In a new note, Morgan Stanley's Calvin Tse and Evan Brown say the market is about to go from "sweet spot" to "sugar crash."
To recap, basically things are going swimmingly. People aren't worried for the moment about Eurozone contagion, inflation is pretty benign everywhere, and after a bit of a growth scare last year, the data is coming in robust all around the world, as seen in this simple chart.
Morgan Stanley
But not everything is perfect.
For example, this is worrying. Exports in Asia are rolling over.
Morgan Stanley
Ultimately, it comes down to three things:
We believe that the current risk-on environment of positive growth surprises, low and/or falling inflation and easy monetary policy will soon come to an end. Our main signals for a departure from the “sweet spot” are 1) potential default/contagion in Europe 2) growth challenges from the US and 3) a possible China-led growth slowdown in Asia. Should either of these catalysts occur, this should support USD and JPY against commodity and EM currencies. Additionally, we believe recessionary growth, aggressive ECB policy, political turmoil, and increased uncertainty will shift EUR to the global funding currency of choice in 2012.
All that is reasonable, though we'd add one bit of commentary, which is that basically since March 2009, everyone's been obsessed with figuring out the next shoe to drop, which partly explains why the market has been so buoyant. Thinking that Europe or China will blow up, or that the US is due to rollover is nothing new.
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