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

US Treasury yields fall on cautious Fed; Pound drops amid Brexit resignations; Portfolio risk rises on stronger correlations




US Treasury yields fall on cautious Fed


Yields on US Treasury bonds fell in the week ending Nov. 16, 2018, after newly appointed Federal Reserve Vice-Chairman Richard Clarida remarked in a CNBC interview that the central bank is close to becoming “neutral” on interest rates. Long-term rates had already fallen earlier in the week when US blue-chip indices took a 2% plunge, taking the total decline for the 10-year benchmark to -11 basis points. On the other side of the Atlantic, the same-maturity British Gilt yield dropped even more—down 13 basis points—following several ministerial resignations over the proposed Brexit deal on Thursday. The 2-year rate even dipped below the Bank of England’s base rate of 0.75%, as investors sought the relative safety of government securities. The German Bund curve also profited from safe-haven flows, as the risk premium on Italian sovereign debt rose sharply on the back of a standoff between the populist government in Rome and the European Commission over the projected budget for 2019.

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


Pound drops amid Brexit resignations


The pound sterling lost 1.5% against the US dollar in the week ending Nov. 16, 2018. In its biggest 1-day plunge in almost 2 years, the British currency crashed more than 2% on Thursday morning, after several cabinet ministers resigned in protest over the Brexit deal agreed to the day before. The departures included Brexit secretary Dominic Raab, who had been instrumental in brokering the agreement in the first place. At the same time, the FTSE 100 dropped 1.4% from its early-morning high to afternoon low. We view this co-movement of exchange rate and share prices as momentous, as it contravenes the recently prevailing pattern of weaker pound and stronger UK stock market. Short-horizon risk for the GBP/USD exchange rate surged by 0.17% to 8.27%.

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


Portfolio risk rises on stronger correlations


Short-term risk in Axioma’s global multi-asset class model portfolio surged almost 1 percentage point to 10.45% as of Friday, Nov. 16, 2018. The increase was attributable to a stronger co-movement of share prices and exchange rates against the USD on the one hand and a resumption of the positive relationship of the oil price and stock markets on the other. The latter was reflected in both the US Equity and Oil categories, with the contribution from the second one rising from -0.7% to +3.2%. In absolute terms, the increase in oil risk accounted for 0.39% of the 0.95% rise in overall portfolio volatility. The share of non-US sovereign and corporate bonds was also up, as exchange rate movements offset the risk-reducing effects of local price returns.

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

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Axioma Insight™ 2018 Risk Review
Date: December 12, 2018
Time: 11:00 AM ET / 4:00 PM GMT

In this webinar, Melissa R. Brown, Managing Director of Applied Research, will discuss the major themes driving risk across markets in 2018, and do a deeper dive into factor returns that likely impacted portfolios. Register now
REPLAY | Axioma Insight™ Multi-Asset Class Risk Review
In this webinar, Christoph V. Schon, Axioma's Executive Director of Applied Research, took a look back at the different risk environments and correlation regimes that dominated the past 12 months. Watch the recording here.

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