Morgan Stanley Fixed-Global EM Strategist Will a Cut Cut it-110251849

M Global IdeaGlobal EM StrategistWill a Cut Cut it? Morgan Stanley & Co. International plc+James K LordStrategist James.Lord@morganstanley.com +44 20 7677-3254 Neville Z MandimikaStrategist Neville.Mandimika@morganstanley.com +44 20 7425-2509 Pascal N BodeStrategist Pascal.Bode@morganstanley.com +44 20 7425-3282 Arnav GuptaStrategist Arnav.Gupta@morganstanley.com +44 20 7677-0382 Morgan Stanley & Co. LLCSimon WaeverStrategist Simon.Waever@morganstanley.com +1 212 296-8101 Ioana ZamfirStrategist Ioana.Zamfir@morganstanley.com +1 212 761-4012 Emma C CerdaStrategist Emma.Cerda@morganstanley.com +1 212 761-2344 Morgan Stanley Asia Limited+Min DaiStrategist Min.Dai@morganstanley.com +852 2239-7983 Gek Teng KhooStrategist Gek.Teng.Khoo@morganstanley.com +852 3963-0303 Rate cuts are coming, but are they coming fast enough and big enough? Data have weakened in the US but the Fed looks set to kick off with 25bp. This leaves the risk backdrop fragile and investors lacking confidence. We move to bearish on EM credit and expect recent Asia FX outperformance to reverse. FX & EM Strategy: Downside risks to the US economy have been met with more dovish commentary from Fed officials. Yet a 25bp start to the easing cycle amid labour market weakness leaves a fragile risk backdrop. We see risk that recent Asia FX outperformance can reverse. Downside risks to DXY from lower US rates should offset headwinds to some extent for EM FX.Sovereign Credit Strategy: We suggest reducing risk further, turning outright bearish on EM sovereign credit in the near term and favouring IG over HY. Lower UST yields have been supportive so far but any further fall will likely be risk-negative. We also don't see a first cut as the decisive factor for inflows to EM funds to restart. Away from the Fed, spread valuations are far from cheap. EM growth keeps moderating, with August data out of China set to be weak. EM fiscal data keep deteriorating nearly across the board. We expect issuance to remain high and, while this in itself should not reprice markets, it leaves technicals more vulnerable to any shocks. Finally, the uniform sentiment across other key asset classes is that the soft landing is priced, leaving risk/reward unattractive, including in US credit and US equities. We suggest selling EM CDX and remove like stances on Nigeria, Argentina and Morocco, replacing them with like stances on Mexico and Romania. LatAm Macro Strategy: Local rates should grind lower amid Fed cuts, with steepening pressures across the board bar Brazil. We see important differentiation among countries, given stages of their own cycles and external imbalances. We add receivers in 1y IBR, Jan 29 DIs and 1y TIIE vs. SOFR, as well as long BRL/COP. In Mexico, we keep 2y2y TIIE receivers and play for tighter 10y swap spreads.Asia Macro Strategy: We see Asia FX exposed to a US slowdown, lower equity markets, possible US tariff risks and China's weak growth. Plus the short positi