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 after ‘dovish’ Powell speech; Dollar gains on China trade hopes; Portfolio risk declines further on weaker FX/equity correlation




US Treasury yields fall after ‘dovish’ Powell speech


Yields on US government bonds fell across the board in the week ending Nov. 30, 2018, following a remark from Federal Reserve Chairman Jay Powell on Wednesday that the central bank’s target rate was “just below the broad range of estimates of the level that would be neutral for the economy.” Markets interpreted this as a signal that short-term rates might rise less than previously expected, although this was slightly qualified by last month’s meeting minutes—released on Thursday—in which policymakers indicated that they would continue with gradual increases, if the US economy stayed on track. Meanwhile, on the other side of Atlantic, the 10-year risk premium of Italian sovereign debt over German Bunds fell another 17 basis points after reports that the government in Rome might revise its budget to bring it more in line with EU regulation.

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Please refer to figure 3 of the current Multi-Asset Class Risk Monitor (dated Nov. 30, 2018) for further details.


Dollar gains on China trade hopes


The US dollar rose 0.4% against a basket of foreign currencies in the week ending Nov. 30, 2018, in hopeful anticipation ahead of the working dinner between US President Donald Trump and China’s President Xi Jinping on Saturday, in which the two leaders were due to discuss the ongoing trade war between their countries. The greenback managed to end the week slightly in the black, despite a brief sell-off when bond traders started to discount the probability of further rate hikes following Fed Chairman Jay Powell’s ‘dovish’ speech on Wednesday. The rise was broad-based against most G10 currencies, with the biggest gain recorded vis-à-vis the Japanese yen, which is usually a sign of rising risk appetites. Meanwhile, short-horizon risk for JPY/USD fell to 6.21%, making it the least risky G10 currency.

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Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated Nov. 30, 2018) for further details.


Portfolio risk declines further on weaker FX/equity correlation


Short-term risk in Axioma’s global multi-asset class model portfolio further declined to 10.06% as of Friday, Dec. 03, 2018, compared with 10.24% the previous week. The reduction in volatility remained attributable to a renewed weakening of the relationship between share prices and currency exchange rates against the US dollar. It was again the equity buckets that experienced the biggest contractions in their risk contributions, as the perceived correlation across regions appeared to have weakened. This was partly offset by a less negative interaction with bond returns, which meant slightly lower diversification benefits from the latter.

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Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated Nov. 30, 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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