Global In the Flow June 2012

Transcription

1 GLOBAL CROSS-ASSET STRATEGY June 212 A quick risk rebound in June. Greek elections, Spanish bailout progress, bank downgrades and the European Summit turned out to be net positive, and equities led the recovery from May s sell-off. Oil fell the most, while safe-haven assets also declined. Performance improvements in various asset classes. European equities outperformed the US, but sovereign yields tell a more cautionary tale. Financials did better and Treasuries underperformed risk, while funding and liquidity eased further. Taking down the global growth outlook. Our economists have lowered their forecasts in both DM and EM. The US economy stays tepid, while the periphery is driving Europe s slowdown deeper. EM is little improved, but Japan s recovery is moving along and China s policymakers have stepped up. June 212 (%) YTD (%) MSCI Europe MSCI Japan MSCI World S&P MSCI EM EUR EM DXY Gold S&P GSCI Oil Emerging Markets Treasuries TIPS Gilts Bunds US Corp HY US BIG Index. 2.3 EUR BIG Index Source: Bloomberg, The Yield Book, Morgan Stanley Research Note: Total returns in USD, positive currency indicates appreciation Global Cross-Asset Strategy Group Morgan Stanley & Co. LLC Gregory Peters Jason Draho Jerry Chen Morgan Stanley & Co. International plc.+ Neil McLeish +44 () Brennan Leong +44 () Morgan Stanley Australia Ltd.+ Gerard Minack Katie Hill Global Cross-Asset Directory Subscribe to the Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. += Analysts employed by non-u.s. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

2 Table of Contents Markets Review 1. Returns 5 Equity Rates Credit FX Commodities 2. Performance 2 Sector Performance Trading Volumes Credit Comparisons Sovereign CDS, Yields EM vs. DM Funding, Liquidity Inflation Pricing Currencies Commodities 3. Valuation 51 Yield Curves US Debt, Equity Issuance P/Es Earnings Revisions Consensus Estimates Financial Conditions Cross-Asset Relationships 4. Risk Measures 62 Implied, Realized Volatility Volatility Skew, Term Structure Correlation 5. Sentiment 68 Put-Call AAII GRDI 6. Positioning 69 Dealer Holdings Net Protection Speculative Positioning US, EM Fund Flows Global Economics Review 1. Global Growth Slowing Further 77 MS Forecasts EM Real Exchange Rate Global PMIs Global Policy Rates Global Inflation Global Trade 2. US Progress Uninspiring 81 Sentiment Housing Labor Market Inflation Retail Sales Trade 3. Europe s Stress Hits Core 86 Policy Inflation PMIs Sentiment UK PMI UK Lending 4. Japan s Domestic Recovery 91 Sentiment Machinery Orders Capital Spending Production Internal Demand Trade Inflation 5. China s Policy Steps Up 95 Production Trade Inflation Investment Lending Money Retail Sales Policy 6. EM s Risks Growing 11 PMI Production Trade Inflation Internal Demand 2

3 Markets Review What Happened Last Month

4 What Happened Last Month 1. Returns 2. Performance 3. Valuation 4. Risk Measures 5. Sentiment 6. Positioning Risk assets staged a rebound in June Tail- and near-term risks were diminished by Greek elections, Spanish bailout progress, bank downgrade outcomes, and the European Summit. Equities ended higher, led by Europe, but still underperformed over 2Q12 vs. bonds and the safe-haven USD. US equities are still on top for 2Q12 and YTD, and defensive sectors maintained outperformance as the broader market fell in 2Q12. In the rates space, EM beat in June, safe-haven government bonds led in 2Q12, and high yield credit is still on top YTD. Within credit, lower-quality returned the most in June while higher-quality did in 2Q12 and YTD. AxJ, US HY and financials led the June recovery in synthetic credit. CEEMEA and commodity currencies appreciated against the USD in June as safe-haven support fell away. Commodities improved in June, driven by agriculture, but is down overall for 2Q12 and YTD, with energy prices declining the most. Better performance across various asset classes Risk markets rose in June, but equities have yet to return to cyclical outperformance. European equities outperformed the US as Spain recouped some losses, but sovereign yields tell a more cautionary tale. Japanese equities moved up and the JPY fell. Trading volumes were lower in equities and corporate bonds but higher in Treasuries. Commodity currencies gained, but continued strength depends on commodities. Despite the general recovery, continued concerns in Europe are apparent in credit spreads and the EUR. Financials are doing better this year but have contributed to spread compression in credit. Front-end Treasury rates rose as risk assets drew more interest, and liquidity and funding conditions eased further away from stressed levels. Valuations inched closer to local highs and tights Global P/Es are below historical averages, and more so in DM than in EM. Trailing P/E multiples are around one standard deviation below averages, while NTM P/E is slightly higher in the US vs. Europe relative to history. Outside of the US, dividend yields are generally well above historical averages. Earnings revisions have fallen more negative but consensus earnings remain relatively lofty in the US. US corporate debt issuance has been lower in HY compared to 211. Germany s sovereign curve steepened and the EUR weakened as economic surprise turned more bearish. Risk measures relaxed after rising noticeably in May Volatility declined across asset classes in June and ended the month lower in Treasuries, but higher in Bunds. Similarly, equity volatility fell in the US but ended June higher in Europe. S&P 5 implied correlation declined as stocks recovered. Sentiment turned cautiously less bearish Put/call ratios have decreased in the US and Europe, signaling diminishing bearishness. The Morgan Stanley Risk Demand indicator also shows greater risk appetite despite a small pull-back at the end of June. However, the AAII Bulls-Bears measure is still leaning towards the bears. Positioning adjusted as risk assets rallied back US fixed income funds are still seeing solid inflows, continuing the cumulative trend of flows into fixed income and out of equity funds. Treasury sentiment is not far from neutral, and dealers have reduced bill exposure. Investors are net short IG credit protection in both the US and Europe. Speculative positioning in oil has fallen substantially this year, reversed sharply down for the USD and up for the EUR. 4

