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

Sovereign yields drop on virus fears
Pound rocked by base-rate uncertainty
Portfolio risk declines amid flight to quality




Sovereign yields drop on virus fears


Government bond yields dropped around the globe in the week ending January 24, 2020, as fears of a coronavirus pandemic resulted in the biggest weekly US stock-market drop in almost four months. American blue-chip indices posted their worst one-day performance since the beginning of October on Friday, after health officials reported a second case of the potentially lethal flu-like virus in the United States. The 10-year US Treasury benchmark ended the week 16 basis points lower. In contrast, rate decreases were much less pronounced on the other side of the Atlantic, following better-than-expected composite purchasing manager index data in Germany and the UK.

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Please refer to figure 4 of the current Multi-Asset Class Risk Monitor (dated January 24, 2020) for further details.


Pound rocked by base-rate uncertainty


The British pound seesawed in the week ending January 24, 2020, as the latest bout of economic news for the UK left traders divided on whether to still expect the Bank of England to lower its base rate at this week’s Monetary Policy Committee meeting. In last week’s newsletter, we noted how interest-rate futures markets had assigned a 72% probability to a 25-basis point cut, following previous signs of economic weakness. Meanwhile, the most recent labor-market report exhibited the lowest unemployment rate since the 1970s, while the more forward-looking purchasing manager index indicated that the UK economy may be growing again, lifting GBP/USD by 0.7% by mid-week. Yet, the pound gave up most of its gains afterwards, as futures traders remained almost evenly split about Thursday’s rate decision.

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Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated January 24, 2020) for further details.


Portfolio risk declines amid flight to quality


Short-term risk in Axioma’s global multi-asset class model portfolio declined 0.34% to 3.50% as of Friday, January 24, 2020, reduced by a combination of lower equity volatility and a more inverse interaction of stock and bond prices. The latter relationship intensified amid flight-to-quality movements, as investors dumped riskier equities in favor of the relative safety of government bonds, fueled by coronavirus concerns. The move mostly benefitted non-US sovereigns, which saw their share of overall portfolio risk decline by 1.2 percentage points, further aided by an appreciation in the yen and the pound.

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Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated January 24, 2020) for further details.

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