The Morning Edge: US-Japan Affirm Currency Alignment As Morgan Stanley Turns Bullish On US Assets

QUICK SNAPSHOT
Global Sentiment: Risk-off
Factors:  US Tax Bill, Trade Deals

TODAY’S WATCHLIST
 - India HSBC flash India PMI for May
 - US unemployment insurance claims
 - ITC, Grasim Earnings 

THE BIG STORY
US Treasury Secretary Scott Bessent and Japanese Finance Minister Katsunobu Kato reaffirmed their commitment to market-driven currency valuations Wednesday, declaring the dollar-yen exchange rate fundamentally sound—a diplomatic alignment that keeps forex tensions separate from ongoing trade talks. The agreement comes as Morgan Stanley makes a decisive pivot toward US markets, upgrading stocks and Treasuries to "overweight" on fading downturn risks and anticipated Fed rate cuts. Yet in a twist, the Wall Street giant remains bearish on the dollar itself, forecasting continued pressure as global growth slows to 2.5% by year-end, a deceleration fuelled partly by Trump administration tariffs that now show signs of easing after the US-China deal.

While Morgan Stanley sees US equities thriving boosted by corporate earnings rebounds and Fed easing, its dollar scepticism underscores a broader shift: the currency may no longer ride shotgun with American asset outperformance. The brokerage notes multinationals could cash in on a weaker greenback, even as tariff aftershocks continue rerouting global capital flows. With Japan and the US deliberately sidelining currency disputes, investors face a new paradigm where dollar depreciation coexists with bullish bets on everything from Treasuries to tech stock, a fragile equilibrium that hinges on the Fed’s next moves and whether trade detente holds.

DATA
UK's inflation jumped more than expected in April, with the annual rate climbing to 3.5% from 2.6% in March its highest since January 2024 and the sharpest monthly acceleration since 2022, when inflation was surging above 10%. The surprise spike has led investors to reassess expectations for Bank of England rate cuts, anticipating a more cautious approach going forward. The UK now holds the second-highest inflation rate among major Western European economies, trailing only the Netherlands. Meanwhile, house prices also surged, rising 6.4% in the year to March—the fastest pace since December 2022—according to official data from the Office for National Statistics.

WHAT HAPPENED OVERNIGHT
US stocks tumbled on Wednesday, posting their steepest daily losses in a month, as rising Treasury yields stoked concerns over ballooning government debt tied to President Donald Trump’s proposed tax-cut bill. The S&P 500, Dow, and Nasdaq all closed sharply lower. Alphabet bucked the trend, gaining 2.7%, but tech heavyweights Nvidia, Apple, and Tesla lost ground, falling 1.9%, 2.3%, and 2.7% respectively. UnitedHealth Group sank nearly 6% after a report alleged it paid bonuses to nursing homes to curb hospital transfers, prompting HSBC to downgrade the stock. Target slumped 5.2% after cutting its annual outlook amid weak discretionary spending.

US Treasury yields surged on Wednesday, reflecting deepening investor concerns over the country’s mounting debt as debate intensifies in Congress over a tax and spending bill likely to worsen the fiscal outlook. A weak $16 billion auction of 20-year bonds underscored the anxiety, with the debt selling at a high yield of 5.047%—around one basis point above pre-auction levels. Yields on 20-year notes rose post-auction to 5.127%, the highest since November 2023, while the benchmark 10-year yield touched 4.607%, a peak not seen since mid-February.

The US dollar weakened across the board on Wednesday, pressured by deepening concerns over President Donald Trump's tax cut and spending bill, as well as tepid demand for a 20-year Treasury bond auction — both of which highlighted waning investor appetite for US assets. With Republican lawmakers still divided on key details of the tax plan, Trump's attempts to unify party support have so far faltered. The euro climbed 0.4% to $1.1334, hitting a two-week high, while the dollar dropped 0.6% to 143.62 yen as rising Japanese bond yields continued to lift the safe-haven currency.

Brent crude oil prices slipped on Wednesday after Oman's foreign minister announced that fresh nuclear talks between Iran and the US are scheduled for later this week, raising hopes of easing geopolitical tensions and potentially higher Iranian crude supply. This pullback followed earlier gains sparked by a CNN report that US intelligence believes Israel may be preparing to strike Iranian nuclear sites. Brent crude settled 47 cents lower at $64.91 a barrel, while US West Texas Intermediate dropped 46 cents to close at $61.57.

Day’s Ledger

Economic Data:

• India HSBC flash India PMI for May
• India weekly water storage status
• Germany flash PMI for May
• Eurozone flash PMI for May
• UK flash PMI for May
• US unemployment insurance claims
• US flash manufacturing and services PMI
• US EIA natural gas report 

Corporate Actions:

• Jan-Mar earnings: ITC, Grasim Industries, Clean Science & Technology, Container Corporation of India, Deepak Fertilisers and Petrochemicals Corporation, Emcure Pharmaceuticals, GMR Airports, Gujarat State Petronet, HFCL, Honasa Consumer, Sun Pharmaceutical Industries, TBO Tek, and Ramco Cements.
• Adani Ports and Special Economic Zone to consider raising of funds
• GHV Infra Projects to consider raising of funds
• OLA Electric Mobility to consider raising of funds

Policy Events:

• BoE MPC Member Pill Speaks
• ECB's Elderson Speaks
• ECB's De Guindos Speaks
• US FOMC Member Williams Speaks
• German Buba President Nagel Speaks

TICKERS

• Colgate India March quarter profit slips 6.5% on softer urban demand
• Andhra govt issues letter of intent to Hind Zinc for Tungsten mineral block
• IndusInd Bank to submit CEO pick to RBI by June 30, pledges strong leadership.
• IndusInd Bank net ₹22.36 billion after accounting clean-up
• IREDA moves DRT and NCLT against Gensol Group firms for ₹7.29 billion dues
• LIC increases stake in ACC by 2.02% to 8.58% over 6 years
• Mankind Pharma PAT beats Street but falls YoY as costs surge
• NBCC gets ₹1.62-billion interior work order from PFC
• NTPC Green Energy March quarter net profit triples on strong revenue growth; FY25 profit up 39%
• Oil India March quarter profit, revenue fall y/y on lower crude sales, but beat estimates
• Rail Vikas Nigam’s profit drops for fourth straight quarter on weak revenue
• Uno Minda March quarter net down 8% YoY despite strong revenue growth; FY25 profit up 8%

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