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

Italian risk premium falls, despite budget spat; Pound drops after turbulent week; Lower FX/equity correlation reduces portfolio risk




Italian risk premium falls, despite budget spat


The yield premium of Italian short-term bonds over their low-risk German counterparts fell to the lowest level in almost 2 months in the week ending Nov. 23, 2018. The spread of 2-year BTPs over same-maturity Bunds dropped nearly 40 basis points over Wednesday and Thursday, despite the European Commission’s initiation of disciplinary proceedings against the Italian government regarding its proposed 2019 budget. However, markets seemed to discount the danger of potential fines and instead wagered on the government’s willingness to compromise and implement reforms. Meanwhile, the 10-year British Gilt benchmark rate dropped 4 basis points on Friday, as the UK government faced renewed criticism from MPs across the political spectrum over its proposed Brexit deal.

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Please refer to figure 4 of the current Multi-Asset Class Risk Monitor (dated Nov. 23, 2018) for further details.


Pound drops after turbulent week


The British pound fell 0.3% against the US dollar in the week ending Nov. 23, 2018, after Prime Minister Theresa May once again struggled to secure support in her own ranks for her proposed withdrawal agreement with the European Union. Initially, the currency had risen substantially, after a draft declaration agreed upon by both sides promised an “ambitious, broad, deep and flexible partnership” between Britain and the EU. But the pound still ended the week in the red, as it became clear that the intentions expressed in the non-legally binding political declaration were insufficient to convince hard-core Brexiteers and opposition politicians to vote for the withdrawal bill, which then would be binding. Short-horizon risk for the GBP/USD exchange rate, on the other hand, was slightly lower at 8.20%, though still substantially higher than most other developed currencies.

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Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated Nov. 23, 2018) for further details.


Lower FX/equity correlation reduces portfolio risk


Short-term risk in Axioma’s global multi-asset class model portfolio stood slightly lower at 10.24% as of Friday, Nov. 23, 2018, compared with 10.45% the previous week. The decline was mostly due to a less pronounced co-movement of share prices and currency exchange rates against the US dollar. The risk-reduction was therefore most prominent in the non-US equity category, which saw its share of overall volatility fall by 0.3%—or 2.5% of total risk. US stock holdings, on the other hand, experienced a rise in their volatility contribution due to a slightly higher standalone standard deviation. Oil risk also increased further, as the recent price fall resulted in a stronger correlation with stock markets.

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Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated Nov. 23, 2018) for further details.

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Axioma Insight™ 2018 Risk Review
Date: December 12, 2018
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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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