Axioma Risk Monitor
AXIOMA RISK MONITOR
MULTI-ASSET CLASS EDITION

Sovereign yields and credit spreads unmoved amid opposing forces
Pound drops as Brexit fears intensify
Portfolio risk falls, as asset volatilities decline

 

HIGHLIGHTS FOR THE WEEK ENDED MAY 15

 
 

Sovereign yields and credit spreads unmoved amid opposing forces

 

Sovereign yields around the globe continued to drift sideways in the week ending May 15, 2020, held in check by disappointing economic data and rising geopolitical tensions on one side, and the anticipated benefits of reopened economies and fiscal and monetary rescue packages on the other. The 10-year US benchmark rate climbed on Monday, as several European countries and US states unveiled, or began to implement, plans to lift elements of their lockdown restrictions. However, these gains were more than offset over the rest of the week by higher-than-expected unemployment claims, record drops in industrial production and retail sales, and increasingly hostile rhetoric from the White House against China.

Meanwhile, risk premia in the corporate-bond market also remained mostly flat, despite the onset of the Federal Reserve’s eagerly awaited ETF-buying program, as price gains in the respective listed funds were not reflected in the spreads of the underlying bond segment.

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Please refer to figures 4 and 5 of the current Multi-Asset Class Risk Monitor (dated May 15, 2020) for further details.

 


Pound drops as Brexit fears intensify

 

The British pound depreciated 2.5% against the US dollar in the week ending May 15, 2020, as Brexit talks between the United Kingdom and the European Union seemingly ended in deadlock. Negotiators on both sides acknowledged that discussions had stalled over disagreements on common standards, which the EU wants the UK to adopt to ensure a level playing field. British Prime Minister Boris Johnson had previously threatened to walk away, if no sufficient progress was achieved ahead of the European Council meeting scheduled for mid-June, thus raising the risk of the transition period ending with no deal by the end of the year.


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Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated May 15, 2020) for further details.

 


Portfolio risk falls, as asset volatilities decline

 

Short-term risk in Qontigo’s global multi-asset class model portfolio fell 2.4% to 20.1% as of Friday, May 15, 2020, due to declining standalone volatilities across all security types and risk factors. Oil once again experienced the biggest drop in percentage risk contribution from 5.2% to 4.5%, primarily from lower price variation. US corporate bonds also saw their share of total portfolio volatility reduced by 0.6%, due to a combination of smaller interest-rate and credit-spread fluctuations. Their non-USD counterparts, on the other hand, did not benefit to the same extent, as exchange rates remained positively correlated with both equity and credit-spread returns. US Treasuries and the Japanese yen, meanwhile, continued to provide the greatest diversification opportunities, as they remained uncoupled from stock markets.


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Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated May 15, 2020) for further details.



Bank funding risk returns to normal after a brief spike

 
  • The 3Month LIBOR-OIS spread has come back as rapidly as it widened. It is a measure of bank credit risk and liquidity of lending.
  • The COVID-19 related widening was the largest since the Global Financial Crisis, but reached only half those levels.
  • The spread is back to pre-COVID levels.


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Please refer to the Fixed Income Chart of the Week for further details.



 

 
 
Stay Connected
 
 

Events

Webinar | Inquire UK: Investment implications of Covid-19

Date: May 20, 2020
Time: 2:30 PM GMT

Join us on Wednesday for a lively discussion hosted by Inquire on the investment implications of Covid-19. We will be delving deeper into the changes in the 2020 risk landscape, and the response of quantitative portfolio managers.

Register here >


Webinar | Qontigo Insight™ Quarterly Multi-Asset Risk Review

Date: May 27, 2020
Time: 11:00 AM ET | 4:00 PM GMT

In this webinar, Christoph V. Schon, Qontigo’s Executive Director of Applied Research, explains how this has rendered traditional diversification strategies ineffective and led to surge in multi-asset class portfolio risk.

Register here >


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Axioma Risk Monitor

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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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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