Treasuries outperform Bunds and Gilts as political risk increases; Currency risk rebounds as the euro surpasses pre-US election levels
AXIOMA RISK MONITOR
Multi-Asset Class Edition
Treasuries outperform Bunds and Gilts as political risk increases;
Currency risk rebounds as the euro surpasses pre-US election levels
 
HIGHLIGHTS FOR THE WEEK ENDED MAY 19
 
 
 

Treasuries outperform Bunds and Gilts as political risk increases

 

The yield of the 10-year US Treasury bellwether fell by 9 basis points in the week ending May 19, 2017, outperforming its German and British counterparts, which closed almost flat compared with the previous Friday. Most of the decline occurred on Wednesday after claims that President Trump had interfered with an FBI investigation, thus evoking concerns about a possible impeachment, which sent a wave of unease through financial markets.

 

The heightened political uncertainty also raised stock market risk. Annualized 60-day volatility for the Russell 1000 surged by more than a percentage point compared with the previous week and was up 1.4% versus the preceding 3-month period. The increase was slightly less pronounced for the FTSE All World index, which saw its volatility go up by 0.7% over the week and 0.9% compared with three months earlier.

Please refer to figures 2 and 4 of the current Multi-Asset Class Risk Monitor (dated May 19, 2017) for further details.

 

 

 
Currency risk rebounds as the euro surpasses pre-US election levels
 

Speculation about the future of Trump’s presidency also pushed the US dollar lower, which lost 1.8% against a trade-weighted basket of major currencies over the week ending May 19, 2017. One of the biggest beneficiaries was the euro, which was further bolstered by ongoing positive momentum as political uncertainty in Europe continued to subside. The single currency gained 2.5% versus the greenback, while its Japanese and British rivals appreciated by 1.5% and 1%, respectively.

 

As the euro surpassed the $1.11 mark, a level last seen before the US presidential election in November last year, short-horizon risk for EUR/USD rebounded from the previous Friday’s low of 7.44% to end the week at 7.69%.

 

 

 

Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated May 19, 2017) for further details.

 

 

 
Portfolio risk rises across all asset classes
 

Short-term risk in Axioma’s global multi-asset class model portfolio rose by 0.56% to 4.05% in the week ending Friday, May 19, 2017. This was driven by an increase of standalone volatilities for all asset classes in the portfolio. If all risk types in the portfolio were perfectly correlated, total weighted standard deviation would have increased by 1.63% to 9.43%. However, the renewed negative correlation between FX and equity factors (stock markets going down while most currencies appreciated versus the dollar) also meant that there was an increased diversification effect of -5.38%, compared with -4.31% on the previous Friday.

 

The negative relationship with non-USD denominated assets significantly reduced the risk contribution from US equities to 32% of total portfolio volatility, down from more than 50% the week before, despite an upsurge in standalone standard deviation of more than a percentage point. The change in correlation of FX rates with other risk factors had the opposite effect on fixed income assets. As most major rival currencies appreciated versus the dollar and Treasury prices rose, a strengthening of the interrelationship between global debt markets resulted in an increase in risk contributions from all fixed income categories. The only asset class still actively reducing risk in the portfolio is JPY cash.

 

 

 

Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated May 19, 2017) for further details.

 
 
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