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

European yields diverge amid political unrest; Pound drops as Brexit vote is delayed; Lower equity volatility and flight-to-quality reduce portfolio risk




European yields diverge amid political unrest


Yields on European sovereign bonds diverged, following increased political unrest in the week ending Dec. 14, 2018. The 10-year German benchmark rate ended the week flat, driven alternately by concerns over Brexit and the French ‘Yellow Vest’ protests and a significant reduction in the Italian risk premium, after the government in Rome promised to cut its 2019 budget deficit target. The 10-year BTP-Bund spread dropped 19 basis points to 2.72%—its tightest in 11 weeks. Meanwhile, the yield premium on French OATs was only marginally wider, as bond markets appear to remain relatively relaxed about the worsening political unrest in the Eurozone’s second biggest economy. British Gilt yields, in the meantime, plunged initially on news that Tuesday’s vote on the Brexit deal proposal would be postponed by several weeks and that Prime Minister Theresa May faced a motion of no confidence from her own party. While long-term rates recovered partly after a large majority of Tory MPs confirmed their support for May, they still ended the week slightly in the red.

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Please refer to figure 4 of the current Multi-Asset Class Risk Monitor (dated Dec. 14, 2018) for further details.


Pound drops as Brexit vote is delayed


The British pound dropped to its lowest level since April 2017 in the week ending Dec. 14, 2018, on the news that the Parliamentary vote on the Brexit deal was postponed to sometime in January. The Sterling’s 1.8% plunge on Monday, in turn, helped lift the Dollar Index—a measure of the USD’s value against a basket of foreign currencies—by 0.73%. Disappointing economic data from China and the European Union, combined with the political unrest in France, lifted the greenback even further, taking the total rise in the Dollar Index to almost 1%. Short-horizon risk for the GBP/USD exchange rate surged by 0.3% to 8.26%.

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Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated Dec. 14, 2018) for further details.


Lower equity volatility and flight-to-quality reduce portfolio risk


Short-term risk in Axioma’s global multi-asset class model portfolio dropped by 0.55% to 9.63% as of Friday, Dec. 14, 2018, as equity volatility declined by more than 1 percentage point. That said, the stock holdings in the portfolio continued to contribute more than 94% of overall risk, as a 2% reduction in the US equity bucket was offset by a similar increase in the non-US categories. The latter was due to a more positive correlation of European stocks with their currency exchange rates against the US dollar. The negative relationship between share and bond prices, on the other hand, became more intense, as an increase in political uncertainty resulted in more pronounced flight-to-quality buying.

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Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated Dec. 14, 2018) for further details.

Stay Connected


Look Back, Look Ahead: Q4 2018 Risk Review
Date: January 9, 2019
Time: 11:00 AM ET / 4:00 PM GMT

In this webinar, Melissa R. Brown, Managing Director of Applied Research, will review the risk environment during 2018, paying particular attention to the fourth quarter.  Register now
REPLAY | Axioma Insight™ 2018 Risk Review
In this webinar, Melissa R. Brown, Managing Director of Applied Research, discussed the major themes driving risk across markets in 2018, and took a deeper dive into factor returns that likely impacted portfolios. Watch the replay here.

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