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
MULTI-ASSET CLASS EDITION

Sovereign yields hit record lows, as investors seek safe havens
Dollar drops as Fed cuts rates
Portfolio risk rises on increased FX volatility and correlation

 

HIGHLIGHTS FOR THE WEEK ENDED MAR 6

 
 

Sovereign yields hit record lows, as investors seek safe havens

 

Government bond yields fell to record lows around the globe in the week ending March 6, 2020, as investors once more sought safe havens amid intense stock-market volatility. Rate decreases were most pronounced in North America, where the 50-basis point emergency rate cut by the Federal Reserve Bank on Tuesday added additional downward pressure. The 10-year US Treasury benchmark rate dropped 42 basis points to 0.71%—the lowest level on record—while on the other side of the Atlantic, the same-maturity German Bund also breached its previous record low of -0.71%. The 10-year British Gilt, meanwhile, dropped 20 basis points to 0.22%, as traders started to price in action expected from the Bank of England later this month.

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Please refer to figure 4 of the current Multi-Asset Class Risk Monitor (dated March 6, 2020) for further details.

 


Dollar drops as Fed cuts rates

 

The Dollar Index—a measure of the USD’s value against a basket of foreign currencies—dropped to its lowest level in almost 12 months in the week ending March 6, 2020. The greenback lost between 2% and 3% against its major rivals, as traders priced in more rate cuts, following the Federal Reserve’s decision to lower its target corridor by 50 basis points on Tuesday. The consensus forecast is now for the Fed Funds target rate to reach 0.50%-0.75% by the end of April, potentially through 25-basis point steps each at the next two scheduled meetings on March 18 and April 29. According to the Chicago Mercantile Exchange’s FedWatch tool, about half of the Fed Funds futures traders expect rates to reach 0.25%-0.50% by the end of the year.


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

 


Portfolio risk rises on increased FX volatility and correlation

 

Short-term risk in Axioma’s global multi-asset class model portfolio rose 0.41% to 13.50% as of Friday, March 6, 2020, driven by a mixture of higher currency volatility, a stronger co-movement of FX and interest-rate returns, and a less negative interaction between share prices and exchange rates against the USD. The latter was caused by stock markets see-sawing—ending the week slightly in the black—while foreign currencies strongly appreciated against the dollar. This led to a weaker perceived correlation of US and non-US equities, which lowered the risk contributions from both categories. Non-USD fixed-income securities, on the other hand, saw their volatility-reducing properties shrink, as a closer co-movement with exchange rates made them appear more correlated across currencies.


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Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated March 6, 2020) for further details.



 
 
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