Axioma Risk Monitor
AXIOMA RISK MONITOR
Equity edition

UK risk continues to fall post-election; Style risk elevated for the Russell 2000; Euro suffers as central banks signal rate cuts

 

HIGHLIGHTS FOR THE WEEK ENDED JULY 25

 
 
 

UK risk continues to fall post-election

 

Market risk in the UK continued to slide after Boris Johnson, a supporter of Brexit, won the Conservative Party election and became the UK Prime Minister. The risk of the UK stock market, as represented by the FTSE 350 index, has fallen rapidly in 2019, despite the incessant trepidation on the UK political scene. Short-horizon risk shed 450 basis points in the last six-months, and more than 40 basis points in the past five days alone, as measured by Axioma’s UK short-horizon fundamental model. The decline in risk was driven by a drop in factor volatility, while factor correlations remained relatively stable, with little influence on the change in risk.

See graph from the UK Equity Risk Monitor as of 25 July 2019:



 

Style risk elevated for the Russell 2000

 

Style risk jumped after the Russell 2000’s reconstitution at the end of June, and remained elevated ever since, even though total benchmark risk has drifted down. Style risk fell in the first half of the year, dipping to a near-term low below 0.8% in mid-June. The index reconstitution pushed the style risk above 1% in the beginning of July and, after declining slightly in the first couple of weeks of the month, rose again close to 1% last week, as reflected by Axioma’s medium-term fundamental US Small Cap model.

The factors that have seen the biggest jumps in risk include Earnings Yield, Exchange Rate Sensitivity and Medium-Term Momentum. In addition, Profitability has become more correlated with several factors, also driving style risk higher. Market risk has been the main driver of the decline in the total risk of the Russell 2000 over the past six months, while industry risk and stock-specific risk (which are only a small part of total benchmark risk) have been relatively flat.

See graph from the US Small Cap Equity Risk Monitor as of 25 July 2019:

 

 

Euro suffers as central banks signal rate cuts

 

The euro gained some ground against the US dollar after the European Central Bank (ECB) kept interest rates unchanged on Thursday. However, that did not make up for the abrupt weakening of the common currency in recent months. Signals of imminent interest rate cuts from the Federal Reserve and the ECB put pressure on the euro. The common currency has also been pressed by the recent disappointing German figures. For details on the impact of German economic data on euro sovereigns, see the blog post Weak economy, strong markets? – The German recession anomaly.

As of last week, the euro was positioned at the low end of its six-month return range against the US dollar, recording a loss of more than 4% over this period. The euro was also pushed away from the low end of its six-month volatility range against the greenback, and is now at a level of 5% volatility. However, the euro remained among the least risky developed currencies, with only the Singaporean dollar and Canadian dollar being less volatile among major developed currencies.

See graph from the Equity Risk Monitors as of 25 July 2019:


 

 

 
 
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Note: The recent decision by FTSE to add China A Stock Connect stocks to its indices had little effect on their risk, since the A shares were added initially with a small (25%) weight. However, the addition of so many names has had an impact on the average daily trading volume which accounts for the new names at full weight. That is the source of the huge jump in chart 25 in some of the risk monitors.

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