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

Expanding curve inversion adds fuel to recession concerns; Pound drops and shares rise, as Brexit battle heats up; Portfolio risk unchanged, while correlations shift

 

HIGHLIGHTS FOR THE WEEK ENDED AUGUST 30

 
 

Expanding curve inversion adds fuel to recession concerns

 

The spread between 10-year and 2-year US Treasury rates fell to its most negative level since early 2007 in the week ending Aug. 30, heightening concerns of an impending recession, which customarily follows a yield-curve inversion. The bleak message from the bond markets was, however, seemingly belied by a coincidental rise in share prices, which were lifted by a supposed easing in trade-war tensions. That said, stock markets may continue to rally for at least another six months after long-term yields fall below short-term rates, as Axioma’s previous research has shown. Meanwhile, on the other side of the Atlantic, British sovereign bonds outperformed their American and Continental European counterparts, as investors sought the relative safety of government securities amid rising tensions between the UK government and parliament.

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Please refer to figure 3 of the current Multi-Asset Class Risk Monitor (dated August 30, 2019) for further details.

 


Pound drops and shares rise, as Brexit battle heats up

 

The British pound lost nearly 1% against the US dollar in the week ending Aug. 30, 2019, after Prime Minister Boris Johnson ratcheted up Brexit tensions by another notch by announcing his intention to suspend Parliament. The aim was to preclude MPs from passing legislation that would prevent the UK from leaving the European Union without a deal, thus making a ‘hard’ Brexit more likely. Nonetheless, the British stock market ended the week firmly in the black, following the now familiar pattern of pound down/FTSE up. The relatively muted market reaction suggests that a ‘no-deal’ scenario is now mostly priced in and that a ‘soft’ Brexit would likely result in a more pronounced (upward) move in the pound.




Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated August 30, 2019) for further details.

 


Portfolio risk unchanged, while correlations shift

 

Short-term risk in Axioma’s global multi-asset class model portfolio remained almost unchanged at 6.48% as of Friday, Aug. 30, 2019, as the volatility-raising effect of a less-negative correlation between equity and interest-rate returns was canceled out by a more inverse interaction of share prices and foreign-exchange rates against the USD. The recent co-movement of stock and bond markets meant that changes in value in one of the two major asset classes was no longer offset by moves in the other. While this turned out to be beneficial for the overall portfolio return in the recent environment of rising prices, it also resulted in reduced diversification benefits. Meanwhile, the depreciation of European currencies, weighed down by growing Brexit tensions and political uncertainty in Italy, led to a reduced risk contribution from non-US equities.


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Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated August 30, 2019) for further details.



 
 
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