SALES & TRADING COMMENTARY (NOT A PRODUCT OF MORGAN STANLEY RESEARCH) FOR INSTITUTIONAL USE ONLY MS Market Technicals: The Beginning Of The End? Why This Rally Could Be Durable The Beginning of the End? Trump is in 'deal mode' recognizing there is 'regime change' in Iran and there is also some positive confirmation from the Iranian side today on dialogue. * The narrative pivot began Sunday night aboard Air Force One "We have a group it's really a new regime... people we have never dealt with before that are acting very reasonable it truly is regime change" * This message continued today with Hegseth during the DoW presser "But if Iran is wise, they will cut a deal. President Trump doesn't bluff and he does not back down...The new Iranian regime should know that by now. This new regime, because regime change has occurred. Should be wiser than the last. President Trump will make a deal. He is willing." * There is also a lot of focus on polling and skepticism as to how Trump can walk away without a "win". But the polling Trump looks at, shows support for his decision for military action - see below from his 'Truth Social' post today (I have also been semi- suspicious that the Trump administration might enjoy the symmetry of declaring a "win" on the anniversary of 'Liberation Day' on Thursday too) [cid:image004.png@01DCC112.397A4A00] [cid:image005.png@01DCC112.397A4A00] [cid:image001.png@01DCC10E.DF0BD5F0] The market also responds to positively to 1/ confirmation from the Iranian side that there is "will" to end the war 2/ messages are being exchanged, and 3/ diplomatic efforts involving Pakistan and China has resulted in a 5-point peace initiative: [cid:image003.png@01DCC115.F349B440] [cid:image006.png@01DCC118.29BCFEE0] [cid:image002.png@01DCC111.1B55E0D0] The Equity reaction thus far is positive from a market internals perspective with 392 SPX names higher and the MSZZBETA pair +5.7% the second biggest move higher YTD [cid:image017.png@01DCC123.7CB16950] Why the rally could be durable PB Content HF Net leverage has fallen to 45% which puts it in the bottom 2nd decile. Whilst this is not the washout levels seen post Liberation Day (~36%), this still puts Nets in the 2nd Decile since 2010 from which point forward returns start to shift more positive [cid:image011.png@01DCC11C.09A31500] NDX futures positioning has collapsed per CFTC data, from 20% of open interest on 1st Jan to now only 7% which suggests there are plenty of index hedges out there that could get challenged on a rally: [cid:image012.png@01DCC11D.C9500830] This at a time where Mag-6 valuations are on the lows and Mag-7 positioning is now on the lows on a 1y lookback. This provides the room for a large cap led rally MS Eq Strategy "To further contextualize that valuation level for the Mag 7, it's currently in just the 1st percentile of levels since 2023. Thus, from a relative value perspective, we think the group looks quite attractive here after having already been through 6 months of consolidation." [cid:image015.png@01DCC120.DD6FD400] [cid:image014.png@01DCC11E.25D6DC50] Systematic Strategy exposure is also down to the 36%ile. There could be more selling here sure, but that would need a meaningful realized vol shock [cid:image016.png@01DCC122.61192940] Energy sensitive Airlines (MSXXFLY) and Rates Sensitive Homebuilders (MSXXBLDR) also bottomed on a relative basis earlier in March despite Oil moving higher, indicative of a trend exhaustion on the "easy" shorts: [cid:image018.png@01DCC125.753FABD0] Markets are desperate to move onto a new narrative and today USTR Greer outlined a pretty optimistic pitch into the key Trump-Xi meeting on 14th-15th May, one where he emphasized stability and creating a US-CH Board of Trade. This provides a carrot to setup books more risk positively if this de-escalation narrative follows through next week. * "We are looking at stability...The Chinese want stability, we want stability and I actually see a positive relationship where we learn to manage trade with each other where we pick the kind of things we want to be selling to each other, things that are not sensitive to avoid national security elements that proved challenging in negotiations. I see stability with China over the next year" * "We have been talking about a US-CH Board of Trade. trade which will be a mechanism to help manage trade. Over the past 10 years as the United States has tried to eliminate its trade deficit with China and figure out its export control situation, if we can formalize the mechanism to make sure we can agree on things we are selling to each other, for the US we want to be selling Boeing, we want to be selling Medical Devices and Ag products. The Chinese want to be selling things to us and we are willing to buy things like low-tech consumer goods, certain commodities the Chinese have that we don't. Establishing that mechanism at the Leaders meeting in going through a process of figuring out how to optimize trade, that will be a big deliverable" Source: Jameson Greer (BBTV, 3/31) Lastly, the "bonds are back in town". Bonds working helps provide confidence in portfolio risk management again. * US 2y yields decline by 20bps in the last 3d the largest move lower since Aug last year. This will help ease fears of "hedges not working" * Hourly returns correlation of SPX and US10y bonds has also declined from its peak of 80% showing a potential reversion back to a more normal relationship. [cid:image007.png@01DCC119.37916190] [cid:image008.png@01DCC11A.2DED7740] * There is also media speculation that Kevin Warsh could be in a Confirmation hearing in 2 weeks - this will focus bond markets back to pricing in an easier policy setting post Powell's exit and comes at a time where per MS IR Strategy, markets are pricing in elevated policy trough rates "We also see a positive term premium in the pricing of Fed policy. Exhibit 7 shows how the market prices Fed policy versus the most recent FOMC meeting dot-plot" [cid:image009.png@01DCC11A.CB533290] [cid:image010.png@01DCC11B.65173610] Kunal Sodha, Executive Director Morgan Stanley | Institutional Equity Division 1585 Broadway, 2nd Floor | New York, NY 10036 Phone: +1 212 761-0560 kunal.sodha@morganstanley.com<mailto:kunal.sodha@morganstanley.com> Pronouns: He, Him, His ________________________________ If you have received this communication in error, please notify the sender immediately. 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