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




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.

20181218 third graphic.png

Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated Dec. 28, 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.
Axioma Insight™ Q4 2018 Risk Review, APAC & Outlook for 2019
Date: January 10, 2019
Time: 10:00 AM HKT / 11:00 AM JST

In this webinar Olivier d’Assier will identify the key drivers of market risk in the previous quarter, draw some conclusions as to the nature of risk currently, and make present insight as to which sources of risk will be most influential in the current quarter. Register here.

On the Blog

Minimum Variance Has Delivered in This Downturn

One of the major advantages of minimum variance strategies is that the lower-than-market volatility and beta should pay off by offering protection when the market stumbles, as it has recently.

Crowded Trades Don’t Explain Managers’ Recent Pain

Many managers have taken a beating since early November and some attribute the widespread losses to the unwinding of crowded trades by managers who tightly control their risk exposures. But there is no evidence of that in the returns to Axioma style factors on which many investors tilt.

Plenty of Yellow Vests, but Few Yellow Flags

The recent Yellow Vest protests in France are a particularly striking example of the search for alternative political solutions in many countries around the world.


Latest Research

Crowded Trades Don't Explain Managers' Recent Pain

It has been a tough couple months for many managers, especially hedge funds. Some have speculated that there has been a large unwinding of crowded risk-factor positions. We do not see that in our factor returns, and instead propose a few other possible culprits.

The Year of the Central Banks
2019 will be a decisive year for three of the world’s biggest central banks. In this paper, we use the stress-testing capabilities of our Axioma Risk™ platform to examine the impact of rate hikes on a global multi-asset class portfolio, with a particular focus on equity and credit spread performance in response to a yield curve inversion.

In the News

Managers Prep to Automate More Functions in 2019

Asset managers are catching up on technology that had initially passed them by, says Sebastian Ceria, CEO of Axioma.

Share prices can rise even after dreaded yield curve inversion (log-in required)

The recent dip of the US five-year Treasury yield below the two-year rate has reignited fears of an overall curve inversion, which is usually seen as a precursor for an economic downturn.  


Axioma Risk Monitor

A Weekly Report on Market Risk

The Axioma Risk Monitor reports use Axioma’s solutions to bring you insights on trends in market and portfolio risk. You can subscribe to both the multi-asset class and equity edition here.


MiFID II Statement: Axioma believes that the research we provide falls outside the purview of the MiFID II regulations, which are intended to provide transactional transparency and unbundle research and trading costs. Axioma does not provide recommendation research, is not a regulated company and our business is not transactional. As such, we do not believe that we are subject to MiFID II regulation.

Axioma  17 State Street, 2700    New York  NY  10004  United States