Axioma Risk Monitor
Equity edition

Risk spread raises red flag in the US; China’s risk jumps as trade issues mount; Turkish lira plummets amid political instability




Risk spread raises red flag in the US


US stocks fell last week as investors’ concerns swelled in anticipation of resuming trade talks between China and the US. However, the short-horizon risk for the Russell 1000 continued to fall over the past five days, as measured by Axioma’s short-horizon fundamental US All-Cap Model. The weekly market loss remained within one standard deviation of the expectation at the beginning of the week.

More importantly, the short-horizon statistical forecast has been climbing since the end of April, and the risk spread between statistical and fundamental short-horizon forecasts widened to two percentage points last Thursday. The extra risk picked up by Axioma’s short-horizon US statistical model may reflect potential changes in the risk regime and/or the emergence of non-traditional factor risk sources in the US—a situation that bears monitoring.

Trade volumes in the US picked up in May but they remained relatively low, as investors seem to be reluctant to make drastic changes to their portfolios—perhaps an indication that investors were cautiously waiting for the results of the US-China trade negotiations, and a deterioration of investment sentiment. For more details on the insights revealed by Axioma’s ROOF (Risk-On/Risk-Off) scores regarding changes in the market sentiment, see blogpost Investor Sentiment Tanks on News of Renewed Trade War… But ROOF Scores Show a Deterioration Since February

See graphs from US Equity Risk Monitor as of 9 May 2019:


China’s risk jumps as trade issues mount


China’s equity market took a much larger hit than the US, with the CSI 300 index dropping 8%, while the Russell 1000 shed less than 2% last week. The risk of the Chinese market jumped close to 200 basis points over the past five days and more than 800 basis points in the past three months, as measured by Axioma’s short-horizon China fundamental model. The increase in risk was fueled by an increase in both stock volatility and stock correlations. China’s short-horizon risk of 27% is now 15 percentage points higher than that of the US market. China is by far the riskiest among the geographies Axioma tracks closely.

See graph from the China Equity Risk Monitor as of 9 May 2019:



Turkish lira plummets amid political instability


The Turkish lira plunged against the US dollar to an eight-month low, after the country’s board of election announced a repeat of the local election for the city of Istanbul, a move that may have raised concerns among investors about an erosion in Turkey’s democracy. The lira’s six-month return against the US dollar turned negative last week, with the Turkish currency being positioned at the bottom of its six-month return range against the greenback as of last Thursday. Despite the Turkish central bank’s unconventional efforts to prop the lira, the Turkish currency recorded a 5% loss against the US dollar over the past six months. Only six weeks ago, the lira was the best performing emerging currency, with a six-month return above 20%. The Turkish lira was still the riskiest emerging currency last Thursday, its volatility exceeding 20%. However, the Turkish lira remained at the low-end of its volatility range against the US dollar.

See graph from the Equity Risk Monitors as of 9 May 2019:



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Webinar | Axioma Insight™ Quarterly Multi-Asset Risk Review

Date: May 16, 2019
Time: 11:00 AM ET / 4:00 PM GMT

In this webinar, Christoph V. Schon, Axioma's Executive Director of Applied Research, examines how different scenarios affect the overall risk and diversification opportunities of a global multi-asset portfolio.

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Webinar Recording | Axioma Insight™ Q1 2019 Risk Review

In this webinar, Melissa R. Brown, Managing Director of Applied Research, discussed the major drivers of the change in risk during the first quarter and provided a comprehensive picture of the risk environment impacting investor portfolios.

Watch here.


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Investor Sentiment Tanks on News of Renewed Trade War… But ROOF Scores Show a Deterioration Since February

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