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

Bund yields drop as economy slows; Sterling lifted further by Brexit deal hopes; Portfolio risk reduced by lower equity volatility

 

HIGHLIGHTS FOR THE WEEK ENDED JANUARY 25

 
 

Bund yields drop as economy slows

 

Yields on German government bonds fell to their lowest levels in 20 months in the week ending Jan. 25, 2019, after European Central Bank President Mario Draghi noted “weaker momentum” in Eurozone economic growth and acknowledged that risks had “moved to the downside.” As a result, the 10-year Bund benchmark dropped to 0.18% on Thursday—a level not seen since April 2017. The central bank’s assessment was underscored by a 5-year low in the Eurozone composite purchasing managers’ index, with the German manufacturing variant even signalling a contraction. The drop in euro yields also put pressure on their British and North American counterparts, although moves there were less pronounced. Both of the latter recovered 4 basis points on Friday, although for different reasons. Gilt yields were buoyed by increasing hopes that a no-deal Brexit could be avoided, while Treasury rates were lifted by a 0.9% rise in the US stock market.

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Please refer to figure 4 of the current Multi-Asset Class Risk Monitor (dated Jan. 25, 2019) for further details.

 



Sterling lifted further by Brexit deal hopes

 

The pound sterling continued its ascent in the week ending Jan. 25, 2019, rising to its highest level in more than 3 months. The British currency was up 2% against the US dollar, after having received a 1% boost on Friday, when reports indicated that Prime Minister Theresa May could receive support for her controversial Brexit plan from her coalition partner, the Northern Irish Democratic Unionist Party (DUP), if she were to remove the contentious backstop option from the deal. The pound’s move was further amplified by a drop in the dollar’s value, as the greenback depreciated 0.84% against a basket of foreign currencies on Friday, following reports that the Federal Reserve Bank may put an early end on its balance sheet reduction program.


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Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated Jan. 25, 2019) for further details.

 


Portfolio risk reduced by lower equity volatility

 

Short-term risk in Axioma’s global multi-asset class model portfolio dropped another percentage point to 9.39% as of Friday, Jan. 25, 2019, mostly driven by a further 1.5% reduction in standalone equity volatility. The risk decline was therefore largely reflected in lower absolute contributions from the three equity buckets, while their percentage share of overall volatility remained stable around 96%. Non-US stocks, however, accounted for a much smaller portion of total risk, compared with their monetary weight, than their US counterparts, due to an almost zero correlation with currency exchange rates. Oil also saw its absolute risk contribution decline, partly because of a reduction in its own standalone volatility, but also due to its currently high correlation with the stock market.


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Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated Jan. 25, 2019) for further details.



 
 
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