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Deal Or No Deal? How Brexit Negotiations May Impact Markets

SeekingAlpha

On the newest version of Market Week in Assessment, Senior Quantitative Funding Technique Analyst Dr. Kara Ng and Sam Templeton, supervisor, international communications, mentioned the newest developments surrounding Brexit, the discharge of minutes from the U.S. Federal Reserve’s (the Fed) September assembly and potential ramifications to U.S. fairness markets of continued interest-rate hikes.

Progress arduous to return by for May, EU in Brexit talks

An EU summit in Brussels the week of Oct. 15 was billed because the second of fact for Brexit negotiations, Ng stated, because the clock is quickly ticking on EU and UK leaders to strike a deal earlier than the UK’s scheduled exit from the EU in March 2019. “The closer we get to the end of the year without much progress at the negotiating table, the more likely a no-deal Brexit becomes,” Ng defined. UK Prime Minister Theresa May discovered herself in a troublesome spot on the summit, she added, with members of her personal social gathering beginning to flip towards her. “This led May to attempt to walk a line between being unyielding enough to retain the support of her party, and yielding enough to be able to make a deal with the EU,” Ng remarked.

So, what got here out of the assembly? Finally, little general progress, Ng stated. With only one extra summit left in December (and probably an emergency assembly in November), Ng and the workforce of Russell Investments strategists consider that markets shall be vulnerable to heightened volatility, as hypothesis mounts over whether or not or not a deal could be reached. “All things considered, we still think that a no-deal Brexit is a low-probability outcome,” she stated, “because in the end, both sides have incentives to reach an agreement.”

Is Fed coverage about to show restrictive?

Shifting to the U.S., Ng stated that just lately launched minutes from the Federal Open Market Committee’s (FOMC) Sept. 25-26 assembly are indicative of a comparatively hawkish tone from the central financial institution – though in all probability not as hawkish as earlier feedback from Fed Chair Jerome Powell might have implied. “Earlier this month, Powell remarked in an interview that the Fed was a long way from reaching neutral interest rates-a fairly hawkish comment which we think may have just been a messaging slip-up,” she stated.

The September minutes present that a majority of FOMC members consider that a extra restrictive financial coverage could also be wanted with a purpose to fight rising inflation and an overheating financial system, Ng famous. “At Russell Investments, this comes as no surprise-we’ve been expecting the Fed to become restrictive in 2019, given that the U.S. is past full employment and inflation is around the Fed’s 2% target.” Due to this, the central financial institution, in Ng’s opinion, has justification to maintain on elevating rates of interest at a quarterly tempo.

Potential impacts of rising rates of interest on U.S. markets

Assuming the Fed sticks to its sample of quarterly interest-rate will increase, what are the potential ramifications for U.S. fairness markets? Not a lot within the short-term, Ng stated, as she believes the current inventory market sell-off might have created a small shopping for alternative for U.S. shares. “Equities there are now a little less expensive, and investor sentiment is slightly less euphoric,” she defined.

The long-term impacts of steady Fed fee will increase might begin inflicting matches for markets round late 2019 or early 2020, Ng stated. “Under this scenario, short-term interest rates would continue to rise, leading to a likely inversion of the U.S. Treasury yield curve around 2019,” she defined. On the similar time, the tailwinds from U.S. fiscal stimulus would additionally in all probability fade – resulting in a possible moderation of the U.S. financial system and a extra weak U.S. fairness market consequently, Ng concluded.

Disclosures

Opinions expressed by readers don’t essentially symbolize Russell’s views.

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This can be a publication of Russell Investments. Nothing on this publication is meant to represent authorized, tax, securities, or funding recommendation, nor an opinion relating to the appropriateness of any funding, nor a solicitation of any sort. The contents on this publication are meant for common info functions solely and shouldn’t be acted upon with out acquiring particular authorized, tax, and funding recommendation from a licensed skilled regarding your personal state of affairs and any particular funding questions you’ll have.

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