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

Bund yields drop to record low after European elections; Traders price in Fed cuts after trade-war escalation; Portfolio risk falls as emerging markets decouple




Bund yields drop to record low after European elections


Yields on German government bonds sunk to the lowest level on record in the week ending May 31, 2019, as market players digested the outcomes of the European parliamentary elections. Italian assets were hit particularly hard after Matteo Salvini’s right-wing League party received 34% of votes. Subsequently, the risk premium of 10-year BTPs over same-maturity Bunds jumped 22 basis points to 2.91%. The result in Italy was part of a wider trend toward populist parties, which also saw Marine Le Pen’s National Rally and Nigel Farage’s Brexit Party defeat their centrist rivals in France and the UK, respectively. Yet, the gains of the populist forces told only half the story of the growing polarisation in European politics, as parties at the opposite end of the political spectrum—such as the Greens in Germany and the Liberal Democrats in Britain—also booked substantial gains.

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Please refer to figure 4 of the current Multi-Asset Class Risk Monitor (dated May 31, 2019) for further details.


Traders price in Fed cuts after trade-war escalation


Yields on US Treasuries fell to their lowest levels since autumn 2017 in the week ending May 31, 2019, as the American stock market recorded its worst weekly drop so far this year. The flight-to-quality flows were driven by escalating trade tensions between the US and China, further fuelled by the announcement later in the week of potential tariffs on imports from Mexico. The 10-year benchmark dropped by a total of 18 basis points, now yielding 0.20% less than 3-month T-Bills. The 3-year point provides the lowest rate—45 basis points below T-Bills—indicating that traders are now pricing an increased likelihood of two rate cuts by the Federal Reserve Bank over that horizon.

Please refer to figure 3 of the current Multi-Asset Class Risk Monitor (dated May 31, 2019) for further details.


Portfolio risk falls as emerging markets decouple


Short-term risk in Axioma’s global multi-asset class model portfolio fell 0.36% to 4.51% as of Friday, May 31, 2019. The decrease was primarily due to a 1.5-precentage point drop in standalone equity volatility. The risk reduction was most pronounced in the emerging-market stock bucket, which experienced a 4-point contraction in its percentage volatility contribution, as its correlation with developed markets decreased notably. Fixed-income assets, gold and the Japanese yen continued to actively lower overall volatility, as their interaction with share prices remained firmly negative in the prevailing flight-to-quality environment.


Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated May 31, 2019) for further details.

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