Our Global Head of Fixed Income Research Andrew Sheets explains
how key market indicators reflect a constructive view around the
global cyclical outlook, despite a volatile start to 2026.
Read more insights from Morgan Stanley.
----- Transcript -----
Andrew Sheets: Welcome to Thoughts on the
Market. I'm Andrew Sheets, Global Head of Fixed Income Research
at Morgan Stanley.
Today I'm going to talk about the unusual alignment of a number
of key indicators.
It's Thursday, February 12th at 2pm in London.
A frustrating element of investing is that any indicator at any
time can let you down. That makes sense. With so much on the
line, the secret to markets probably isn't just one of a hundreds
of data series that a thousand of us can access at the push of a
button.
But many indicators all suggesting the same? That's far more
notable. And despite a volatile start to 2026 with big swings in
everything from Japanese government bonds to software stocks, it
is very much what we think is happening below the surface.
Specifically, a variety of indicators linked to optimism around
the global cyclical outlook are all stronger, all moving up and
to the right.
Copper, which is closely followed as an economically sensitive
commodity, is up strongly. Korean equities, which have above
average cyclicality and sensitivity to global trade is the best
performing of any major global equity market over the last year.
Financials, which lie at the heart of credit creation, have been
outperforming across the U.S., Europe, and Asia. And more
recently, year-to-date cyclicals and transports are
outperforming. Small caps are leading, breadth is improving, and
the yield curve is bear steepening.
All of these are the outcomes that you'd expect, all else equal,
if global growth is going to be stronger in the future than it is
today.
Now individually, these data points can be explained away. Maybe
Copper is just part of an AI build out story. Maybe Korea is just
rebounding off extreme levels of valuation. Maybe Financials are
just about deregulation in a steeper yield curve. Maybe the
steeper yield curve is just about the policy uncertainty. And
small cap stocks have been long-term laggards – maybe every dog
has its day.
But collectively, well, they're exactly what investors will be
looking for to confirm that the global growth backdrop is getting
stronger, and we believe they form a pretty powerful, overlapping
signal worthy of respect.
But if things are getting better, how much is too much. In the
face of easier fiscal, monetary, and regulatory policy, the
market may focus on other signposts to determine whether we now
have too much of a good thing. For example, is there signs of
significant inflation on the horizon? Is volatility in the bond
market increasing? Is the U.S. dollar deviating significantly
from its fair value? Is the credit market showing weakness? And
do stocks and credit now react badly when the data is good?
So far, not yet. As we discussed on this program last week, long
run inflation expectations in the U.S. and euro area remain
pretty consistent with central bank targets. Expected volatility
in U.S. interest rates has actually fallen year-to-date. The U.S.
dollar’s valuation is pretty close to what purchasing power
parity would suggest. Credit has been very stable. And better
than expected labor market data on Wednesday was treated
well.
Any single indicator can and eventually will let investors down.
But when a broad set of economically sensitive signals all point
in the same direction, we listen. Taken together, we think this
alignment is still telling a story of supportive fundamental
tailwinds while key measures of stress hold.
Until that evidence changes, we think those signals deserve
respect.
Thank you as always, for your time. If you find Thoughts on the
Market useful, let us know by leaving a review wherever you
listen. And also tell a friend or colleague about us today.
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