Axioma Risk Monitor
AXIOMA RISK MONITOR
MULTI-ASSET CLASS EDITION

Yields drop on fears of a resurgent coronavirus
The yen is back…as a safe-haven currency
Portfolio risk remains stable amid flight-to-quality
The Corporate Credit Illusion of a Free Lunch

 

HIGHLIGHTS FOR THE WEEK ENDED JUNE 12

 
 

Yields drop on fears of a resurgent coronavirus

 

Sovereign yields on both sides of the Atlantic erased most of their previous gains in the week ending June 12, 2020, as concerns over a new wave of coronavirus cases spooked financial markets. The latest economic and monetary-policy projections from the Federal Reserve, which predicted prolonged high unemployment levels and near-zero interest rates until at least the end of 2022, added further downward pressure on both share prices and long-term Treasury yields. The corresponding rise in bond prices, which move in the opposite direction of yields, meant that equity and fixed-income returns were once more negatively correlated, following a 3-month period in which they appeared mostly uncoupled.

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Please refer to figure 4 of the current Multi-Asset Class Risk Monitor (dated June 12, 2020) for further details.

 


The yen is back…as a safe-haven currency

 

The Japanese yen gained more than 2% against the US dollar in the week ending June 12, 2020, recouping the losses sustained in the previous week. The move was one element of a broad flight to safety, which benefitted primarily the dollar, the Swiss franc, and the yen, while most other major currencies depreciated in value. The Norwegian krone recorded one of the steepest declines, as oil prices came under pressure amid news of rising inventories and concerns over weak economic growth. The yen’s strong returns against the greenback over the past two weeks meant that the Japanese currency regained its standing as a barometer for global risk appetite—a position it had briefly conceded to its American rival.


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Please refer to figure 6 of the current Multi-Asset Class Risk Monitor (dated June 12, 2020) for further details.

 


Portfolio risk remains stable amid flight-to-quality

 

Short-term risk in Qontigo’s global multi-asset class model portfolio remained unchanged at 17.9% as of Friday, June 12, 2020, as the effect of higher equity volatility was offset by lower exchange-rate variation and a more negative interaction between stock and bond prices. US equities experienced the biggest increase in their share of overall risk from 48% to 60%, while non-USD securities benefitted from a lower correlation between FX rates and share prices. Non-US sovereigns saw the strongest decline in their percentage risk contribution, from 3.7% to just 1.0%, as their value increased from both flight-to-quality flows, as well as the currency appreciation against the US dollar. Gold and JPY also expanded their risk-reducing qualities, as both regained their former safe-haven status.


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Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated June 12, 2020) for further details.



The Corporate Credit Illusion of a Free Lunch

 
  • BBB-rated corporate bonds yield more than AAA-rated ones to compensate for their lower credit quality.
  • Within the Investment Grade spectrum from AAA down to BBB one would expect the volatility of credit spreads to go from lower to higher in order to adjust for increasing yields.
  • Instead, outside of crisis periods, the volatility of credit spreads is roughly the same from AAA down to BBB. This pattern can be observed for USD, EUR, GBP. Beware: Mean-variance optimization, Information and Sharpe Ratios all rely on volatility! (More on how we can address this in Risk measurement and modelling in times of crisis).
  • Is this a “free lunch”? No! Volatility does not capture other risks such the “Falling Angel”, the company’s risk of downgrade leading to loss of its cherished Investment Grade status and dropping out of the index. Read more on this in our recent blog, Is BB the new BBB?.
  • Buckle your belt and click here to use your mouse to navigate the 3D volatility landscape in this week’s fixed income chart. Check for yourself: only during major crises (GFC in 2009 and COVID in 2020) does the volatility show any significant differences in the AAA-BBB range, but not during other periods.


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Please refer to the Fixed Income Chart of the Week for interactive charts.



 

 
 
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Events

Webinar | Enhancing Tax Alpha Using Everyday Client Workflows

Date: June 17, 2020
Time: 12:00 PM ET | 9:00 AM PT

In this webinar, we will show how clients leverage Qontigo’s sophisticated tax-managed optimization and risk analytics capabilities to enhance their tax alpha. These techniques will be demonstrated using four typical client workflows.


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Webinar | Stress Testing the Economic Fallout of COVID-19

Date: June 18, 2020
Time: 10:00 AM ET | 3:00 PM BST

Stress testing has long been a powerful arrow in the hedge fund and asset manager’s quiver to test how their portfolios may react in extreme market, geopolitical or macro-economic events. Join us, as we will stress test the economic impact of COVID-19 by analyzing four separate scenarios.


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On the Blog

The top 10 cross-asset correlations to watch

In many of our recent blog posts and webinars, we noted how the COVID-19 crisis had disrupted the long-established co-movements and interactions of major asset classes. Some flipped signs, many broke down, and a few remained remarkably stable. In this blog post, we take a look at some of the most notable asset-class pairs.

The shifting sands of sector risk… When low-volatility sectors become high-volatility — and vice versa

The coronavirus crisis has driven large changes in the relative risk of US sectors. Traditionally defensive sectors, such as Real Estate and Utilities, lost their defensiveness, while typically cyclical, high-beta sectors, such as Info Tech, turned more defensive.

Latest Research

Introducing STOXX® Factor and ESG-X Factor Indices: Get More From Your Premia Exposures

In this paper, Qontigo’s Applied Research Team presents the recently launched STOXX Factor and ESG-X Factor Indices. STOXX Factor Indices are designed for investors who want to reap factor premia while avoiding the noise that pervades many other such products that allow undesired exposures.

Insights

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.

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.

 
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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