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

Bond yields tumble on virus and economic-growth fears
Dollar falls in flight-to-safety
Portfolio risk surges on higher stock-market volatility




Bond yields tumble on virus and economic-growth fears


US Treasury yields dropped to their lowest levels in almost four months in the week ending January 31, 2020, as stock markets gave up the gains of 2020, amid intensifying concerns about the impact of the coronavirus on the global economy. Flight-to-quality flows were even more pronounced in Europe, where sluggish GDP growth data added further downward pressure on both share prices and interest rates. News that the French and Italian economies had shrunk unexpectedly in the fourth quarter of 2019 helped push 10-year German Bund yields to their most negative levels since mid-October, while the EURO STOXX® blue-chip index gave up 3.7%, taking the total year-to-date loss to -2.6%.

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Please refer to figure 4 of the current Multi-Asset Class Risk Monitor (dated January 31, 2020) for further details.


Dollar falls in flight-to-safety


The dollar depreciated 0.5% against a basket of foreign currencies in the week ending January 31, 2020, as the US stock market experienced its worst weekly performance in six months. Gains were most notable against safe-haven currencies, such as the Swiss franc and the Japanese yen. The latter was the biggest beneficiary, appreciating almost 1% against its American rival. The British pound saw its value increase by a similar amount, following the Bank of England’s decision not lower interest rates—despite cutting its growth forecast—citing improved consumer and business confidence, which made an immediate move unnecessary. As a result, short-horizon risk for GBP/USD rose to 7.4%, making the pound once again the riskiest developed-market currency.

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Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated January 31, 2020) for further details.


Portfolio risk surges on higher stock-market volatility


Short-term risk in Axioma’s global multi-asset class model portfolio jumped 0.72% to 4.22% as of Friday, January 31, 2020, driven by a surge in share-price variation. Standalone equity-factor volatility rose 1.5 percentage points to 8%, which translated into a 0.75% rise in total portfolio risk. A less negative correlation between stock-market and exchange-rate returns also added to overall volatility. However, much of this was offset by a more inverse relationship between share and bond prices, driven by the current flight-to-safety environment. The latter meant that sovereign bonds and US investment-grade corporate debt now actively reduced total risk, alongside the JPY cash holding. The equity buckets, on the other hand, saw their combined share of overall volatility surge 12 percentage points to 90%.

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Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated January 31, 2020) for further details.

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On the Blog

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The ability to attribute portfolio risk and performance to key factors is an essential tool for helping portfolio managers to understand their risk and interpret their results. It is notoriously difficult, however, to build such models for bond portfolios. Advanced modeling techniques are required, so that the factor returns used to measure portfolio risk reliably capture systemic risk rather than noise.

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Axioma Risk Monitor

A Report on Market Risk

The Axioma Risk Monitor reports use Axioma’s solutions to bring you insights on trends in market and portfolio risk. You can subscribe to both the multi-asset class and equity edition here.


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