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
Equity edition

China keeps its calm post-downgrade; Correlations soar worldwide at individual country level; Dispersion shrinks in the US

 

HIGHLIGHTS FOR THE WEEK ENDED MAY 25

 
 
 

China keeps its calm post-downgrade

 

China’s stock market remained relatively calm following the downgrading of the country’s sovereign credit rating by Moody’s Investors Service on Wednesday. In fact, the market rose over the past week. Risk forecasts for the CSI 300 ticked up only slightly for the four variants of Axioma’s China Model (statistical and fundamental at short- and medium-horizons) last week. The short-horizon fundamental model reflected risk increases of 30 and 75 basis points over the past week and month, respectively. Risk forecasts have been flat for the past three months, and they decreased 115 basis points in the last six-months. The “Risk Watch” chart showed China’s market returns as having remained within one standard deviation of the expectation at the beginning of the prior month, three months and six months, exceeding expectations for the prior week.

 

At the same time, the heavily controlled Chinese currency was little impacted by the downgrade. As the People’s Bank of China focuses its efforts on the yuan’s stability against the US dollar, the Chinese currency was the least volatile currency against the greenback among major emerging and developed currencies as of last Thursday.


See graph from China Equity Risk Monitor as of 25 May 2017:


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Correlations soar worldwide at individual country level

 

At the individual country level, the latest chart of global correlation hotspots revealed sharp increases in correlations in Spain, Portugal, Switzerland, Belgium, Netherlands, Sweden, Finland, Saudi Arabia, India, Thailand, Brazil and the US. Axioma’s Worldwide short-horizon fundamental model showed correlations increased by more than two percentage points in these countries last week. In contrast, both Slovenia and Venezuela showed a decrease of two percentage points over the same period. At the same time, volatility rose more than one percentage point over last week in some of these counties where correlations shot up: Switzerland, Finland, Saudi Arabia, India, Thailand and Brazil.


See graph from Equity Risk Monitors as of 25 May 2017:

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Dispersion shrinks in the US

 

Dispersion—the cross-sectional standard deviation of weekly returns—decreased steadily in the US over the past four weeks. The narrower the dispersion, the less the opportunity for active managers to add value in this region. At the same time, winning stocks in the Russell 1000 greatly exceeded losers in the index last week.


See graphs from the US4 Edition Equity Risk Monitors as of 25 May 2017:


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