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

Bond yields diverge over central bank expectations; Dollar surges on strong jobs data; Portfolio risk falls as FX/equity decoupling offsets higher equity volatility

 

HIGHLIGHTS FOR THE WEEK ENDED JULY 5

 
 

Bond yields diverge over central bank expectations

 

Government bond yields on both sides of the Atlantic went in different directions for the week ending July 5, 2019, as market players readjusted their expectations of central bank policies. In Europe, the 10-year German Bund rate touched a record low of -0.40% on Thursday, as pundits evaluated the nomination of International Monetary Fund Managing Director Christine Lagarde as the possible successor for outgoing European Central Bank President Mario Draghi. Lagarde is expected to continue the accommodative monetary policy stance taken by Draghi, and traders now consider it a near-certainty that the next interest rate move will be downward. As a result, the monetary policy-sensitive 2-year Schatz yield dropped to -0.75%. US Treasury rates were also initially dragged lower by their European counterparts, but ultimately ended the week 4 basis points in the black, after a strong labor-market report on Friday triggered the worst 1-day sell-off for American government debt since the start of the year.

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Please refer to figure 3 of the current Multi-Asset Class Risk Monitor (dated July 5, 2019) for further details.

 



Dollar surges on strong jobs data

 

The US dollar gained 1.2% against a basket of foreign currencies in the week ending July 5, 2019. The greenback’s strongest performance since August 2018—as measured by the so-called Dollar Index—was supported by a mixture of strong US non-farm payroll data and renewed hopes of easing trade tensions between China and the US, after presidents Xi and Trump resumed talks at the G20 summit in Osaka the preceding weekend. The jobs report on Friday, which came in well above analyst predictions, prompted traders to sharply revise their Fed Funds rate projections from a 50-basis point rate cut at the end of this month to a quarter of a percentage point. The euro was among the hardest-hit developed currencies, losing 1.3% against its American rival, as falling German industrial orders once more highlighted the growing discrepancy between the world’s biggest economies on either side of the Atlantic.




Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated July 5, 2019) for further details.

 


Portfolio risk falls as FX/equity decoupling offsets higher equity volatility

 

Short-term risk in Axioma’s global multi-asset class model portfolio fell slightly to 7.25% as of Friday, July 5, 2019, compared with 7.53% the week before, as higher stock-market volatility was more than offset by a decoupling of equity returns from exchange-rate changes against the US dollar. In previous weeks, stock and foreign-exchange markets had both been focused on potential rate cuts from the Federal Reserve Bank. This had led to rising share prices, while the dollar depreciated because of lower interest-rate expectations. However, the recent upward revision of the latter resulted in a revaluation of the USD, while stock markets kept their upward momentum fueled by revived trade-deal hopes. The disconnect was, consequently, reflected in lower risk contributions from non-USD assets. Oil also saw its share of overall volatility decrease because of a similar decoupling with share price movements.


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Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated July 5, 2019) for further details.



 
 
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