Monday Musings: September 28, 2020

Sep 28, 2020

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Public Trust Credit Team
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Volatility, thy name is presidential election season

Pardon us for our Hamlet reference, but this is the appropriate time to point out that divining anything from the public markets over the coming months will be a fool’s errand. Election season is a quadrennial celebration of uncertainty and speculation for investors, with this year shaping up to be remarkably volatile. Although the Chicago Board of Exchange’s Volatility Index (VIX) is currently at ~27, well below the year’s high of ~83, the current reading is already above any from 2016. Admittedly, this is a reflection of COVID-19, but the cumulative factors are likely to lead to wild swings in the VIX (also known as the fear index). For high-grade, fixed-income investors, volatility in equities is generally insignificant but for investors who are made fearful by the constant barrage of concerning headlines, this is likely to be a nerve-wracking season. As always, the investment professionals at Public Trust are continuing to rigorously analyze investments, portfolios and risk parameters to ensure that we are separating noise from signal.

A Brexit deal remains “very much possible but equally very far from certain”

The above quote from the U.K’s chief negotiator David Frost highlights what continues to be an uphill battle for Brexit to happen smoothly. The U.K. formally left the E.U. on January 31, 2020, via a formal withdrawal agreement but remains in a transition period where the U.K. has to follow E.U. rules until December 31, 2020. With the deadline for extending the transition having passed, U.K. and E.U. negotiators are now set to meet on Tuesday in Brussels over a three day period, but neither side appears ready to compromise on key topics.
 
The biggest sticking points in the trade talk remain around fishing rights and the union’s demand that British and European companies stay on an even playing field, particularly regarding state aid. Making matters even more complicated, U.K. Prime Minister Boris Johnson recently introduced an Internal Market Bill that would allow the U.K. to override sections of the original Brexit withdrawal agreement concerning Northern Ireland, potentially a violation of international law. Brussels has threatened to take legal action if the U.K. government does not withdraw aspects of the bill that the union views as offending before the end of September.
 
Ideally, an agreement would need to be in place by mid-October as it still needs to be ratified before January 1, 2021, to take effect. The stakes are high as a no-deal Brexit could make the economic recovery even harder for the U.K., particularly as it has already been hit hard by the pandemic this year. If the two sides are unable to reach a deal by the end of the year, the U.K. would have to trade with the E.U. following World Trade Organization rules. As a result, tariffs would become applicable on most goods that the U.K. sells in the E.U., making them more expensive and harder to sell. The U.K. could also retaliate and apply tariffs on companies based in the E.U.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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