Deal or no deal? How Brexit negotiations may impact markets

On the latest edition of Market Week in Review, Senior Quantitative Investment Strategy Analyst Dr. Kara Ng and Sam Templeton, manager, global communications, discussed the latest developments surrounding Brexit, the release of minutes from the U.S. Federal Reserve (the Fed)'s September meeting and potential ramifications to U.S. equity markets of continued interest-rate hikes.

Is Fed policy about to turn restrictive?

Shifting to the U.S., Ng said that recently released minutes from the Federal Open Market Committee (FOMC)'s Sept. 25-26 meeting indicative a relatively hawkish tone from the central bank--although probably not as hawkish as earlier comments from Fed Chair Jerome Powell may 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 said.

The September minutes show that a majority of FOMC members believe that a more restrictive monetary policy may be needed in order to combat rising inflation and an overheating economy, Ng noted. "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." Because of this, the central bank, in Ng's opinion, has justification to keep on raising interest rates at a quarterly pace.

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

Assuming the Fed sticks to its pattern of quarterly interest-rate increases, what are the possible ramifications for U.S. equity markets? Not much in the short-term, Ng said, as she believes the recent stock market sell-off may have created a small buying opportunity for U.S. stocks. "Equities there are now a little less expensive, and investor sentiment is slightly less euphoric," she explained.

The long-term impacts of continuous Fed rate increases may start causing fits for markets around late 2019 or early 2020, Ng said. "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 explained. At the same time, the tailwinds from U.S. fiscal stimulus would also probably fade--leading to a likely moderation of the U.S. economy and a more vulnerable U.S. equity market as a result, Ng concluded.

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