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

Gilts outperform, as Brexit uncertainty persists; Dollar benefits from economic and political risk in Europe; Portfolio risk drops, as equity volatility and correlations decline




Gilts outperform, as Brexit uncertainty persists


British government bonds outperformed their Continental European and North American counterparts in the week ending Oct. 25, 2019, as investors sought the relative safety of sovereign debt amid ongoing Brexit uncertainty. Despite Parliament’s apparent support for Boris Johnson’s exit deal proposal in principal, a majority of MPs demanded more time to scrutinize the draft before making a final decision. Hence the scheduled departure on Oct. 31 is unlikely, instead creating more uncertainty around the final exit date and adding the possibility of a general election before the year is out. On the other side of the Atlantic, however, US Treasury yields received a boost from renewed trade-deal hopes, after President Trump indicated on Monday that an agreement could be signed by mid-November.

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Please refer to figure 4 of the current Multi-Asset Class Risk Monitor (dated October 25, 2019) for further details.


Dollar benefits from economic and political risk in Europe


The US dollar appreciated 0.56% against a basket of foreign currencies in the week ending Oct. 25, 2019, lifted primarily by weakness among its European rivals. The euro lost 0.44%, as a report from Germany’s central bank (Bundesbank) and the latest purchasing manager index data both indicated that the Eurozone’s largest economy may already be in a technical recession—defined by two consecutive quarters of negative growth—for the first time in almost 6 years. Losses were slightly higher for the pound (-0.50%), which was weighed down by the added uncertainty of a further Brexit delay and a potential general election.

Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated October 25, 2019) for further details.


Portfolio risk drops, as equity volatility and correlations decline


Short-term risk in Axioma’s global multi-asset class model portfolio fell 0.77% to 6.02% as of Friday, Oct. 25, 2019, driven mostly by 1.5% decline in standalone equity volatility. At the same time, the current focus on political risk resulted in weaker correlations between share prices on one side and exchange rates and bond returns on the other, leading to offsetting effects on overall portfolio risk. While European currencies suffered from ongoing recession fears and Brexit uncertainty, the yen was largely unaffected, resulting in a generally reduced co-movement of equity and FX returns. The risk-lowering effect of this was, however, offset by a less inverse relationship between stock and bond prices, as sovereign yields decoupled across the different regions.


Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated October 25, 2019) for further details.

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