5 1. Returns Commodities and Equities Were the Underperformers of 2Q12 While Bonds Did Better S&P MSCI World MSCI Europe MSCI Japan MSCI EM DXY EM EUR Gold S&P GSCI Oil Gilts TIPS Treasuries Emerging Markets Bunds US BIG Index US Corp HY EUR BIG Index Source: Bloomberg, The Yield Book, Morgan Stanley Research Note: Total returns in USD, positive currency indicates appreciation 2Q12 (%) YTD (%) 5

6 1. Returns Spanish Bailout, Greek Election and Summit Outcomes Lifted European Stocks in June June 212 (%) YTD (%) USD Local USD Local World Euro Stoxx MSCI World MSCI AC World S&P MSCI EM Developed Markets Spain IBEX Italy FTSE MIB France CAC Netherlands AEX UK FTSE Switzerland SMI Australia ASX All Ordinaries Singapore FTSE Germany DAX Hong Kong Hang Seng Japan Nikkei Canada S&P/TSX Composite Emerging Markets Turkey ISE National Mexico IPC Russia RTS India SENSEX South Africa JSE Korea KOSPI Composite Indonesia SE Composite Thailand SET Brazil Bovespa Taiwan TAIEX China Shanghai SE Composite Source: Datastream, Morgan Stanley Research Note: Price return 6

7 1. Returns For 2Q12 and YTD, US Equities Came Out on Top While Turkey Is the EM Outperformer 2Q12 (%) YTD (%) USD Local USD Local World S&P MSCI World MSCI AC World MSCI EM Euro Stoxx Developed Markets Singapore FTSE UK FTSE Hong Kong Hang Seng Switzerland SMI Australia ASX All Ordinaries Japan Nikkei Canada S&P/TSX Composite Netherlands AEX France CAC Germany DAX Italy FTSE MIB Spain IBEX Emerging Markets Turkey ISE National China Shanghai SE Composite Mexico IPC South Africa JSE Thailand SET Indonesia SE Composite India SENSEX Korea KOSPI Composite Taiwan TAIEX Russia RTS Brazil Bovespa Source: Datastream, Morgan Stanley Research Note: Price return 7

8 1. Returns DM Telecoms and Financials Fared Well in June While Tech Lagged Globally MSCI World June 212 (%) YTD (%) MSCI USA June 212 (%) YTD (%) Telecom Financials Health Care Utilities Energy MSCI World Cons Staples Materials Industrials Tech Cons Disc Telecom Energy Health Care Financials Materials MSCI USA Utilities Cons Staples Industrials Tech Cons Disc MSCI Europe June 212 (%) YTD (%) MSCI EM June 212 (%) YTD (%) Utilities Financials Telecom Energy Health Care MSCI Europe Cons Staples Industrials Materials Cons Disc Tech Utilities Telecom Health Care Cons Staples Financials Materials MSCI EM Industrials Energy Cons Disc Tech Source: MSCI, Datastream, Morgan Stanley Research Note: Total return in USD 8

9 1. Returns Defensive Sectors Performed Best as the Broader Market Fell in 2Q12 MSCI World 2Q12 (%) YTD (%) MSCI USA 2Q12 (%) YTD (%) Telecom Health Care Utilities Cons Staples MSCI World Cons Disc Industrials Financials Energy Tech Materials Telecom Utilities Cons Staples Health Care MSCI USA Industrials Cons Disc Materials Energy Financials Tech MSCI Europe 2Q12 (%) YTD (%) MSCI EM 2Q12 (%) YTD (%) Health Care Cons Staples Telecom Utilities MSCI Europe Energy Cons Disc Industrials Financials Materials Tech Health Care Telecom Cons Staples Utilities Financials MSCI EM Tech Cons Disc Industrials Materials Energy Source: MSCI, Datastream, Morgan Stanley Research Note: Total return in USD 9

10 1. Returns Large Cap Stocks Generally Gave the Greatest Returns in June MSCI World Growth Large Cap June 212 (%) 4.2 YTD (%) 7.8 Mid Cap Small Cap Value Large Cap Mid Cap Small Cap Large Cap Small Cap MSCI USA Growth Small Cap June 212 (%) 3.6 YTD (%) 8.5 Large Cap Mid Cap Value Large Cap Small Cap Mid Cap Large Cap Small Cap MSCI Europe Growth Large Cap June 212 (%) 6.3 YTD (%) 5.1 MSCI EM Growth Large Cap June 212 (%) 3.9 YTD (%) 4.7 Mid Cap Small Cap Small Cap Mid Cap Value Value Large Cap 1..5 Large Cap Mid Cap Mid Cap Small Cap Small Cap Large Cap Small Cap Large Cap Small Cap Source: MSCI, Datastream, Morgan Stanley Research Note: Total return in USD 1

11 1. Returns In 2Q12, Large Caps Were DM Outperformers While Small Caps Did Better in EM MSCI World Growth Large Cap 2Q12 (%) -5. YTD (%) 7.8 Small Cap Mid Cap Value Large Cap Small Cap Mid Cap Large Cap Small Cap MSCI USA Growth Large Cap 2Q12 (%) -3.3 YTD (%) 11.6 Small Cap Mid Cap Value Large Cap Small Cap Mid Cap Large Cap Small Cap MSCI Europe Growth Large Cap 2Q12 (%) -6.3 YTD (%) 5.1 MSCI EM Growth Small Cap 2Q12 (%) -7.6 YTD (%) 6.7 Small Cap Large Cap Mid Cap Mid Cap Value Value Large Cap Small Cap Mid Cap Mid Cap Small Cap Large Cap Large Cap Small Cap Small Cap Large Cap Source: MSCI, Datastream, Morgan Stanley Research Note: Total return in USD 11

