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

Sovereign yields drop as US expands tariffs on China; Yen surges in flight-to-quality; Portfolio risk rises despite increased diversification

 

HIGHLIGHTS FOR THE WEEK ENDED MAY 10

 
 

Sovereign yields drop as US expands tariffs on China

 

Yields on government bonds dropped around the globe in the week ending May 10, 2019, following another expansion of import tariffs on $200bn of Chinese goods. When President Trump first announced his intention on Tuesday, US blue-chip indices closed down 1.7% in one of their worst days of the year so far. On the other side of the Atlantic, the 10-year German Bund yield once more plunged into negative territory, as the European Union halved its growth forecasts for the country’s already troubled economy. The report from the European Commission also predicted that Italy’s budget deficit will reach 3.6% in 2020—effectively breaking the EU’s 3% threshold—which sent the risk premium of Italian BTPs over their German rivals to the highest levels in over 10 weeks.

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Please refer to figure 4 of the current Multi-Asset Class Risk Monitor (dated May 10, 2019) for further details.

 



Yen surges in flight-to-quality

 

The Japanese yen gained 1.5% against the US dollar in the week ending May 10, 2019, as traders sold the greenback in exchange for safer havens, such as CHF and JPY. The flight-to-quality flows—which also saw investors sell their risky stock holdings for the relative safety of government bonds—followed the imposition of another round of tariffs on Chinese imports to the US. The sharp move in the JPY/USD exchange rate resulted in a reversal of the recent downward trend in short-horizon risk, as predicted volatility for the currency pair rose 0.14% to 5.29%.


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Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated May 10, 2019) for further details.

 


Portfolio risk rises despite increased diversification

 

Short-term risk in Axioma’s global multi-asset class model portfolio jumped 0.66% to 4.50% as of Friday, May 10, 2019, driven by a surge in equity volatility, following one of the worst weeks for the US stock market since the beginning of the year. However, the accompanying flight-to-quality flows also led to a more inverse relationship between share prices on one side and bond valuations and foreign exchange rates against the US dollar on the other, which increased the diversification benefits from fixed-income and non-USD assets. Non-US sovereign bonds, which saw the strongest decline in their risk contribution, are now the biggest diversifiers in the portfolio—alongside their American counterparts and the Japanese yen—detracting 0.13% (or 2.8% of overall volatility) from total risk. In turn, this meant that equities are now responsible for almost the entire volatility of the portfolio.


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



 
 
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