The investment bank cut its rating from "equalweight" to "underweight" - predicting further asset write-offs at HSBC in 2008 thanks to the continuing decline of the US housing market.
In total, Morgan Stanley claims that the losses might hit $15 billion this year at the bank - up from its previous prediction of $12.5 billion.
HSBC is also set to post earnings of $1.14 per share this year, the investment bank added - also a downwards revision from the previous total of $1.30.
Meanwhile, a further dip in the European stock index futures markets has been caused by the record price of crude oil.
The commodity rose to $124 a barrel yesterday - an all time high.
Futures on the benchmark Dow Jones Euro Stoxx 50 Index dropped 0.7 per cent this morning in London, Bloomberg reports.