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

Yields seesaw, as traders weigh liquidity and duration risks
Dollar soars as cash is king
Portfolio diversification disappears as correlations turn positive

 

HIGHLIGHTS FOR THE WEEK ENDED MAR 20

 
 

Yields seesaw, as traders weigh liquidity and duration risks

 

Yields on 10-year US Treasuries seesawed around the 1% level in the week ending March 20, 2020, as investors were torn between a desire for the relative safety of sovereign debt and the lure of cash. After hitting all-time lows in the previous week, traders struggled over whether the yield pick-up over the Federal Funds Rate, which is now between zero and 0.25%, was worth the additional duration risk from a further rise in long-term rates.

Meanwhile, corporate bond spreads surged to their highest levels since the global financial crisis in 2008/2009, surpassing the two previous peaks of the Eurozone debt crisis in 2011 and the Chinese stock-market turbulence in 2015/2016. The rapid rise in risk premia—the fastest since autumn of 2008—could prove particularly dangerous for issuers at the lower end of the investment-grade spectrum, resulting in additional forced sales of so-called fallen angels in case of rating downgrades.

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Please refer to figures 4-5 of the current Multi-Asset Class Risk Monitor (dated March 20, 2020) for further details.

 


Dollar soars as cash is king

 

In its biggest weekly rise since 2008, the Dollar Index climbed to its highest level since the beginning of 2017 in the week ending March 20, 2020, as investors from around the globe scrambled for cash. Even the Swiss franc and the Japanese yen, which would have traditionally been considered safe havens, recorded losses of 3-4%. More volatile currencies, such as the British pound and the Norwegian krone, were hit even harder, with the latter dropping almost 14% to a record low against the greenback. The pound, meanwhile, briefly plummeted to its lowest level in 35 years, after the UK government announced that it would close schools by the end of the week. A slight recovery followed, as the Bank of England followed its American counterpart by further lowering interest rates and expanding its quantitative-easing program.


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Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated March 20, 2020) for further details.

 


Portfolio diversification disappears as correlations turn positive

 

Short-term risk in Axioma’s global multi-asset class model portfolio rose another four percentage points to 39.7% as of Friday, March 20, 2020, as traditional diversification options all but disappeared. The recent rush out of risky securities, such as equities and corporate bonds, but also sovereign debt and even gold, into USD cash, meant that almost all assets in the portfolio seemed to move in just one direction: downward. US Treasuries still provided at least some risk-reducing benefits, as their prices appeared to be uncorrelated with stock markets, due to their recent zigzag course. The returns of their foreign competitors were mostly driven by exchange-rate changes. Corporate issues also experienced sharp increases in their volatility contributions, as the interplay between credit spreads and risk-free interest rates turned positive for the first time in the portfolio’s 3.5-year history.


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Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated March 20, 2020) for further details.



 
 
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Date: March 25, 2020
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Qontigo Commentary: Coronavirus’ Impact on Markets

Over the past few months, the world has been greatly affected by the extensive spread of the COVID-19 virus. To help our subscribers better understand the impact of these events, Qontigo's Applied Research team put together a collection of market analysis and commentary.

 
Qontigo ROOF Scores

Qontigo's ROOF Scores were created to quantify market sentiment — bullish or bearish? ROOF is an acronym for Risk-On/Risk-Off market conditions; the Scores are calculated from the factor returns to eight style factors from Axioma’s fundamental factor risk models, plus two indicators of changing market volatility. 



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