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

Fed report confirms dovish stance; Pound surges as wages grow; Portfolio risk rises as correlations increase

 

HIGHLIGHTS FOR THE WEEK ENDED FEBRUARY 22

 
 

Fed report confirms dovish stance

 

Yields on US Treasuries edged slightly lower in the week ending Feb. 22, 2019, after indications that the Federal Reserve Bank is unlikely to unwind its quantitative easing program as fast as previously predicted. The semi-annual report to Congress on Friday revealed that the bank does not expect to scale back its balance sheet to levels seen before the global financial crisis, citing higher demand for reserves from commercial banks. This is another manifestation of the Fed’s recent dovish stance, which once again resulted in a simultaneous rise in bond and equity prices. The latter were further supported by renewed optimism about the US-Chinese trade negotiations.

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Please refer to figure 3 of the current Multi-Asset Class Risk Monitor (dated Feb. 22, 2019) for further details.

 



Pound surges as wages grow

 

The British pound gained 1.6% against the US dollar in the week ending Feb. 22, 2019, as wages in the United Kingdom grew at their fastest pace in more than 10 years in the final 3 months of 2018. The sustained strength of the UK labour market—despite the ongoing Brexit uncertainty—fuelled speculation that the Bank of England could raise interest rates further than previously anticipated. This, in turn, made the pound more attractive to foreign investors. The move was augmented by a wider USD weakness—primarily against its European rivals—as traders revised down their interest-rate expectations. The greenback’s decline was accompanied by a general reduction in short-horizon currency risk, with predicted volatility for GBP/USD falling to a 2-year low of 7.4%.


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Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated Feb. 22, 2019) for further details.

 


Portfolio risk rises as correlations increase

 

Short-term risk in Axioma’s global multi-asset class model portfolio rose from 7.61% to 7.73% as of Friday, Feb. 22, 2019, as a ‘dovish’ Federal Reserve Bank report led to a co-movement of share prices, bond valuations and foreign-exchange rates against the USD. The increase occurred despite a further drop in equity volatility, as a downward revision in US interest-rate expectations resulted in a dollar depreciation, which, in turn, amplified foreign stock and bond market gains. The risk increase was particularly evident in the non-US government-bond bucket, which was affected by a less negative correlation with share prices and a stronger positive interaction with non-USD securities. US Treasuries also saw their diversification benefit curtailed, but still marginally reduced overall volatility.


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Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated Feb. 22, 2019) for further details.



 
 
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