12 1. Returns In the Rates Space, EM Did Best in June But High Yield Is Still on Top YTD Total Returns Duration-Adjusted Returns Jun 212 (%) YTD (%) Jun 212 (%) YTD (%) Emerging Markets Emerging Markets High Yield High Yield Sov. & Prov Sov. & Prov Corporates Corporates Supranationals Supranationals ABS ABS Mortgages Asia BIG Index US BIG Index. 2.3 US BIG Index Agencies. 1.4 Agencies.2.4 Asia BIG Index Mortgages World BIG Index World BIG Index Treasuries TIPS TIPS Europe BIG Index Europe BIG Index Gilts Gilts Bunds Bunds Source: The Yield Book, Morgan Stanley Research 12

13 1. Returns Safe-Haven Government Bonds Led in 2Q12 Total Returns Duration-Adjusted Returns 2Q12 (%) YTD (%) 2Q12 (%) YTD (%) Gilts TIPS TIPS Mortgages Treasuries US BIG Index Corporates High Yield Sov. & Prov Agencies Emerging Markets ABS US BIG Index Sov. & Prov High Yield Supranationals Bunds Corporates Agencies Gilts ABS Emerging Markets World BIG Index World BIG Index Asia BIG Index Bunds Mortgages Europe BIG Index Supranationals Asia BIG Index Europe BIG Index Source: The Yield Book, Morgan Stanley Research 13

14 1. Returns Within Credit, Lower-Quality Returned Most in June; Higher-Quality Did in 2Q12 and YTD Jun 212 (%) YTD (%) US A US IG US AAA/AA US BBB US CCC US B US HY US BB EUR A EUR AAA/AA EUR IG EUR BBB Q12 (%) YTD (%) US AAA/AA US A US IG US BBB US BB US B US HY US CCC.2 1. EUR AAA/AA EUR A EUR IG EUR BBB Source: The Yield Book, Morgan Stanley Research 14

15 1. Returns AxJ Paved the Way in Synthetic Credit s June Recovery; Europe Was Weakest in 2Q12 June 212 (%) YTD (%) itraxx AxJ CDX HY itraxx Sr Fin itraxx Sub Fin itraxx Japan ABX AAA (price) CDX IG itraxx XOver itraxx Main CMBX AJ (price) CMBX AAA (price) Q12 (%) YTD (%) ABX AAA (price) CMBX AAA (price) CDX HY itraxx AxJ CMBX AJ (price) itraxx XOver itraxx Japan itraxx Sr Fin itraxx Sub Fin CDX IG itraxx Main Note: Spread returns, positive indicates spread tightening. itraxx SovX includes Greek default in March

16 1. Returns CEEMEA and Commodity Currencies Appreciated As USD Demand Lifted in June June 212 (%) YTD (%) June 212 (%) YTD (%) Per USD Per USD G1 LATAM NZD MXN AUD CLP SEK COP NOK BRL EUR ARS CHF GBP Per EUR CAD SEK JPY ISK ASIA NOK PHP CHF. 1.3 KRW DKK -.1. INR GBP SGD JPY IDR THB MYR.7.3 CNY TWD HKD.1.1 CEEMEA HUF PLN ZAR CZK TRY RUB ILS Source: Thomson Reuters, Morgan Stanley Research 16

17 1. Returns Safe-Haven Flows Supported the USD in 2Q12 2Q12 (%) YTD (%) 2Q12 (%) YTD (%) Per USD Per USD G1 LATAM JPY COP AUD CLP CAD ARS GBP MXN NZD BRL SEK NOK Per EUR CHF JPY EUR ISK ASIA GBP PHP SEK HKD.1.1 NOK SGD CHF KRW DKK.1. CNY TWD THB IDR MYR INR CEEMEA TRY HUF ILS ZAR PLN CZK RUB Source: Thomson Reuters, Morgan Stanley Research 17

18 1. Returns Commodities Improved in June, Led by Agriculture June 212 (%) YTD (%) S&P GSCI Agriculture Precious Metals S&P GSCI Industrial Metals Energy Commodity Corn Natural Gas Soybeans Sugar Cocoa Coffee DJ AIG Commodity Index CRB Futures Index Copper Gold Platinum Coal Cotton Heating Oil Live Cattle Silver Brent Crude Aluminum

19 1. Returns Energy Prices Fell Most in 2Q12 and YTD While Natural Gas Beat the Rest in 2Q12 2Q12 (%) YTD (%) S&P GSCI Agriculture Precious Metals Industrial Metals S&P GSCI Energy Commodity Natural Gas Soybeans Corn Cocoa Coal Live Cattle Gold DJ AIG Commodity Index Coffee CRB Futures Index Copper Aluminum Platinum Sugar Heating Oil Silver Brent Crude Cotton

20 2. Performance More Demand for Risk But Not Back to Cyclical Outperformance SPX, Risk Demand 145 SPX (left) MS Risk Demand Index (right) 12 Risk demand rose on the month along with risk markets May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 S&P 5 Sector Return (%) Utilities Staples 211 Jun 212 YTD Mar 212 YTD Healthcare Telecom Discretionary Technology Energy Industrials Materials Financials But despite the June rally, US equities haven t shifted back to cyclical outperformance 2

21 2. Performance European Equities Outperformed the US in June as Spain Recouped Some Losses European equities rose more than US equities in June, but longer term, the US comes out ahead Spanish equities improved more than peers on bank recap hopes SPX, Eurostoxx 145 SPX (left) Eurostoxx (right) Jun-11 Sep-11 Dec-11 Mar-12 Jun Equity Indices (212=1) Germany DAX France CAC 4 75 Italy FTSE MIB Spain IBEX Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 21

