Equity risk ticks-up in the US, Canada, Japan and Australia; Asset correlations climb in the US; Mexican peso strengthens against the US dollar

Treasuries underperform as markets price in more rate hikes;
Dollar recovers on prospect of higher rates




Treasuries underperform as markets price in more rate hikes


Treasury yields continued their ascent in the week ending Feb. 23, 2018, rising to fresh 4-year highs on Wednesday. The move was triggered by the release of the Federal Reserve Bank’s January meeting minutes, which stated that “a majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate.” Markets took this as a signal for even tighter monetary policy, and short-term interest rate futures started to price in four hikes for the remainder of the year, compared with just three in previous projections. Messages were less clear-cut from the European Central Bank, where policy makers seemed to have argued whether to drop the easing bias from the governing council’s communication. The Bank of England also saw its governor and chief economist bicker over whether exchange rate depreciations helped boost economic growth, although the Bank’s Monetary Policy Committee still seems set to raise the base rate in the coming months. Yields on 10-year Bund and Gilt yields did not follow their US counterparts and ended the week 5 and 6 basis points lower, respectively.

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Please refer to figures 4 of the current Multi-Asset Class Risk Monitor (dated Feb. 23, 2018) for further details.


Dollar recovers on prospect of higher rates


The US dollar recovered from the previous week’s lows in the week ending Feb. 23, 2018, appreciating 0.9% against a basket of major currencies. Most of the move happened on Tuesday and Wednesday, as Treasury yields were pushed up by the prospect of higher short-term rates. European currencies saw their short-horizon risk fall, with the biggest decline of 0.15% recorded for the pound. Still, the British currency remained the riskiest in the developed world, with a predicted volatility of 8.88%.

Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated Feb. 23, 2018) for further details.


Portfolio risk declines but equity/FX correlation remains strong


Short-term risk in Axioma’s global multi-asset class model portfolio plunged by 1.33% to 12.22% as of Friday, Feb. 23, 2018. The decline was almost entirely due to an almost 2% drop in standalone equity standard deviation. However, the stock holdings still accounted for close to 80% of total portfolio volatility, with the risk decomposition by asset class remaining largely unchanged. Diversification also continued to be compressed, as the strong positive relationship between equity and FX returns persisted, while the correlation between stocks and bonds stayed close to zero.

Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated Feb. 23, 2018) for further details.


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