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 drop on renewed geopolitical concerns; Treasury curve steepens on dovish central bank signals; Portfolio risk plunges, as equity volatility falls

 

HIGHLIGHTS FOR THE WEEK ENDED SEPTEMBER 20

 
 

Sovereign yields drop on renewed geopolitical concerns

 

Global government bond yields gave up much of their recent gains in the week ending Sep. 20, 2019, as the market focus once again shifted toward geopolitical risk. The US 10-year benchmark experienced the biggest drop at 0.15%—compared with 7 and 11 basis points for the same-maturity Bund and Gilt, respectively—amid rising tensions in the Middle East, dovish signals from the world’s largest central banks and fading hopes of a US-Chinese trade deal. Investors once more fled risky equities for the relative safety of sovereign debt, following a drone attack on Saudi Arabia’s biggest oil-processing facility—claimed by Yemeni rebels, but ultimately blamed on Iran—on Monday, and reports that Chinese officials cancelled a planned visit to American farms on Friday.

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Please refer to figure 4 of the current Multi-Asset Class Risk Monitor (dated September 20, 2019) for further details.

 


Treasury curve steepens on dovish central bank signals

 

The spread between long-term and short-term US Treasury rates narrowed once again in the week ending Sep. 20, 2019, as declines from flight-to-safety flows were much less pronounced at the front end of the curve. The monetary-policy sensitive 2-year rate fell by only 9 basis points—compared with 15 basis points at the 10-year point—as the latest official projections from the central bank (the so-called “dot plot”) revealed that FOMC members are divided on the future path for interest rates. The median forecast now indicates that last week’s 25-basis point cut will not be followed by any additional moves this year or the next. Meanwhile, the Bank of England kept its base rate at 0.75% as expected, but, at the same time, noted that ongoing Brexit uncertainty could hamper economic growth and thus reduce domestically generated inflationary pressures, opening the door for a potential future rate cut.




Please refer to figure 3 of the current Multi-Asset Class Risk Monitor (dated September 20, 2019) for further details.

 


Portfolio risk plunges, as equity volatility falls

 

Short-term risk in Axioma’s global multi-asset class model portfolio plunged by almost a percentage point to 5.04% as of Friday, Sep. 20, 2019, driven lower by a 2% drop in standalone equity volatility. Correlations with other asset classes and risk factors, on the other hand, remained largely unchanged, meaning that the risk reduction was predominantly limited to the equity buckets. The oil holding, in contrast, saw its share of overall volatility surge from 4.6% to 6.3%, as its price variation skyrocketed following the drone strike in Saudi Arabia.


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Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated September 20, 2019) for further details.



 
 
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