Greenwich Associates has released its “Top 9 Market Structure Trends for 2019,” and volatility tops its list of predictions.
Global financial services markets are entering a “post-credit crisis” era marked by the fact that easy-money policies are ending, interest rates are heading up while markets are swinging down and a new volatility will rock this timid new world in 2019, according to predictions from Greenwich Associates.
In its new report, the market research firm spotlights the “Top 9 Market Structure Trends for 2019,” and market volatility tops the list.
Volatility Tests New Market Structure (No. 1)
The researchers are predicting that the market structure “built since the end of the global credit crisis” may get a wrenching test or two in 2019.
“Despite some short-lived spikes, volatility has remained relatively low for the past decade, as markets have risen and the U.S. Federal Reserve injected more and more stimulus into the economy. While this has been great for retirement accounts, it hasn’t offered a prolonged test of the new post-crisis market structure. That means major portions of Dodd-Frank, EMiR, MiFID II, Basel III, and other large-scale legislative and regulatory changes around the world—all intended to reduce systemic risk—have had barely a chance to prove their true worth,” according to report.
“While we are certainly not predicting any major market calamities in 2019, we fully expect market volatility to stay with us. This will also include general uncertainty among market participants, increased volumes across the board and varied methods of risk-taking and hedging — some of which will end poorly. As a result, today’s market structure, which looks and feels vastly different than it did 10 years ago, will be forced to prove that it has, in fact, made markets better and safer,” according to the report.
Uncertainties with Brexit (No. 8)
If global volatility weren’t enough, the unsettled environment of 2019 is bracing for the seen and unseen shocks that may come if and when the U.K. leaves the European Union by March 29, 2019.
“Even the Brexit-supporting government acknowledges that the deal they have negotiated will lead to worse economic conditions than staying in the European Union would,” according to the report. “Outflows from U.K.-focused equity funds have already hit $1 trillion, and thousands of financial services jobs are expected to shift from London to Paris, Frankfurt and Dublin.”
The researchers predict that “an even worse outcome than the government’s deal would be no deal at all — which would have significant impact on cross-border financial services, especially clearing of Euro-denominated interest-rate swaps, 90% of which are cleared in London. There are other scenarios that could also come to pass, including Prime Minister Theresa May being replaced, a general election that could lead to a Labour government, and/or a second referendum that could reverse Brexit. Only one thing is really certain — political and market volatility are set to continue well into 2019.”
The Death of LIBOR (No. 3)
Another international worry is the future of the London Interbank Offered Rate (LIBOR).
The report’s authors acknowledge that “the death sentence handed out to LIBOR” following rates manipulation scandals will not kick in until 2021 “the transition to new benchmarks like SOFR and SONIA will consume legal and operations teams for months to come” starting in 2019.
The manipulation scandal has rendered Libor “dead in just two more years,” and “SOFR [Secured Overnight Funding Rate] and SONIA [the U.K.’s Sterling Overnight Index Average], among other benchmarks, are slowly starting to find their way into new contracts and debt issuance around the world, as the market is finally accepting and dealing with this enormous change,” according to the report.
“The impact of this on market structure goes beyond the $350 trillion face value of financial products currently tied to Libor. Hedging vehicles will need to change, making some existing futures and swaps products less useful, and the exchanges will all fight to take control of new SOFR and SONIA contracts. Existing contracts need to be renegotiated as well, creating a huge operational burden for the industry that will consume legal and operations teams for months to come. In the long run, the industry will adapt and move on, but the short-term fight to change will be intense and meaningful,” according to the report.
The report hits upon six other areas that are key trends:
- Exchanges Grow in Importance (and Size) (No. 2)
“The importance of exchanges around the world has grown tremendously over the past decade, and 2019 will see them advance even further,” according to the report, which notes that in 2008, CME had a market capitalization of $7 billion but a decade the CME Group’s market cap has hit $65 billion.
- Blockchain and crypto move into the trough of disillusionment (No. 4)
The blockchain buzz and crypto craze will smash into realism in 2019 as “institutional trading of cryptocurrencies will start to gain structure as regulators provide additional clarity, and DLT projects now five years in the making will start to bear fruit in places where that technology makes the most sense.”
- Streaming prices hit asset managers (No. 5)
“The electronification of the bond market, while set to continue, is not new for 2019. However, the market is beginning to shift from on-demand prices toward continuous prices, more akin to the current foreign exchange market,” according to the report.
- Trading analytics get even more embedded (No. 6)
“No, this is not a broken record,” the authors insist. “Trading is going to get even more data-focused next year. Transaction cost analysis has become increasingly important over the last decade, and despite near saturation among equity traders, we should expect to see TCA become even more ingrained in the equity workflow.”
- Data, data and more data (No. 7)
“One thing that comes up in every market structure and technology conversation is the growing importance of data,” say the report’s authors, who not that in 2019 the data obsession of financial services firms will not be over-hyped.
- ETFs as an asset class (No. 9)
The identity crisis plaguing exchange-traded funds (ETFs) may be resolved in 2019 as traders stop treating ETFs the same as single stocks. “Trading algorithms, TCA and other portfolio-related tools will begin to really emerge in 2019, allowing investors and traders to more smartly utilize ETFs going forward,” according to this prediction.
Access to the full report can be found here.