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

Government yields diverge as stocks come back with a vengeance;
European currency risk highest since July last year




Government yields diverge as stocks come back with a vengeance


US Treasury yields rose again in the week ending Feb. 16, 2018, climbing to levels last seen 4 years ago. The 10-year rate surged to 2.92% on Wednesday, when data released by the US Bureau of Labor Statistics showed that consumer prices had risen by 2.1% in January—0.2% more than economists had predicted. Yet, despite the fact that returning inflation had been cited as the main reason for the previous week’s sell-off, stock markets rebounded strongly around the globe, as US indices posted their strongest 7-day gains since February 2016. Yield movements were less pronounced on the other side of the Atlantic, though, with British 10-year Gilts ending the week only 2 basis points higher, while the same-maturity German Bund rate declined by the same amount.

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Please refer to figures 4 of the current Multi-Asset Class Risk Monitor (dated Feb. 16, 2018) for further details.


European currency risk highest since July last year


The US dollar gave up all its gains from the previous week, depreciating 1.5% relative to a basket of major currencies in the week ending Feb. 16, 2018, dropping to a 3-year low on Thursday, despite a hearty recovery in the US equity market. The decline starkly contrasted with the pattern observed during the Trump rally 12-14 months ago, when strong gains in share prices were accompanied by a sharp appreciation of the USD versus most of its rivals. The Japanese yen was once again one of the biggest beneficiaries, gaining 2.5% against the greenback. However, European currencies saw bigger increases in their short-horizon risk. The euro experienced the largest rise of 0.13% to 7%—its highest level since July last year. Sterling volatility remained above 9%, retaining its crown as the most-risky developed currency.

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Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated Feb. 16, 2018) for further details.


Strong FX/equity correlation squeezes portfolio diversification


Short-term risk in Axioma’s global multi-asset class model portfolio edged higher to 13.55 as of Friday, Feb. 16, 2018, compared with 13.09% the week before. The increase was mostly due to a combination of greater exchange-rate volatility and a stronger positive relationship between stock market and foreign-currency gains against the USD. The correlation between FX and equity returns is now at its highest since the inception of the portfolio in November 2016, resulting in the smallest diversification effect in its history of only 2.45%. The result was a further increase in volatility contributions from non-dollar denominated stock holdings, where strong local gains were amplified by foreign exchange rate appreciation. Even non-US fixed-income securities saw their share of overall risk grow despite a significant reduction in the recently positive correlation between interest rate and equity returns to zero. The reason for this was that their values appeared to increase in USD terms together with the US stock market, despite price declines in their local currencies.

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Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated Feb. 16, 2018) for further details.


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