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

‘Patient’ Fed boosts US share and Treasury prices; Sterling dips again after vote to remove Brexit ‘backstop’; Renewed inflation focus reduces diversification benefits

 

HIGHLIGHTS FOR THE WEEK ENDED FEBRUARY 1

 
 

‘Patient’ Fed boosts US share and Treasury prices

 

US stock and Treasury prices both rose in the week ending Feb. 1, 2019. A co-movement of the two asset classes usually indicates that market participants are focusing on consumer price growth, with simultaneous gains in stock and bond markets implying a reduction in inflation expectations. This was spurred by both the Federal Reserve Bank’s decision to leave rates unchanged on Wednesday, and its public assertion that the central bank “can best support the economy by being patient” regarding future policy adjustments.

On the other side of the Atlantic, the German government also saw its borrowing rates decline, as Eurozone GDP data released on Thursday indicated that the single-currency area grew at its slowest pace in 4 years. The risk premium on Italian sovereign issues, on the other hand, widened by 11 basis points, as Q4 growth data for the country revealed that the bloc’s third-biggest economy had fallen into a recession (2 consecutive quarters of negative GDP growth).

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Please refer to figure 4 of the current Multi-Asset Class Risk Monitor (dated Feb. 1, 2019) for further details.

 



Sterling dips again after vote to remove Brexit ‘backstop’

 

The British pound lost 0.6% against the US dollar in the week ending Feb. 1, 2019, following Tuesday’s parliamentary vote on removing the controversial ‘Irish border backstop’ option from the proposed withdrawal agreement with the European Union. Even though the motion managed to secure a majority within the House of Commons, EU officials and heads of state were quick to point out that there was no appetite for renegotiation from their side. The pound was the only major currency that depreciated against the greenback, though, as traders withdrew money from the United States, following the Federal Reserve Bank’s announcement of a more “patient” stance on future interest rate raises. As a result, the Dollar Index—a measure of the USD’s value against a basket of foreign currencies—dropped half a percent on Wednesday, ending the week 0.22% lower.


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Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated Feb. 1, 2019) for further details.

 


Renewed inflation focus reduces diversification benefits

 

Short-term risk in Axioma’s global multi-asset class model portfolio rose by 0.38% to 9.77% as of Friday, Feb. 1, 2019. The increase was brought about by a change in correlations, which was, in turn, caused by a renewed market focus on consumer prices and monetary policy. A downward revision in interest-rate expectations after last week’s Fed meeting resulted in a simultaneous rally at the stock and bond markets, while the US dollar depreciated against most of its major rivals. This significantly curtailed diversification opportunities, as both fixed-income and non-USD assets moved in the same direction as the stock holdings—even though in this case it would have been beneficial for the portfolio’s performance. As a consequence, the biggest increases in risk contributions were observed in the non-USD bond categories.


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Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated Feb. 1, 2019) for further details.



 
 
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