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 drop on renewed recession and trade-war fears; Pound plunges as Brexit talks stall; Portfolio risk rises, despite increased diversification




Treasury yields drop on renewed recession and trade-war fears


US Treasury yields fell across all maturities in the week ending May 17, 2019, after surprise declines in both retail sales and industrial production reignited recession fears. The monetary policy-sensitive 2-year rate fell to its lowest level since February 2018 on Wednesday, while 10-year Notes provided the same yield as 3-month T-Bills. Earlier in the week, sovereign bond prices had already benefitted from outflows from the US stock market, which hit 2.5% on Monday—the biggest 1-day fall so far this year—after China threatened to retaliate against the latest US import tariffs.

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Please refer to figure 3 of the current Multi-Asset Class Risk Monitor (dated May 17, 2019) for further details.


Pound plunges as Brexit talks stall


The pound sterling plunged to its lowest level in more than 4 months in the week ending May 17, 2019, as Brexit uncertainty dragged on. The British currency lost more than 2% against its American rival as the cross-party talks, with which Prime Minister Theresa May had hoped to break the parliamentary deadlock, seemed to falter. The move led to a slight uptick in short-horizon risk for the GBP/USD exchange rate to 7.12%, while the euro, Swiss franc and Japanese yen all saw their predicted volatility decline.

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Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated May 17, 2019) for further details.


Portfolio risk rises, despite increased diversification


Short-term risk in Axioma’s global multi-asset class model portfolio rose by 0.43% to 4.93% as of Friday, May 17, 2019. A sharp uptick in standalone equity volatility added almost a percentage point to the overall risk, although more than half of it was offset by a more negative interaction between share prices and foreign-exchange rates against the US dollar. The latter also translated into an increased diversification benefit. At the same time, gold became more negatively correlated with the stock market, which meant that the precious metal significantly curtailed overall portfolio volatility, alongside other safe-haven assets, such as government and investment-grade corporate bonds and the Japanese yen. The biggest risk reduction came from non-US sovereigns, which further benefitted from the inverse FX/equity relationship.


Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated May 17, 2019) for further details.

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