Welcome to Thoughts on the Market. I'm Michael Zezes, head of Public Policy and Municipal Strategy for Morgan Stanley.

Along with my colleagues bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and

financial markets.

We're recording this on Wednesday, June 5th at 9 a.m. Eastern. Trade tension seem to be

escalating. The newest wrinkle is a proposal from the U.S. to Tariff Mexico until it meets certain demands to help the US administration achieve its goals for the southern border.

The obvious risk here is a greater burden for both the US and Mexico economies at an already fragile time, but this also has an important read-through for the global economy.

Why? Because it underscores the escalation momentum in the US-China trade relationship.

And as our economists have pointed out in recent publications,

further escalation there comes with a cost,

higher risk of a global recession.

Recall we recently talked about using game theory

to explain why US-China trade tensions are escalating.

Basically, both sides perceive greater risks to cooperating than escalating.

The US proposal of the terror of Mexico might reinforce this perception.

Consider that Mexico has had a free trade agreement with the US for 25 years now,

just signed on to a new one, yet still may be subject to fresh tariffs from the US,

first steel and aluminum, and now potentially tariffs on all exports.

And that means you could still need more downside from markets or economic data to clarify the benefits

of cooperation to both sides.

For investors, this underscores the core views of our cross-acid strategy team.

We still prefer government bonds over risk assets, in particular corporate credit,

where a more meaningful re-pricing of economic cycle risks has yet to occur.

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