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 fall further as business sentiment dips; Currencies flat as geopolitical tensions alternate with trade deal hopes; Portfolio risk drops on lower equity/FX correlation




Bund yields fall further as business sentiment dips


Yields on German government bonds ventured deeper into negative territory in the week ending June 28, 2019, as yet another key economic indicator pointed toward contraction. The Ifo Institute’s overall business climate index descended to 97.4 in the month of June—its lowest level since November 2014. The leading indicator for the German economy has been below 100—a level that implies unfavorable business conditions—since the start of the year. The forward-looking expectations component has been pointing downward for even longer, having fallen into contractionary territory in October 2018. Yet, German and Pan-European stock markets appear to be unfazed the bleak outlook for Europe’s largest economy, with the DAX® and STOXX® 50 indices up 17.4% and 16.3% for the first half 2019, lifted by their US counterparts and the prospect of expansionary central bank policies on both sides of the Atlantic.

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Please refer to figure 4 of the current Multi-Asset Class Risk Monitor (dated June 28, 2019) for further details.


Currencies flat as geopolitical tensions alternate with trade deal hopes


The Dollar Index—a measure of the USD’s value against a basket or foreign currencies—was mostly flat in the week ending June 28, 2019, as tensions in the Middle East took turns with hopes of a trade deal between China and the US. The first two days of the week were dominated by concerns over the imposition of economic sanctions against Iran by the US administration, and the Japanese yen—generally a reliable indicator for risk aversion—gained 0.7% against its American rival. However, those profits were mostly wiped out over the following days, as the market focus turned toward the upcoming G20 summit at the weekend, and reports emerged that presidents Trump and Xi were close to agreeing a truce to avoid further tariffs on imports from China.

Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated June 28, 2019) for further details.


Portfolio risk drops on lower equity/FX correlation


Short-term risk in Axioma’s global multi-asset class model dropped 1.33% to 7.53% as of Friday, June 28, 2019, driven lower by a mixture of lower stock market volatility and a reduced co-movement of equity returns and exchange-rate changes against the US dollar. The effect was most notable in the three equity buckets, which accounted for almost 70% of the overall risk reduction. Meanwhile, US Treasuries remained uncorrelated with share prices, while the market focus shifted between geopolitical risk, trade deal hopes and central bank policies. Corporate bonds, on the other hand, actively raised portfolio risk, as credit spreads retained their strong inverse relationship with interest rates and stock prices.


Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated June 28, 2019) for further details.

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Axioma Risk Monitor

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