22 2. Performance But Sovereign Yields Tell a More Cautionary Tale ASW 2s1s (bp) Peripheral ASW curves bear-flattened Spain Italy France -2 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 Source: Market1, Morgan Stanley Research 1y Sovereign Yield (%) y sovereign yields rose in the core as well as in the periphery 1 Spain Germany Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 22

23 2. Performance Germany Continues YTD Equity Underperformance vs. the US; China Weakens SPX, DAX (212=1) SPX DAX German equity underperformance vs. the US continues 1 95 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 SPX, Shanghai Composite (3-Mar = 1) China has been steadily retracing equity outperformance vs. the US 9 SPX Shanghai Composite 85 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 23

24 2. Performance Japanese Equities Moved Up and the JPY Fell as the UST-JGB Spread Widened Japanese equities higher, yields lower The JPY fell as the UST-JGB yield differential turned up Nikkei, JGB 1y USD/JPY, UST-JGB 2y Nikkei (left) JGB 1y (%, right) USD/JPY (left) UST-JGB 2y Spread (%, right) Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 24

25 2. Performance In Equities, More Advancers in June But Few Net New Highs Cumulative Advance-Decline for NYSE Stocks Cumulative NYSE advancers rebounded NYSE Net New Highs, SPX 4 # New Highs - New Lows (1d ma, left) 3 SPX (right) Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 But the rally wasn t enough to boost more companies to 52- week highs 25

26 2. Performance Lower Equity Volumes and Lower Put/Call Bearishness SPX volumes dropped slightly as the market ended higher The put/call ratio fell back after rising dramatically in May SPX Volume, SPX SPX, Put/Call 5. SPX Volume (bn shares 2d ma, left) SPX (inverted, right) Jun-1 Sep-1 Dec-1Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun SPX (left) Put/Call (inverted 1d ma, right) 1.3 Jun-1 Oct-1 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 26

27 2. Performance A Move Up in Treasury Volumes, a Move Down in Corporate Bond Volumes Treasury Volume, UST 1y 4 35 ICAP UST Volume ($bn 2d ma, left) UST 1y Yield (%, right) Treasury volumes moved a bit higher as yields came in Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Source: ICAP, Bloomberg, Morgan Stanley Research Corporate Bond Volume, CDX IG IG+HY TRACE Volumes ($bn, left) CDX IG (inverted bp, right) 7 May-1 Aug-1 Nov-1 Feb-11May-11 Aug-11 Nov-11 Feb-12May Corporate bond volumes fell as spreads ended wider Source: FINRA, Bloomberg, Morgan Stanley Research 27

28 2. Performance EM FX Little Changed While AUD Strength Depends on Commodities EM FX (212=1) USD/EM USD/BRL USD/INR USD/TRY EM FX is little changed but INR and BRL staged impressive rallies after a month of weakness 8 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 DM FX (212=1) AUD/USD CAD/USD EUR/USD 15 1 The AUD outperformed but its strength will be tied to stability in commodities 95 9 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 28

29 2. Performance Continued Concerns in Europe Apparent in Credit Spreads and the EUR Bund 1y, itraxx Main Bund 1y (%, left) itraxx Main (inverted bp, right) Jun-11 Sep-11 Dec-11 Mar-12 Jun Bund yields rose as European corporate spreads stayed wide EUR, Spain 5y CDS EUR/USD (left) Spain 5y CDS (inverted bp, right) Jun-11 Sep-11 Dec-11 Mar-12 Jun EUR weakness mirrors sovereign weakness 29

30 2. Performance Oil Sank Through Most of June and Gold Ended Flat Oil extended its plunge from May but rebounded at the end of June Gold was tossed around by headlines but ended the month more or less flat SPX, WTI (212=1) 125 Gold, UST 1y Real SPX WTI Gold ($ / troy oz, left) UST 1y Real (inverted %, right) Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr

31 2. Performance Financials Are Not Repeating Last Year s Significant Underperformance US Equities (212=1) Financials are relatively stronger SPX DJ Transports Financials 15 1 US Equities (211=1) 11 SPX DJ Transports Financials Jan Feb Mar Apr May Jun 95 Jan Feb Mar Apr May Jun Than they were last year 31

32 2. Performance A Bumpy Ride Lower for Spanish Yields; EUR Volatility Receded IBEX, Spain 1y IBEX (left) 65 Spain 1y Gov't (inverted %, right) 6 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun Spain s 1y yield moved shakily lower while equities began to recover itraxx Main, EUR Volatility 22 itraxx Main (bp, left) EUR/USD 3m ATM Vol (%, right) EUR volatility fell as credit spreads leveled Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr

33 2. Performance Credit Spread Compression From Financials and Peripheral Corporates Spreads compressed in the US, driven by concerns in financials Similarly in Europe, where peripheral corporates have also driven IG spreads wider CDX HY / CDX IG Spread Ratio 1 itraxx XOver / itraxx Main Spread Ratio 11 9 CDX HY / CDX IG 1 itraxx XOver / itraxx Main 8 Average 9 Average Jan-7 Oct-7 Jul-8 Apr-9 Jan-1 Oct-1 Jul-11 Apr-12 3 Jan-7 Oct-7 Jul-8 Apr-9 Jan-1 Oct-1 Jul-11 Apr-12 33

34 2. Performance Stress Eased Back Down in EM and European Dollar Funding EM funding stress eased back down as some European tail risks were removed EUR cross-currency basis swaps are calmer across maturities EM Funding Stress, Spain 5y CDS EM Funding Stress (level, left) Spain CDS 5y (bp, right) Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 EUR XCCY basis swap (bp) m -14 1y -16 3y -18 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 34

