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

Yields jump on trade deal and Brexit hopes; Pound flat after choppy week; Portfolio risk unchanged, but diversification increases

 

HIGHLIGHTS FOR THE WEEK ENDED APRIL 5

 
 

Yields jump on trade deal and Brexit hopes

 

Government bond yields rose on both sides of the Atlantic in the week ending April 5, 2019, as the US and China indicated considerable progress in their trade negotiations. The 10-year US Treasury benchmark rose 9 basis points, further buoyed by upbeat manufacturing and job market data, which both exceeded analyst expectations. Rate gains were even bigger in the UK, where the same-maturity Gilt climbed 12 basis points. The majority of the increase occurred on Wednesday, when Members of Parliament narrowly pushed through a bill, which requires the government to seek an extension of the Brexit negotiation period in order to avoid leaving without a deal on April 12. Prime Minister Theresa May also met opposition leader Jeremy Corbyn in another attempt to break the parliamentary deadlock.

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Please refer to figure 4 of the current Multi-Asset Class Risk Monitor (dated Apr. 5, 2019) for further details.

 



Pound flat after choppy week

 

The British pound closed just above $1.30 on Friday, April 5, 2019—almost the same level as the previous weekend—after hitting a mid-week high of $1.316. The currency was lifted by renewed hopes that a hard, no-deal Brexit on April 12 will still be avoided, despite the fact that the Prime Minister’s proposal has already been rejected three times by the House of Commons. The exchange rate against the US dollar reached its pinnacle on Wednesday, when Parliament approved a bill—by just one vote—which forced Theresa May to return to the European Union and ask for more time to come up with a viable proposition for the exit agreement. For the same purpose, the PM initiated talks with Labour leader Jeremy Corbyn, which, in turn, generated a lot of opposition in her own party. The dichotomy was reflected in the sawtooth pattern the pound exhibited over the course of the week.


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Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated Apr. 5, 2019) for further details.

 


Portfolio risk unchanged, but diversification increases

 

Short-term risk in Axioma’s global multi-asset class model portfolio remained almost unchanged at 5.55% as of Friday, April 5, 2019, as a surge in share price variation was offset by a lower correlation with exchange rates and fixed-income assets. Standalone equity volatility rose by more than a percentage point, as investors relinquished the relative safety of government bonds to buy riskier stocks as risk appetites increased, driven by perceived progress in the US-China trade talks. The more pronounced countermovement of the two asset classes resulted in a significant diversification benefit, which offset most of the higher equity risk. Non-USD government bonds saw the biggest decline in their volatility contribution, now also actively reducing overall portfolio risk alongside their US counterparts.


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Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated Apr. 5, 2019) for further details.



 
 
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