BNY Mellon Still Watching for Bigger Shakeout Outside of Stocks

There’s still potential for market turbulence in asset classes outside of stocks, Bank of New York Mellon Corp. says.

“We have not seen the broad capitulation of valuation adjustments across many asset classes,” BNY Mellon senior global market strategist Marvin Loh wrote in a note Wednesday. “In fact, it has only been an equity adjustment at the moment, although many of the thematic catalysts have broader economic undertones.”

He pointed to U.S. high-yield debt volatility versus that of stocks, as measured by the Cboe Volatility Index, or VIX.

“The volatility in U.S. and euro high yield has actually continued to widen even as stock volatility has fallen,” Loh wrote. “Whether this proves to be a harbinger of additional volatility or a delayed reaction to the better tone from equity markets remains to be seen.

“A case can be made that there should be greater co-movements, as most asset classes were considered rich at the start of the year,” the report said. The Japanese yen is also an asset to watch because its strength shows repatriation during periods of volatility, Loh said.

Still, Loh doesn’t see the current situation as too dangerous yet. A breakout “in overly troubling fashion” would need to see inflation-adjusted yields move through 1 percent and the 10-year Treasury yield to move above 3.25 percent, he said. The 10-year yield is currently about 2.92 percent.

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