35 2. Performance Equity Volumes Slowed and the Ratio of S&P 5 Advancers to Decliners Jumped Up Total Volume Traded on US Exchanges (bn shares) US Exchange Volume 22 2d Moving Avg Jun-1 Oct-1 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 S&P 5 Volume on Up, Down Days (mm shares) Up Days 12 Down Days Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 S&P 5 Monthly Advance/Decline ETF Volume (bn shares) Monthly Advance/Decline Benchmark SPDR ETFs 2d ma Jun-1 Dec-1 Jun-11 Dec-11 Jun-12. Jun-2 Jun-4 Jun-6 Jun-8 Jun-1 Jun-12 35

36 2. Performance Stocks Regained Some Ground Against Their Higher Historical Moving Averages Equity Index and Moving Averages: DM 145 Equity Index and Moving Averages: EM MSCI World 135 2d ma 5d ma 13 2d ma Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May Jan-1 May-1 Sep-1 MSCI EM 2d ma 5d ma 2d ma Jan-11 May-11 Sep-11 Jan-12 May-12 Equity Index and Moving Averages: US 145 Equity Index and Moving Averages: Europe SPX 2d ma 5d ma d ma Eurostoxx d ma d ma 2d ma 95 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 36

37 2. Performance US Equities Maintain Outperformance Over Europe, in Financials and the Broader Market MSCI World, EM (212=1) S&P 5, Euro Stoxx (212=1) DM EM S&P 5 Euro Stoxx 85 Jun-1 Oct-1 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 7 Jun-1 Oct-1 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 EM Asia, Latam (212=1) US, European Banks (212=1) EM Asia 1 US 9 85 EM Latam 9 Europe 8 Jun-1 Oct-1 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 8 Jun-1 Oct-1 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 37

38 2. Performance Risk Assets Recovered in June Even As Economic Surprise Went More Negative Economic Surprise, Equities: DM Economic Surprise, Equities: EM 6 DM Surprise (left) 14 3 EM Surprise (left) 5 4 MSCI World (right) MSCI EM (right) Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Source: Citigroup, Bloomberg, Morgan Stanley Research Source: Citigroup, Bloomberg, Morgan Stanley Research Economic Surprise, Equities: US Economic Surprise, Equities: Europe 15 1 US Surprise (left) SPX (right) Europe Surprise (left) Eurostoxx (right) Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Source: Citigroup, Bloomberg, Morgan Stanley Research Source: Citigroup, Bloomberg, Morgan Stanley Research 38

39 2. Performance Dividend Stocks Continue to Generate Greater Returns Than Defensives This Year Morgan Stanley Cyclical, Consumer Indices (212=1) S&P 5 Growth, Value Total Return (212=1) Cyclicals Consumer Growth Value Jun-1 Dec-1 Jun-11 Dec-11 Jun Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 Morgan Stanley Discretionary Baskets (212=1) Morgan Stanley Defensive, Dividend Baskets (212=1) Consumer Discretionary 65 High-Beta Discretionary 55 Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun Defensives 8 High & Stable Divs 75 Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 39

40 2. Performance High Yield Credit Tightened More Than Investment Grade in June and for the Year SPX, CDX IG CDX IG, HY (bp, 212=1) SPX (level, left) CDX IG (inverted bp, right) CDX IG CDX HY 15 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 CDX HY, CMBX (price) CDX HY, ABX (price) CDX HY (left) CMBX AJ S4 (right) CDX HY (left) ABX AAA 26-2 (right) Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 4

41 2. Performance Credit Quality Curves Generally Shifted Lower US IG Corp Credit Quality Curve (bp) 3 US HY Corp Credit Quality Curve (bp) Jun May Dec Jun May Dec-11 5 AAA AA A BBB 3 BB B CCC Source: The YieldBook, Morgan Stanley Research Source: The YieldBook, Morgan Stanley Research Europe IG Corp Credit Quality Curve (bp) US, Europe IG Corp Credit Quality Curves (bp) Jun May Dec US Europe AAA AA A BBB AAA AA A BBB Source: The YieldBook, Morgan Stanley Research Source: The YieldBook, Morgan Stanley Research 41

42 2. Performance European Sovereign CDS Generally Improved as Near-Term Risks Were Reduced itraxx SovX (bp) 4 Sovereign 5y CDS (bp) Italy Spain France Germany CEEMEA Western Europe Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Note: Drop in Western Europe series due to Greek default Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 Sovereign 2s5s, European Financial CDS (bp) Spain (left) 4 Belgium (left) 2 Italy (left) itraxx Snr Fin (right) Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun CDS Net Notional Outstanding ($bn) 28 Germany France 26 Italy Spain Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Source: DTCC, Bloomberg, Morgan Stanley Research 42

43 2. Performance Front-End Treasury Rates Rose As Risk Assets Drew More Interest UST 2y (%) UST 2y, Fed Funds Effective (%) UST 2y Fed Funds Effective.1 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12. Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 European 1y Government Yield (%) 9 8 Germany 7 France 6 Spain 5 4 Italy Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 European 1y Government Yield (%) 8 Germany France Spain Italy Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 43

44 2. Performance Financial Equity and Credit Improved in Both the US and Europe US Financial Equity, Cash Credit Europe Financial Equity, Cash Credit S&P Financials (level, left) US Fins Credit (inverted bp, right) Stoxx Financials (level, left) Europe Fins Credit (inverted bp, right) Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Source: The Yield Book, Bloomberg, Morgan Stanley Research Source: The Yield Book, Bloomberg, Morgan Stanley Research US, Europe Financial Cash Credit (bp) US Financial, Industrial Cash Credit (bp) US Europe Fins - Indus Spread (left) (Fins - Indus) / Fins % (right) Jun-8 Jun-9 Jun-1 Jun-11 Jun-12 Jun-8 Jun-9 Jun-1 Jun-11 Jun-12 Source: The Yield Book, Morgan Stanley Research Source: The Yield Book, Morgan Stanley Research 44

