Equity risk ticks-up in the US, Canada, Japan and Australia; Asset correlations climb in the US; Mexican peso strengthens against the US dollar

European yields surge on Brexit deal hopes; Pound remains riskiest developed currency; Portfolio volatility shoots up, as political risk in Europe increases




European yields surge on Brexit deal hopes


Yields on European sovereign bonds rose in the week ending Oct. 18, 2019, driven by rising hopes that a Brexit deal could still be reached before the Oct. 31 deadline. The 10-year Gilt benchmark rate climbed 7 basis points, when the first reports emerged that British and EU negotiators were close to a draft agreement on Tuesday. However, the gain merely offset a downward move from the previous day, so that the UK bellwether ended the week flat. The same-maturity German Bund, on the other hand, ended the week 7 basis points in the black, receiving additional support from slightly better-than-expected data releases, as both Eurozone industrial production and the ZEW investor survey came in above consensus estimates.

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Please refer to figure 4 of the current Multi-Asset Class Risk Monitor (dated October 18, 2019) for further details.


Pound remains riskiest developed currency


The British pound remained the riskiest developed-market currency in the week ending Oct. 18, 2019, climbing to its highest level against the dollar in 5 months, buoyed by a perceived negotiation breakthrough at the European Council summit on Thursday and Friday. That said, the increased short-horizon volatility of 7.85% underscored the still-elevated uncertainty surrounding the Brexit debate, with discussions in Parliament over the weekend once again highlighting the continued strength of domestic resistance. The euro also benefitted from the renewed optimism, gaining almost 1% against its American rival.

Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated October 18, 2019) for further details.


Portfolio volatility shoots up, as political risk in Europe increases


Short-term risk in Axioma’s global multi-asset class model portfolio surged 1.38% to 6.79% as of Friday, Oct. 18, 2019, as an increase in political risk in Europe resulted in a higher correlation of share prices and foreign-currency movements. This meant that the returns of non-US equities were amplified by exchange-rate fluctuations, boosting the percentage risk contribution of the corresponding bucket by 7.3% to 26.7%. At the same time, heightened FX and stock-market volatility was largely offset by a more inverse relationship between stock and bond price returns, meaning that all government-bond categories in the portfolio once again actively reduced overall risk.


Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated October 18, 2019) for further details.

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