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

European yields fall on growth concerns; Dollar benefits from European currency weakness; Portfolio risk drops, as equity volatility and cross-asset correlations decrease

HIGHLIGHTS FOR THE WEEK ENDED FEBRUARY 8

European yields fall on growth concerns

Yields on European benchmark government bonds dropped to their lowest levels since October 2016 in the week ending Feb. 8, 2019. The 10-year German Bund rate fell to single-digit basis-point numbers, after the European Commission revised its 2019 growth forecast for the Eurozone to just 1.3%—down from a previous projection of 1.9% in November. The downward adjustment was particularly strong in Italy, resulting in a surge of 0.32% in the 10-year risk premium of BTPs over Bunds to 2.97%. The same-maturity Gilt rate also dipped 10 basis points, after the Bank of England lowered its growth prediction for the current year by half a percentage point to 1.2%, citing “softer activity abroad and greater effects of Brexit uncertainties at home.”

Please refer to figure 4 of the current Multi-Asset Class Risk Monitor (dated Feb. 8, 2019) for further details.

Dollar benefits from European currency weakness

The US dollar appreciated more than 1% against a basket of foreign currencies in the week ending Feb. 8, 2019. The greenback’s strength was mostly driven by weakness among its European rivals. Both the euro and the pound lost around 1.1%, after a string of poor economic data and downward growth revisions from the European Commission and the Bank of England. Predicted risk for the two currencies also fell to their lowest levels in over 3 years. Losses were less pronounced, however, for safe-haven currencies, such as the Swiss franc and the Japanese yen, which depreciated by 0.7% and 0.3%, respectively. .

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Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated Feb. 8, 2019) for further details.

Portfolio risk drops, as equity volatility and cross-asset correlations decrease

Short-term risk in Axioma’s global multi-asset class model portfolio dropped by 1.29% to 8.48% as of Friday, Feb. 8, 2019. The decline was caused by a combination of lower stock market volatility and a weaker interaction of share prices and foreign exchange rates against the USD. The latter resulted in a greater diversification effect, which was further augmented by a decoupling of interest rate changes and FX returns, as the dollar appreciated, while the recent stock market rally seemed to have taken a breather. Despite the fact that most part of the risk decline was recorded in the three equity buckets, the share holdings remained the biggest contributor, accounting for 88% of overall portfolio volatility. US Treasuries, on the other hand, once again reduced risk, together with the JPY cash position.

Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated Feb. 8, 2019) for further details.

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