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 diverge, as economic gap widens; Euro dips as ECB prepares more stimulus; Portfolio risk falls further amid European flight-to-quality

 

HIGHLIGHTS FOR THE WEEK ENDED JULY 26

 
 

Sovereign yields diverge, as economic gap widens

 

Government bonds diverged on both sides of the Atlantic in the week ending July 26, 2019, following another round of contrasting economic news. US Treasury yields went slightly higher, as stock markets celebrated new highs, lifted by stronger-than-expected GDP growth, which was, in turn, supported by robust consumer spending. The German 10-year benchmark rate, on the other hand, descended 5 basis points to -0.38%, amid an ongoing flow of bad economic news. Germany was hit particularly hard, as leading indicators continued to surprise on the downside, while actual industrial output data confirmed the bleak outlook. The ECB added additional downward pressure on European bond yields, when its outgoing president Mario Draghi commented that “the outlook is getting worse and worse” for the single-currency area, in particular “in those countries where manufacturing is very important.”

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Please refer to figure 4 of the current Multi-Asset Class Risk Monitor (dated July 26, 2019) for further details.

 


Euro dips as ECB prepares more stimulus

 

The euro lost 0.8% against the US dollar in the week ending July 26, 2019, amid a bout of bad manufacturing data and signals from the European Central Bank that it may ease monetary policy further. While it kept interest rates on hold at last Thursday’s meeting, the governing council stated that it expects rates “to remain at present or lower levels for an extended period of time,” thus opening the door for either further cuts or for resuming its bond-buying program. Meanwhile, the British pound dropped to its lowest level since the triggering of Article 50 in April 2017. It would be tempting to attribute this fall to the confirmation of Boris Johnson as the new Prime Minister, which is expected to increase the likelihood of a hard Brexit. However, the initial market reaction after the announcement was relatively muted—a sign that the result had been widely anticipated—and the move seemed to be driven instead by a dollar appreciation, following the encouraging US GDP data on Friday.




Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated July 26, 2019) for further details.

 


Portfolio risk falls further amid European flight-to-quality

 

Short-term risk in Axioma’s global multi-asset class model portfolio descended to 5.10% as of Friday, July 26, 2019, compared with 5.73% the previous week. The reduction in volatility was driven by the simultaneous rise in share prices and the value of the US dollar. This meant that local gains in non-USD stock holdings were dampened by a depreciation in the respective currency. As a consequence, the change was most notable in the non-US equity buckets. International sovereign and investment-grade bonds also saw their share of overall risk decline, although part of this was offset by the price increases brought about by the flight-to-quality flows in Europe.


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Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated July 26, 2019) for further details.



 
 
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