Markets Highly Dependent on Binary Outcomes Resulting from Political Negotiations

BNY Mellon’s Pershing issues the Lockwood Investment Insights for the fourth quarter, says geopolitics will test investors’ resolve

JERSEY CITY, N.J. — Capital markets appear highly dependent on a large set of binary outcomes that may have more to do with political negotiations than changes in market dynamics, according to the latest Lockwood Investment Insights commentary.

“Markets have remained resilient through the third quarter, but negotiations over the United Kingdom’s planned exit from the European Union, protests in Hong Kong as well as U.S. and China trade talks and impeachment proceedings, among other developments, will test investors’ resolve in the coming months,” said Matthew Forester, chief investment officer of Lockwood at BNY Mellon’s Pershing and author of the report.

The capital markets outlook has not materially changed since last quarter as bond markets have continued to signal significant and renewed concerns about economic growth and monetary policy and investors worry whether cyclical pressures will grow more quickly than expected.

“Uncertainty can suppress market activity as investors wait for resolution before acting, but while we worry about these geopolitical events, better-than-expected outcomes or even simple clarity can have healthy results for markets,” Forester said.

Some highlights from the report include:

• Difference Between Interest Rates in U.S. and Countries in Europe and Asia
  The large disparity between interest rates in the U.S. and countries in Europe and Asia puts downward pressure on U.S. rates. While foreign investors need to consider the currency implications of buying U.S. debt, relatively high rates in the U.S. will continue to attract global capital.
• Misalignment Between Monetary Policymakers and Markets
  The difference in expectations between markets and monetary policy makers widened over the past year as global growth prospects weakened and markets expected more central bank stimulus than policy makers telegraphed. This misalignment is a risk for markets.
• Divergence in Valuations Between Growth and Value Stocks
  Valuation gaps between growth and value stocks are approaching or exceed nearly all historical precedents. While this level of valuation disparity looks unlikely to continue indefinitely, it may portend other internal equity market shifts as investors adjust to new macroeconomic realities.
• Impact of Rising U.S. Dollar on Global Capital Markets
  Currency risk is one of the top contributors of risk to a globally diversified portfolio. Many return streams, from foreign stocks and bonds, oil and other commodities depend highly on the exchange rate. Continued gains in the U.S. dollar put pressure on many global capital markets.

For more information on these trends, please visit www.pershing.com to view the full report and relevant disclosures.

This material is intended for informational purposes only and does not constitute investment advice or an offer or solicitation to purchase, hold or sell any securities. The opinions expressed by Lockwood are as of October 2019, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Lockwood to be reliable, but are not necessarily all inclusive. This material may contain forward-looking information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.