45 2. Performance Germany s Yield Curve Bear-Steepened US Spread Curve (bp) Germany Spread Curve (bp) 35 US 2s1s US 1s3s 25 GE 2s1s GE 1s3s Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 US Butterfly Spread (bp) Germany Butterfly Spread (bp) 25 5s1s3s 2s5s1s 2s1s3s 2 5s1s3s 2s5s1s 2s1s3s Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12-1 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 45

46 2. Performance US Nominal Rates and Inflation Expectations Paused in Their Downtrend US Nominal Rate (%) US Real Rate (%) 6 5Y 1Y 3Y 4 5Y 1Y 3Y Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12-2 Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 US 1y Breakeven, Real Rate (%) US Breakeven Spread (%) Real (left) Breakeven (right) Jun-1 Dec-1 Jun-11 Dec-11 Jun s1s 1s3s Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 46

47 2. Performance The USD and EUR Are Still Above and Below Their Respective 5-day Moving Averages FX Index and Moving Averages: USD FX Cross and Moving Averages: EUR/USD DXY 2d ma d ma 2d ma EUR/USD 5d ma 2d ma 2d ma 7 Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 FX Cross and Moving Averages: CHF FX Cross and Moving Averages: JPY USD/CHF 5d ma 2d ma 2d ma USD/JPY 5d ma 2d ma 2d ma Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 47

48 2. Performance The USD Fell and EUR Rose While Risk Markets Improved DXY, SPX EUR, SPX DXY (left) SPX (right) EUR/USD (left) SPX (inverted, right) Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Asian Currencies, DXY (level) EM Currencies, Volatility (level) USD/AxJ Currencies (inverted, left) DXY (inverted, right) EM Currency Basket (left) EM FX Volatility (right) Jun-11 Sep-11 Dec-11 Mar-12 Jun Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 7 Source: JP Morgan, Bloomberg, Morgan Stanley Research 48

49 2. Performance Energy Prices Dropped Further While Agriculture Gained Brent, Commodity Index Gold, Real Rates Brent ($/bbl) CRB Index (level, right) Gold ($/oz, left) 1y TIPS (inverted %, right) Jun-2 Jun-4 Jun-6 Jun-8 Jun-1 Jun-12 Source: CRB, Bloomberg, Morgan Stanley Research Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 GSCI, SPX GSCI Indices (212=1) GSCI (left) SPX (right) Agriculture Industrial Metals Energy Precious Metals Jun-11 Sep-11 Dec-11 Mar-12 Jun Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 49

50 2. Performance Liquidity and Funding Conditions Eased Further Away From Stressed Levels MS Financial Conditions Index, SPX Citi Liquidity Index, St. Louis Fed Stress Index MS Financial Conditions Index (left) SPX (inverted, right) Citi Liquidity Index (left; + = less liquidity) St. Louis Fed Financial Stress Index (right) Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 Source: Citigroup, St. Louis Federal Reserve, Bloomberg, Morgan Stanley Research MS EM Funding Stress Index 12 Funding Markets, European Financial Credit Spreads (bp) EMFSI 2d ma Libor-OIS EUR Basis Swap 1m itraxx Snr Fin 6 5d ma Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 5

51 3. Valuation Risk Valuations Inched Closer to 1-Year Highs and Tights Global Shiller P/Es (Low, Spot, High) European Credit (Low, Spot, High) S&P Financials (bps) FTSE All-Share Non-Fins (bps) Main (bps) MSCI Europe XOver (bps) Source: S&P, Shiller, MSCI, NBER, Bloomberg, Morgan Stanley Research Note: 1-year range US Credit (Low, Spot, High) Source: iboxx, Bloomberg, Morgan Stanley Research Note: 1-year range US and European Rates (Low, Spot, High) US Financials (bps) y Treasuries (%) US Industrials (bps) y Bunds (%) CDX IG (bps) Italy 2s1s (bps) CDX HY (bps) Spain 2s1s (bps) Source: YieldBook, Bloomberg, Morgan Stanley Research Note: 1-year range Note: 1-year range 51

52 3. Valuation Equities More Attractive Than Bonds on Dividend and Forward Earnings Yields S&P 5 Dividend Yield, UST 1y Yield (%) Spread UST 1Y Yield S&P 5 Dividend Yield Equity dividend yields are greater than nominal bond yields Source: Federal Reserve, Haver Analytics, Datastream, Morgan Stanley Research S&P 5 Forward Earnings Yield, UST 1y Real Yield (%) Spread 1Y Real Bond Yield S&P 5 Forward Earnings Yield Forward earnings yield continues to rise above real bond yields Source: BLS, Federal Reserve, Haver Analytics, IBES, Datastream, Morgan Stanley Research 52

53 3. Valuation Global P/Es Are Below Historical Averages, and More So in DM Than in EM Trailing P/E: DM vs. EM Trailing P/E: US vs. Europe DM EM 35 3 USA Europe Dec-87 Dec-9 Dec-93 Dec-96 Dec-99 Dec-2 Dec-5 Dec-8 Dec-11 Source: MSCI, Datastream, Morgan Stanley Research 5 Dec-87 Dec-9 Dec-93 Dec-96 Dec-99 Dec-2 Dec-5 Dec-8 Dec-11 Source: MSCI, Datastream, Morgan Stanley Research NTM P/E: DM vs. EM NTM P/E: US vs. Europe DM EM 25 USA Europe Dec-87 Dec-9 Dec-93 Dec-96 Dec-99 Dec-2 Dec-5 Dec-8 Dec-11 Source: IBES, MSCI, Datastream, Morgan Stanley Research 5 Dec-87 Dec-9 Dec-93 Dec-96 Dec-99 Dec-2 Dec-5 Dec-8 Dec-11 Source: IBES, MSCI, Datastream, Morgan Stanley Research 53

