30] - The correlation between equity returns and bond yields has turned negative, indicating a potential "bad is good" environment [23][30] Global Cross-Asset Strategy - Section 899 of the One Big, Beautiful Bill Act could have significant implications for foreign investment in US assets, with US liabilities to foreign entities totaling US$39.8 trillion as of December 2024 [31][36] - The largest holders of US securities are EU entities, which could be affected by the broad interpretation of Section 899 [31][36] Japan Equity Strategy - There is a limited risk of Japan being designated as a "discriminatory foreign country" under Section 899, but sectors like Financials, Autos, and Trading Companies may face indirect risks [37][40] Latin America Equity Strategy - Global investors are currently underweight in emerging market equities, and a shift to an equal-weight position could lead to significant inflows into Latin American markets, with estimates of inflows reaching US$40 billion for Brazil and US$14 billion for Mexico [51][54] Other Important Insights - The demand for US stocks has declined recently, but this is not alarming based on monthly data, indicating a potential shift towards international equity funds [41][43] - The overall size of the US stock market is expected to continue attracting inflows, albeit at a reduced rate [41][43] This summary encapsulates the key points discussed in the conference call, highlighting the economic outlook and investment strategies across various sectors and regions.

Economic Indicators - US Manufacturing and Services ISM data fell below consensus, indicating potential slowing growth[1] - Non-Farm Payrolls (NFP) growth slightly exceeded expectations, but the unemployment rate remained flat, suggesting a mixed economic outlook[1] Monetary Policy and Interest Rates - The European Central Bank (ECB) reduced the deposit rate by 25 basis points and lowered its 2026 inflation projection to 1.6%[1] - Yield curves flattened across regions, with US bonds experiencing a sell-off due to higher front-end and real rates[2] Foreign Investment and Currency Forecasts - Section 899 highlighted concerns regarding foreign investors' appetite for US assets, potentially leading to further USD weakness[3] - EUR/USD forecasts were adjusted to 1.17, 1.20, and 1.25 for 3, 6, and 12 months respectively[3] Equity Market Reactions - US high dividend yield (DY) stocks slightly underperformed compared to the broader market, while non-US stocks with high US exposure showed muted returns[4] - Estimated impact on STOXX 600 earnings is projected at 5% by year four, with companies having options to mitigate this impact[4] Asset Allocation Strategy - The firm maintains a neutral stance in asset allocation, advocating for increased international diversification in equities and bonds[7] - US equities have partially recovered year-to-date underperformance, primarily driven by mega-cap stocks, while the S&P 500 equal weight remains flat against global indices[7]

Investment Rating - The report maintains a neutral stance on asset allocation, advocating for diversification, particularly in international equities and bonds [8]. Core Insights - The report highlights a renewed focus on the demand for US assets from foreign investors, with potential risks from incremental tax and policy changes affecting their appetite [3]. - US equity markets have shown limited reaction to recent economic data, with high dividend yield stocks slightly underperforming compared to the broader market [4]. - The report notes that US mega-cap stocks have been the primary drivers of the recent recovery in US equities, while the S&P 500 equal weight index remains flat against global counterparts [8]. Economic Indicators - Recent economic data indicates that both US Manufacturing and Services ISM came in below consensus, while non-farm payroll growth slightly exceeded expectations, suggesting a slowdown in US growth [1]. - The European Central Bank (ECB) has lowered its deposit rate by 25 basis points and downgraded its inflation projection for 2026 to 1.6% [1]. Yield Curves and Interest Rates - Yield curves have flattened across regions, with US bonds experiencing a sell-off following the non-farm payroll report, driven by higher front-end and real rates [2]. - The report anticipates that the last rate cut by the ECB will occur in September, with expectations of further rate cuts from the Swiss National Bank [2]. Currency and Foreign Exchange - The report's foreign exchange strategists have adjusted their EUR/USD forecasts to 1.17, 1.20, and 1.25 for 3, 6, and 12 months respectively, reflecting concerns over US fiscal sustainability [3]. - The correlation between the US dollar and other assets has reverted to more normal levels, although the gap between the dollar and rates differentials remains wide [3]. Earnings Impact - The report estimates a potential impact of 5% on STOXX 600 earnings by year four, although companies may have offsetting options such as re-listing in the US [4]. Asset Allocation Recommendations - The report suggests an overweight position in US government bonds, while maintaining a neutral stance on equities and advocating for international diversification [22].

4 June 2025 | 5:01AM BST Strategy Espresso: Section 899 and European Equities: Navigating Risks, Unlocking Flows The "One Big Beautiful Bill Act" extends the 2017 tax cuts and introduces new tax and spending measures. While US equity markets may benefit in the short term — particularly from CAPEX and R&D — one of the most consequential provisions for global investors is Section 899. Section 899 introduces retaliatory tax measures against non-US individuals, corporations, and governments from countries that ...

Summary of Key Points from the Conference Call Industry Overview - The discussion primarily revolves around the US dollar (USD) and its performance in the context of US equities, interest rates, and potential legislative impacts on foreign investments. Core Insights and Arguments 1. **US Equities Performance**: US equities are currently outperforming, driven by a resurgence in major tech stocks, referred to as MAG7, which includes companies like NVIDIA (NVDA) [4][5][32] 2. **Challenges of Shorting USD**: Shorting the USD has become increasingly difficult due to high costs associated with USD puts and the overall market dynamics favoring US equities [5][10][15] 3. **Interest Rate Differentials**: The 2-year interest rate differential between the US and other countries is highlighted, indicating that while the cost of carrying USD shorts is high, the yields in other countries are also significant [12][18] 4. **Section 899 of the OBBB**: The One Big Beautiful Bill (OBBB) includes Section 899, which proposes tariffs on passive income from foreign ownership of US assets, potentially impacting foreign investment in US equities and Treasuries [19][20][22] 5. **Impact of Section 899**: If enacted, Section 899 could lead to a marginally weaker USD unless the Portfolio Interest Exemption (PIE) is repealed, which would significantly increase tax burdens on foreign investors [27][30] 6. **Market Reactions**: The potential for Section 899 to create uncertainty among foreign investors is noted, with implications for USD demand and capital flows [29][30] 7. **Future Legislative Actions**: The timeline for passing the OBBB and potential repeal of PIE is discussed, with expectations for Senate action possibly in July [26][21] Additional Important Content 1. **Cost of Shorting USDCAD**: The cost of shorting USDCAD is near record highs, indicating a challenging environment for traders looking to capitalize on USD weakness [18] 2. **Investor Sentiment**: The sentiment among foreign institutional investors is cautious, particularly regarding the implications of Section 899 and potential tax increases on US Treasuries [24][28] 3. **AI Trade Influence**: The resurgence of AI-related stocks is noted as a significant factor influencing market dynamics, with NVDA's performance being a key indicator [32][34] 4. **Long-term Implications**: The discussion suggests that without significant changes, such as the repeal of PIE, the immediate impact of Section 899 may be limited, but it raises concerns for long-term foreign investment strategies [25][30] This summary encapsulates the critical points discussed in the conference call, focusing on the implications for the USD, foreign investment, and the legislative landscape affecting these dynamics.