Morgan Stanley (NYSE:MS) said its global market stress and sentiment indicator has turned positive, signaling a shift to a “risk on” appetite after holding a neutral reading since January. According to the bank’s Tuesday note, this regime has historically been linked to above-average one-week returns for global equities.
Morgan Stanley’s Market Sentiment Indicator (MSI) combines data from surveys, positioning, volatility, and momentum to measure and quantify market stress and sentiment.
“With overall sentiment now 'low but reversing', MSI has switched into a positive regime,” Morgan Stanley strategists said in a Tuesday note.
The MSI generates risk-on/risk-off signals based on two key conditions: the “level” and the “change” in the MSI. Strategists note that both conditions are currently met.
Sentiment hit a two-year low on August 8, driven by bearish signals from its survey, volatility, and momentum components following the July peak. However, since then, eight out of ten metrics have shown positive changes, leading to a reversal in sentiment and generating a positive signal.
“While the 'level' condition should remain satisfied for some time, the 'change' condition is more fragile,” strategists explained. “Any deterioration in sentiment data again would cause the signal to return back to neutral.”
U.S. stock indexes rose on Tuesday, reaching a nearly two-week high, as softer producer price data bolstered expectations for a potential interest rate cut by the Federal Reserve in September.
Producer prices in the U.S. increased less than expected in July, with a rise in goods prices offset by lower costs for services, signaling continued moderation in inflation. The Producer Price Index (PPI) grew 2.2% year-over-year in July, following a 2.7% jump in June.
Investors are now focusing on the July consumer price data set to be released on Wednesday and retail sales figures on Thursday, which could solidify expectations for an aggressive rate cut by the Fed.