54 3. Valuation Trailing P/E Multiples Are Around One Standard Deviation Below Historical Averages Trailing P/E: DM Trailing P/E: EM Dec-87 Dec-9 Dec-93 Dec-96 Dec-99 Dec-2 Dec-5 Dec-8 Dec-11 Source: MSCI, Datastream, Morgan Stanley Research Dec-87 Dec-9 Dec-93 Dec-96 Dec-99 Dec-2 Dec-5 Dec-8 Dec-11 Source: MSCI, Datastream, Morgan Stanley Research Trailing P/E: US Trailing P/E: Europe Dec-87 Dec-9 Dec-93 Dec-96 Dec-99 Dec-2 Dec-5 Dec-8 Dec-11 Source: MSCI, Datastream, Morgan Stanley Research Dec-87 Dec-9 Dec-93 Dec-96 Dec-99 Dec-2 Dec-5 Dec-8 Dec-11 Source: MSCI, Datastream, Morgan Stanley Research 54

55 3. Valuation NTM P/E Is Slightly Higher in the US vs. Europe Relative to Each Region s History NTM P/E: DM NTM P/E: EM Dec-87 Dec-9 Dec-93 Dec-96 Dec-99 Dec-2 Dec-5 Dec-8 Dec-11 Source: IBES, MSCI, Datastream, Morgan Stanley Research 5 Dec-87 Dec-9 Dec-93 Dec-96 Dec-99 Dec-2 Dec-5 Dec-8 Dec-11 Source: IBES, MSCI, Datastream, Morgan Stanley Research NTM P/E: US NTM P/E: Europe Dec-87 Dec-9 Dec-93 Dec-96 Dec-99 Dec-2 Dec-5 Dec-8 Dec-11 Source: IBES, MSCI, Datastream, Morgan Stanley Research Dec-87 Dec-9 Dec-93 Dec-96 Dec-99 Dec-2 Dec-5 Dec-8 Dec-11 Source: IBES, MSCI, Datastream, Morgan Stanley Research 55

56 3. Valuation Outside of the US, Dividend Yields Are Generally Well Above Historical Averages Dividend Yield: DM Dividend Yield: EM Dec-87 Dec-9 Dec-93 Dec-96 Dec-99 Dec-2 Dec-5 Dec-8 Dec-11 Source: MSCI, Datastream, Morgan Stanley Research Dec-87 Dec-9 Dec-93 Dec-96 Dec-99 Dec-2 Dec-5 Dec-8 Dec-11 Source: MSCI, Datastream, Morgan Stanley Research Dividend Yield: US Dividend Yield: Europe Dec-87 Dec-9 Dec-93 Dec-96 Dec-99 Dec-2 Dec-5 Dec-8 Dec-11 Source: MSCI, Datastream, Morgan Stanley Research 1 Dec-87 Dec-9 Dec-93 Dec-96 Dec-99 Dec-2 Dec-5 Dec-8 Dec-11 Source: MSCI, Datastream, Morgan Stanley Research 56

57 3. Valuation Earnings Revisions Have Fallen More Negative DM NTM Earnings Revisions Ratio (%) EM NTM Earnings Revisions Ratio (%) 6 4 DM 3m ma 6 4 EM 3m ma Source: IBES, MSCI, Datastream, Morgan Stanley Research Source: IBES, MSCI, Datastream, Morgan Stanley Research US NTM Earnings Revisions Ratio (%) Europe NTM Earnings Revisions Ratio (%) 6 4 US 3m ma 6 4 Europe 3m ma Source: IBES, MSCI, Datastream, Morgan Stanley Research Source: IBES, MSCI, Datastream, Morgan Stanley Research 57

58 3. Valuation Consensus Earnings Are Falling But Remain Relatively Lofty in the US DM FY Consensus EPS EM FY Consensus EPS Source: IBES, MSCI, Datastream, Morgan Stanley Research Source: IBES, MSCI, Datastream, Morgan Stanley Research US FY Consensus EPS Europe FY Consensus EPS Source: IBES, MSCI, Datastream, Morgan Stanley Research Source: IBES, MSCI, Datastream, Morgan Stanley Research 58

59 3. Valuation US HY Corporate Debt Issuance Has Been Below 211 s Dollar Amount Since March US IG Corporate Debt Issuance ($bn) US HY Corporate Debt Issuance ($bn) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec US Equity IPO ($bn) US Equity IPO (# issues) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 59

60 3. Valuation Germany s Yield Curve Bear-Steepened as Peripheral Stress Lingers US Yield Curve (%) Germany Yield Curve (%) Current 1 Month Prior.5. Current 1 Month Prior M 1Y 3Y 5Y 7Y 1Y 15Y 2Y 25Y 3Y 3M 1Y 3Y 5Y 7Y 1Y 15Y 2Y 25Y 3Y Italy Yield Curve (%) 7 6 Spain Yield Curve (%) Current Current 2 1 Month Prior 2 1 Month Prior 1 1 3M 1Y 3Y 5Y 7Y 1Y 15Y 2Y 25Y 3Y 3M 1Y 3Y 5Y 7Y 1Y 15Y 2Y 3Y 6

