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 see-saw on mixed signals; Pound surges on Brexit hopes; Portfolio risk drops as equity volatility falls

 

HIGHLIGHTS FOR THE WEEK ENDED AUGUST 23

 
 

Sovereign yields see-saw on mixed signals

 

Global government bond yields took a rollercoaster ride in the week ending Aug. 23, 2019, jolted by mixed signals from monetary and trade policies. US Treasuries initially gave up part of their gains from the previous week, after President Trump softened his tone toward China, promising that the trade war between the two countries would be “fairly short.” However, the accompanying rise in yields was more than offset on Friday, as the Chinese government announced additional tariffs on $75bn of US imports, to which Trump retaliated by ordering American companies to look for alternative trading partners. Meanwhile, minutes from last month’s Federal Reserve Bank meeting revealed that FOMC members viewed the 25-basis point downward adjustment in interest rates as a mid-cycle “recalibration” of monetary policy, thus confirming the previous notion of an ‘insurance’ cut.

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Please refer to figure 4 of the current Multi-Asset Class Risk Monitor (dated August 23, 2019) for further details.

 


Pound surges on Brexit hopes

 

The British pound gained around 1% against the US dollar in the week ending Aug. 23, 2019, following encouraging Brexit meetings between Prime Minister Boris Johnson and his counterparts in Berlin and Paris on Wednesday and Thursday, respectively. Both Chancellor Merkel and President Macron indicated their willingness to find a speedy solution, with the former under particular pressure to ensure continued frictionless trade with the United Kingdom, as Germany remains gripped by recession fears. The pound was further supported by a widespread dollar depreciation on Friday, when escalating trade tensions between China and the US prompted investors to flee riskier assets into safe havens, such as government bonds and the Japanese yen. The sharp upward move also resulted in a significant reduction in short-horizon risk, which dropped 0.21% to 7.23%.




Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated August 23, 2019) for further details.

 


Portfolio risk drops as equity volatility falls

 

Short-term risk in Axioma’s global multi-asset class model portfolio dropped 0.55% to 6.50% as of Friday, Aug. 23, 2019, as standalone share-price volatility fell by 1 percentage point to 14.5%. As a consequence, the risk reduction was mostly limited to the equity buckets, in particular US stocks, as most currency exchange rates remained largely uncorrelated with other asset classes. The major exception was the Japanese yen, which actively reduced overall volatility due to its inverse relationship with the US stock market. Sovereign and investment-grade corporate bonds also retained their risk-lowering qualities in the flight-to-quality environment, alongside gold. This was in contrast to high-yield issues, where a stronger correlation with share prices outweighed the benefits from lower (risk-free) interest rates.


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Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated August 23, 2019) for further details.



 
 
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