BNY Capital Market Perspectives

The Waiting Game

Last week we had highlighted the divergence of various volatility measures with equity volumes hitting near all-time lows, while FX and FI measures remaining elevated. Other ways of expressing this basic disparity is to look at correlations, which we had also previously pointed out were focused on USD and/or Treasury relationships sitting as the widest levels relative to their means. Over the past week, we have seen some reversion of these relationships as the USD and stocks have mostly weakened, while yields have fallen slightly. As the chart below indicates, the reversion between the MOVE and VIX has been slight at best over the past week, with the large diversion since the elections mostly intact. As has been the case since the elections, expectations regarding the Trump administration have been the primary catalyst for asset class moves, and we think that this remains the primary headline for investors. Given the early nature of the administration, there have been few answers on the topics of trade, deregulation, taxes and fiscal stimulus, which we feel are the areas that will have the biggest impact on valuations. However, the markets have arrived at where they are without this granularity, so they can certainly stay here until we get information that will either support or reject the investment thesis. What exactly is built into expectations is of course subject to debate, with varying interpretations of tax reform, trade implications, and fiscal stimulus revealing themselves in different ways across the asset classes, which at times appears to be telling different stories to us.

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