Equity risk ticks-up in the US, Canada, Japan and Australia; Asset correlations climb in the US; Mexican peso strengthens against the US dollar

Treasury yields rise as Fed dismisses weak inflation; Pound surges and risk falls as BoE ups growth forecasts; Portfolio risk stable, despite lower equity volatility




Treasury yields rise as Fed dismisses weak inflation


Government bond yields rose on both sides of the Atlantic in the week ending May 3, 2019. The 10-year US benchmark rate closed 3 basis points higher, as the Federal Open Market Committee decided to keep interest rates on hold, despite an unexpected fall in consumer price growth. Instead, Fed Chairman Jerome Powell remarked in his speech that the dip in inflation was only transient and that the economy was supported by solid fundamentals. His assessment was confirmed by the non-farm payroll report on Friday, which indicated strong employment growth, while increases in hourly earnings remained stable compared with the previous month. Yield increases were even higher in the UK, where the 10-year Gilt rate rose by 7 basis points, following an upward revision of the Bank of England’s economic outlook.

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Please refer to figure 4 of the current Multi-Asset Class Risk Monitor (dated May 3, 2019) for further details.


Pound surges and risk falls as BoE ups growth forecasts


The British pound gained about 1.5% against the US dollar in the week ending May 6, 2019, as the Bank of England upgraded its economic growth forecast for 2019 from 1.2% to 1.5%. While Monetary Policy Committee members voted unanimously to hold the main interest rate at 0.75%, they also maintained their view that “an ongoing tightening of monetary policy” was the right course—sending a clear message that markets were underestimating the pace and size of future rate hikes. This put the British central bank at odds with the European Central Bank and US Federal Reserve, which are either not going to hike interest rates (any further) or are even beginning to contemplate easing monetary conditions. Meanwhile, short-horizon risk for GBP/USD fell further to 7.12%.

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Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated May 3, 2019) for further details.


Portfolio risk stable, despite lower equity volatility


Short-term risk in Axioma’s global multi-asset class model portfolio remained stable at 3.84% as of Friday, May 3, 2019, as lower share price volatility was offset by a less negative interaction between stock and bond returns, with (weak) inflation once more at the forefront of investors’ minds. As a consequence, the overall risk contribution of the three equity buckets dropped by more than 8 percentage points to 82%, while the combined share of fixed-income assets and gold increased by the same amount. US Treasuries and investment-grade corporate bonds still actively reduced total volatility, but to a much lesser degree than in previous weeks.


Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated May 3, 2019) for further details.

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In this webinar, Melissa R. Brown, Managing Director of Applied Research, discussed the major drivers of the change in risk during the first quarter and provided a comprehensive picture of the risk environment impacting investor portfolios.

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