Careful with the ECB, BoJ, Morgan Stanley says

Strategists at Morgan Stanley saw several bends in the road ahead for financial markets, particularly regarding the outlook for ECB policy.

Chief among those, they believed the European Central Bank was more likely to surprise negatively than the US Federal Reserve, hence they preferred the euro versus the greenback.

"Fed on Hold. BoJ/ECB at Limit," they said in their latest Cross Asset Strategy Playbook.

"We expect no further cuts or QQE from the BoJ in September and see a low chance of helicopter money. ECB pushes back further action to December."

"EUR is cheap, diversifying to risk, and could be difficult to weaken," Andrew Sheets, Phanikiran Naraparaju, Serena Tang and Wanting Low said in a research note published on 5 September.

Yen was their preferred currency up through August.

They also expected Emerging Markets to perform "relatively better" with EM growth probably rising to meet estimates and additional interest rates cuts likely on the cards.

Indeed, despite the EM rally real interest rates remained high versus their Developed World peers; with the Brazilian real, Indian rupiah and Russian rouble possibly benefitting.

In parallel, oil and iron-ore prices were expected fall through year-end, with Chinese growth weakening, driven by slower growth in money supply (M2) and lower property and fiscal spending, Morgan Stanley said.

Among their new recommended trades they added 'calls' on the South Korean Kospi.

The yuan was also seen heading lower.

"Asia ex-Japan FX offers low yields and poor return skew," they argued.