Morgan Stanley’s Global Sentiment Indicator Turns Positive: What it Means for Markets

After maintaining a neutral score since January, Morgan Stanley claimed that its global market stress and sentiment index has turned positive, indicating a move to a “risk on” appetite. The bank’s paper on Tuesday states that historically, this regime has been associated with one-week returns for global stocks that are higher than normal.

To monitor and quantify market stress and sentiment, Morgan Stanley uses the Market Sentiment Indicator (MSI), which incorporates data from surveys, positioning, volatility, and momentum.

In a note published on Tuesday, Morgan Stanley strategists stated, “MSI has switched into a positive regime, with overall sentiment now ‘low but reversing’.”

Two important factors that determine the MSI’s risk-on/risk-off signals are the MSI’s “level” and “change.” Currently, both prerequisites are met, according to strategists.

On August 8, sentiment reached a two-year low as a result of negative signals from its survey, as well as volatility and momentum components after the top in July. Since then, though, eight of ten measurements have demonstrated improvements, which has caused a shift in mood and produced a positive signal.

Strategists clarified, “The ‘change’ condition is more fragile, while the ‘level’ condition should remain satisfied for some time.” “Any further decline in sentiment data would result in the signal reverting to neutral.”

Tuesday saw gains in U.S. stock indices, which hit a nearly two-week high as expectations for a September interest rate cut by the Federal Reserve were reinforced by lower producer pricing data.

July saw a smaller-than-expected increase in producer prices in the United States, indicating that inflation is still moderate. This was due to reduced costs for services and a rise in the price of goods. Following a 2.7% increase in June, the Producer Price Index (PPI) increased 2.2% year over year in July.

Investor interest now lies in the consumer pricing data for July, which is scheduled for release on Wednesday, and the retail sales data on Thursday, which may confirm predictions for an aggressive rate decrease by the Federal Reserve.

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