Equity risk ticks-up in the US, Canada, Japan and Australia; Asset correlations climb in the US; Mexican peso strengthens against the US dollar
AXIOMA RISK MONITOR
MULTI-ASSET CLASS EDITION

US Treasury yields drop on dovish Fed and US government shutdown; Dollar plunges as yields fall; Surge in equity volatility raises portfolio risk

 

HIGHLIGHTS FOR THE WEEK ENDED DECEMBER 28

 
 

European yields diverge amid political unrest

 

US Treasury yields fell across the maturity spectrum in the 2 weeks ending Dec. 28, 2018. Declines at the short end of the curve were more pronounced, with the 2-year benchmark descending by a total of 20 basis points, after Federal Open Market Committee members lowered their short-term interest rate projections. The median forecast by Federal Reserve rate setters—the so-called “dot plot”—now indicates two more raises in 2019, down from three in the previous poll in September. The current US government shutdown weighed further on long-term interest rates, which declined by a total of 15 basis points. This slightly expanded the 10-year/2-year term spread to 23 basis points, up from lows of 0.12% earlier in the month, but still substantially narrower than the 0.55% observed 12 months ago. Even though 5-year rates had risen back above the 2-year level, part of the front end remained inverted, keeping alive fears of an impending economic downturn, despite the Fed’s more moderate stance.

20181218 first graphic.png

Please refer to figure 3 of the current Multi-Asset Class Risk Monitor (dated Dec. 28, 2018) for further details.

 



Dollar plunges as yields fall

 

The US dollar depreciated by more than 1% against a basket of foreign currencies in the 2 weeks ending Dec. 28, 2018. The losses were mostly against its European counterparts and the Japanese yen, which experienced the biggest gain of nearly 3%. The so-called Dollar Index—a measure of the USD’s value against its major rivals—is still up 4.6% for the year, supported by a substantial interest-rate differential over most other developed economies and ongoing political uncertainty in Europe. Gains against the greenback were accompanied by significant drops in short-horizon risk for the respective exchange-rate pairs. Compared with the start of the year, the yen saw the biggest reduction in predicted volatility from around 8% to just over 6%—thus turning from one of the riskiest developed currencies into the second least volatile, apart from the Swiss franc.


20181218 second graphic.png

Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated Dec. 28, 2018) for further details.

 


Surge in equity volatility raises portfolio risk

 

Short-term risk in Axioma’s global multi-asset class model portfolio surged by more than 2 percentage points to 11.85% as of Friday, Dec. 28, 2018. This was almost entirely caused by a 5% increase in equity standalone volatility, although some of it was offset by the recent dollar depreciation, which meant that part of the non-US share price losses was attenuated by foreign-currency gains. Therefore, most of the risk increase was recorded in the US equity bucket, where the share of overall volatility surged by 10 percentage points. Yet, the total contribution from equities rose only 3.1% to 97.7%, due to the inverse relationship between stock and FX returns. On the flipside, the exchange rate rises benefitted non-USD fixed-income securities, which now actively reduced risk, alongside other safe-haven assets, such as gold and the Japanese yen. The present correlation pattern indicates that markets are in a “flight-to-safety” mode, as the dollar depreciates alongside equity markets, while sovereign yields fall, amid fears of a slowing economy and concerns about the current US government shutdown.


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Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated Dec. 28, 2018) for further details.



 
 
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