US Markets continue to rise as risk ticks up; Momentum excels globally, except in China; Loonie surges against the greenback

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Equity correlations tighten their grip; Highly leveraged US companies little impacted by rising rates; Asset return dispersion narrows in developed markets




Equity correlations tighten their grip


Asset-asset correlations skyrocketed in all regions Axioma tracks closely, during the turbulent weeks of February. The median pairwise realized 20-day correlations in the Russell 1000, FTSE Developed Europe, and FTSE Japan soared around 0.50 points. FTSE Developed Markets and FTSE Emerging Markets saw the lowest levels of 20-day correlations among regions, with median correlations of around 0.20 last week, likely reflecting differences in price movements across markets rather than within them. Asia Pacific ex-Japan saw the most accelerated rise in correlations, with the median surging five-fold (from 0.05 to 0.25) over the past three weeks.

See graph from the Asia Pacific ex-Japan Equity Risk Monitor as of 22 February 2018:



Highly leveraged US companies little impacted by rising rates


US stocks with the highest levels of debt were little impacted by the jump in 10-year Treasury yields following the release of the Fed’s minutes last week. Return to the Leverage factor in Axioma’s fundamental medium-term US4 model was relatively flat for the past week ending on Thursday. Over the past six months, however, highly leveraged US companies slightly underperformed, the Leverage factor reporting a six-month return of -0.79%, slightly below the long-term average six-month return of -0.13%. For more details on the weak relationship between the US Leverage style factor and changes in 10-year yields, please see the blog post: "Treasury yields and factor returns? Acquaintances, but little in common…"

See graph from the US Equity Risk Monitor as of 22 February 2018:



Asset return dispersion narrows in developed markets


As major indices fell into correction territory earlier this month, almost all stocks in FTSE Developed recorded losses. In contrast, as stocks rebounded somewhat in the past couple of weeks, winners have been dominating losers. Dispersion, the cross-sectional standard deviation of weekly returns, increased steadily in FTSE Developed in 2018 before narrowing last week. With the exception of Australia and the UK, all regions Axioma tracks closely saw asset dispersion shrink last week, an indication of less opportunity for active managers to add value in these regions, but also reflecting a bit less pain for managers and asset owners.

See graphs from the Developed Markets Equity Risk Monitor as of 22 February 2018:



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