61 3. Valuation The EUR Weakened As Economic Surprise Turned More Bearish in the US and Europe EUR, 2y Yield Differential EUR, Economic Surprise EUR/USD (left) Bund 2y - UST 2y (inverted %, right) EUR/USD (left) Citi Surprise: US (inverted, right) Citi Surprise: Europe (inverted, right) Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Source: Citigroup, Bloomberg, Morgan Stanley Research EUR, SPX EUR, Commodities EUR/USD (left) SPX (inverted, right) EUR/USD (left) CRB Commodity Index (right) Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Source: CRB, Bloomberg, Morgan Stanley Research 61

62 4. Risk Measures Volatility Retraced Its May Rise as Uncertainties Were Lifted From Markets FX volatility retraced its May uptick Equity and rate volatility are also lower FX 3m Implied Volatility (%) Treasury, Equity Volatility G7 EM 12 Treasury 1m Implied Vol (normalized bp, left) VIX (right) Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 5 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 1 Source: JP Morgan, Bloomberg, Morgan Stanley Research 62

63 4. Risk Measures Credit Markets Also Saw a Fall in Volatility IG Credit Implied 3m Volatility (bp) CDX IG itraxx Main IG credit volatility trended lower, more so in the US than in Europe 3 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Source: Morgan Stanley Research HY Credit Implied 3m Volatility (bp) CDX HY itraxx Xover HY credit volatility increased earlier in the month in the US, then fell back 3 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Source: Morgan Stanley Research 63

64 4. Risk Measures Volatility Declined Across Asset Classes in June Volatility (indexed) May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Source: Bloomberg, Market1, Morgan Stanley Research Note: Indexed 3m ATM implied volatility. Equity includes S&P, EuroStoxx, Nikkei, Kospi, Bovespa, Hang Seng. Commodity includes gold, oil. FX includes EURUSD, JPYUSD, USDKRW, AUDUSD. Rates includes USD Libor, Euribor, JPY Libor 3m3m 1y vol. Credit includes CDX IG, itraxx Main. Skew (9-11) by Maturity Equity Rates FX Credit Commodity 15% 14% 3m 6m 9m 13% 1y 2y 12% 11% 1% 9% 8% 7% 6% 5% 4% 3% 2% Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12, Quantitative & Derivative Strategies 3m Implied, Realized Volatility 4% 3m Imp Vol - 3m Rlzd Vol (right) 2% 35% 3m Rlzd Vol 15% 3m Imp Vol 1% 3% 5% 25% % -5% 2% -1% 15% -15% -2% 1% -25% 5% -3% Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12, Quantitative & Derivative Strategies Realized vs. Implied Equity Volatility 7% 6% Imp Vol 1D Rlzd 5% 1m Rlzd 3m Rlzd 6m Rlzd 4% 3% 2% 1% % Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12, Quantitative & Derivative Strategies 64

65 4. Risk Measures Volatility Ended the Month Lower in Treasuries But Higher in Bunds UST Implied Volatility UST, Bund 1y Implied Volatility Y 1Y 5Y UST Bund Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 3 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 US Swaption Volatility EU Swaption Volatility 16 3m2y 3m1y 3m3y 16 3m2y 3m1y 3m3y Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 2 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 65

66 4. Risk Measures Equity Volatility Fell in the US But Ended the Month Higher in Europe SPX, Volatility Euro Stoxx, Volatility Volatility (left) SPX (inverted, right) Volatility (left) Euro Stoxx (inverted, right) Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 DXY, SPX VIX, EUR/USD DXY (level, left) 8 84 SPX (inverted, right) Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun VIX (left) EUR/USD (inverted, right) Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 66

67 4. Risk Measures S&P 5 Implied Correlation Declined As Stocks Recovered S&P 5 Implied Correlation Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Source: CBOE, Bloomberg, Morgan Stanley Research European Banks Relative Performance, Peripheral CDS Banks Relative Performance vs. MSCI Europe (left) 5 Peripheral Sovereign Avg 5y CDS (bp, right) 4 Sep-9 Mar-1 Sep-1 Mar-11 Sep-11 Mar-12 Note: Peripheral Sovereign Avg includes Ireland, Italy, Portugal, Spain Source: MSCI, Bloomberg, Morgan Stanley Research MSCI EM, S&P 5 ETF Implied Volatility MSCI Germany, EAFE ETF Implied Volatility Spread EEM SPY Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun Spread MSCI Germany MSCI EAFE Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 67

68 5. Sentiment Put/Call Ratios Have Decreased But AAII Bulls-Bears Is Leaning Towards the Bears US Equity Put/Call Ratio Europe Equity Put/Call Ratio Put/Call Composite 1.4 2D ma Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 Source: CBOE, Bloomberg, Morgan Stanley Research Put/Call 2D ma.5 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 AAII Bulls-Bears Morgan Stanley Standardized Global Risk Demand Index Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 Source: AAII, Bloomberg, Morgan Stanley Research Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 68

69 6. Positioning US Fixed Income Funds Still Seeing Solid Inflows US Fixed Income Fund Flows, Weekly ($bn) US Equity Fund Flows, Weekly ($bn) Jan-1 Apr-1 Aug-1 Dec-1 Mar-11 Jul-11 Nov-11 Feb-12 Jun-12 Source: ICI, Morgan Stanley Research -35 Jan-1 Apr-1 Aug-1 Dec-1 Mar-11 Jul-11 Nov-11 Feb-12 Jun-12 Source: ICI, Morgan Stanley Research US Hybrid Fund Flows, Weekly ($bn) Jan-1 Apr-1 Aug-1 Dec-1 Mar-11 Jul-11 Nov-11 Feb-12 Jun-12 Source: ICI, Morgan Stanley Research US Money Market Fund Flows, Weekly ($bn) Jan-1 Apr-1 Aug-1 Dec-1 Mar-11 Jul-11 Nov-11 Feb-12 Jun-12 Source: ICI, Morgan Stanley Research 69