BNY Mellon Global Markets – Weekly Market Commentary


As we end the first half of the year, we will take a little time to review the major themes that we think asserted themselves into the market so far. We will also review where we think it will become difficult for some of these same influences to have a similar impact in the remainder of the year. One constant that will not change this year is the outsized influence that various monetary policy regimes will have on determining asset values. At this point, even as we look forward to more normalized monetary policies, at least from the Fed and BOE, the collective balance sheets of the G-4 recently exceeded $9 trillion and show no signs of returning to pre-crisis levels anytime soon. In fact, while we simply hope that the Fed and BOE will stop increasing their balance sheets, the BOJ and ECB will continue to expand their securities holdings, which will likely cause the overall asset base of these CBs to continue expanding. Continuing and expanding central bank liquidity has, therefore, effectively suppressed volatility around the globe, slowly driven increasing risk appetites and sparked the yield rally that was the top story of the year, if for no other reason than most did not expect it. Returns data reflects this commentary, as fixed income has been the strongest performing asset class YTD, posting gains between 3% and 11% on USD assets. This compares to a 2% and 6% gain on the DJIA and S&P 500 in 1H:14, as well as negative returns for the FTSE, Nikkei, and Hang Seng. While bonds reacted early to the continuation of the low rate regime, equities have more recently joined the party, with most of this year’s equity gains occurring over the past few months. The ability of rates to remain anchored at these lower levels, while driving additional risk taking, will be the pivotal decision facing investors in 2H:14. This leads to our first major 1H:14 theme that may have difficulty replicating itself during the second half of the year.