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 converge, as safe-haven buying surges in risk-off conditions; JPY and CHF surge on safe-haven buying, while GBP and euro continue to decline; Portfolio risk rises on volatility surge, despite cross-asset class diversification gains

 

HIGHLIGHTS FOR THE WEEK ENDED AUGUST 2

 
 

Sovereign yields converge, as safe-haven buying surges in risk-off conditions

 

Last week’s divergence in Government bond yields in response to contrasting economic data across the G4 has given way to indiscriminate safe-haven buying in response to heightened geopolitical risks. Donald Trump is playing hard ball with the Chinese and threatening global trade. Boris Johnson is playing hard ball—somewhat surprisingly given his slim majority—with the EU and threatening the stability of the largest trading block. And Shinzo Abe is playing hard ball with South Korea—over the same 75-year-old issue—threatening the tech sector’s global supply chain. Given the latest escalation in these three conflicts, Government bonds saw buying from both long-term investors seeking downside protection, as well as speculators who now see a greater probability of further Fed rate cuts. In contrast, credit spreads for G4 corporate bonds shot up, reversing all of last week’s declines in the US and UK and steepening their rise in Europe and Japan.

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Please refer to figure 4 and 5 of the current Multi-Asset Class Risk Monitor (dated August 2, 2019) for further details.

 


JPY and CHF surge on safe-haven buying, while GBP and euro continue to decline

 

Traditional safe-haven currencies jumped during the week as the risk-off conditions increased. Both the Swiss franc and the Japanese yen rose against the USD, erasing their declines of the past few weeks when investors were more risk tolerant. The pound continued to decline against both the euro and the USD, and the euro continued to decline against the USD, as consensus builds for a hard-Brexit scenario and the associated negative economic consequences that come with it for both sides. Not even the slight relief in the interest rate differential across currencies from expectations of further Fed rate cuts could stop the USD surge, as demand for safe-haven US Treasuries far outpaced the supply from Japanese investors returning home in this risk-off environment.






Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated August 2, 2019) for further details.

 


Portfolio risk rises on volatility surge, despite cross-asset class diversification gains

 

Short-term risk in Axioma’s global multi-asset class model portfolio rose to 5.39% from 5.10% at the end of the previous week. The 29-basis point increase was due to an 81-basis point surge in the volatility of the underlying assets in the portfolio, reduced by a 52-basis point increase in the cross-asset class diversification, mostly due to the -0.47 correlation between equities and bonds. The 19-basis point increase in the positive correlation between equities and currency returns (against the USD) was almost completely negated by an 18-basis point increase in the negative correlation between bond and currency returns (against the USD). In the US, the negative correlation between corporate bonds and treasuries meant that exposure to both sub-asset classes increased the portfolio diversification. US IG bonds contributed 14-basis points to the increase in volatility but increased cross-asset class diversification by 36-basis points, resulting in a negative overall contribution to portfolio risk this past week alongside US Treasuries.


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Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated August 2, 2019) for further details.



 
 
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