Putin addresses Zelensky as 'mister' for the first time. Morgan Stanley says it means a vibe shift in peace negotiations.

By Jules Rimmer

Smoke signals suggest Russia may be close to suing for peace

The Kremlin's annual May Day Victory parade in Moscow was a far more subdued affair in 2026. Many commentators interpreted this as an indication of Russia's difficulties in sustaining its war effort.

Kremlinologists have detected a shift in the signals Russia is sending about potentially bringing the war in Ukraine - which already lasted longer for Russia than its involvement in World War II - to an end.

Mikhail Khodorkovsky, a Russian exile and well-known dissident critic of Vladimir Putin, posted an observation on X Wednesday that, in an address to the nation last week, the Russian president respectfully referred to his Ukrainian counterpart as "Gaspadin," or "Mr Zelensky" for the first time. This contrasts with his more habitual form of address in the last few years, describing him as a "disgrace" or a "Nazi."

CNN reported on Putin's comment that the "special military operation" was "coming to an end." Elsewhere, the Guardian noted that Putin had suggested former German Chancellor Gerhard Schroeder conduct negotiations on Russia's behalf. The Wall Street Journal noted heavy Russian casualties suffered recently. The BBC highlighted the lower number of military hardware on display at the annual Victory Parade in Red Square last week.

None of this confirms that the war, now entering its fifth year, is on the cusp of ending. But, in a note from Morgan Stanley published Wednesday, strategists declared they are now incorporating "potential negotiations on our radar." The shift in approach, set out in the bank's midyear outlook for European equities, the team led by Marina Zavolock identified some investment themes that may develop as the contours of a possible peace deal are sketched out.

Those themes included the wholesale rebuilding of Ukraine, potentially lower gas prices for Europe, a lower cost of equity to be applied to valuation models on European stocks - most notably in the banking sector XX:SX7E - and a reconsideration of defense stocks EUAD and rearmament plays.

European defense stocks have weakened of late, partly in response to suggestions of a more lasting cease-fire, but Morgan Stanley recommended caution about de-emphasizing defense plays. This is because the durable enforcement of a deal would require European peacekeeping forces, and both Russia and Ukraine would most likely seek to reconstitute their military capabilities and rearm in any case.

Morgan Stanley's sovereign-debt strategists calculated that Ukrainian government bonds have already priced in 65% of the expected normalization in Ukraine's macro fundamentals.

Morgan Stanley's sovereign-debt strategist estimated that Ukraine's sovereign bonds have priced 65% of the way to normalization in Ukraine's macro fundamentals.

Wednesday's report noted that almost half of the returns for MSCI Europe in the first quarter of 2025 were linked to smoke signals from the peace pipe.

During market excitement around the prospect of a Russia-Ukraine peace deal in the first quarter of 2025, almost half of MSCI Europe's returns were linked to this theme, Morgan Stanley said.

Energy prices might well use any serious negotiations as an excuse for discounting an easing of supply constraints for natural gas, crude oil (BRN00), grain and many other important commodities.

Bottom line: "European rearmament would still remain a priority," Zavalock and team said.

-Jules Rimmer

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05-13-26 0725ET