Axioma Risk Monitor

Pound and UK share prices fall in sync
Yields decline as lockdowns resume
Equity risk falls, but correlations remain stable
Leverage vs credit spreads: No extra support from the Fed




Pound and UK share prices fall in sync


The pound sterling dropped to its lowest value against the US dollar in a month, in the week ending June 26, 2020, as UK share prices fell more than 2%. In our recent blog post on The top 10 cross-asset correlations to watch, we noted the more pronounced co-movement of the British currency and stock market lately, with both going in the same direction in 13 of the past 16 weeks. This is in stark contrast to the previous 3.5 years, following the EU referendum in June 2016, in which the interaction between the two was mostly negative—the prevalent belief being that a weak exchange rate favoured the large, internationally active corporations dominating the UK’s blue-chip indices. However, the recent re-emergence of the US dollar as the world’s number-one safe haven and rising concerns of a no-deal Brexit at the end of the year have led to a significant increase in the pound’s perceived riskiness.

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Please refer to figures 1 & 6 of the current Multi-Asset Class Risk Monitor (dated June 26, 2020) for further details.


Yields decline as lockdowns resume


Sovereign yields on both sides of the Atlantic declined to their lowest levels in six weeks in the week ending June 26, 2020, following a resurgence of new COVID-19 cases in Europe and the United States. The corresponding stock-market benchmarks lost between 2% and 3%, as governments re-imposed partial lockdowns in the regions that were worst affected. However, the actual decline of six basis points in the 10-year US Treasury rate appeared relatively benign compared with the 21 basis points seen two weeks earlier. This seems to indicate that investors were unwilling to accept a 10-year yield lower than the current rate of 0.64%, a level that was undercut on only seven days in past three months.

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Please refer to figure 4 of the current Multi-Asset Class Risk Monitor (dated June 26, 2020) for further details.


Equity risk falls, but correlations remain stable


Short-term risk in Qontigo’s global multi-asset class model portfolio fell almost two percentage points to 13.5% as of Friday, June 26, 2020. Most of the change was once again due to a further decline in standalone equity volatility. Correlations across asset classes and risk factors, on the other hand, remained largely stable. Most of the risk reduction occurred in the equity part of the portfolio, but the corporate-bond buckets also saw their contributions to overall volatility decrease, due to the consistently strong inverse interaction of share prices and credit spreads.

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Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated June 26, 2020) for further details.

Leverage vs credit spreads: No extra support from the Fed

  • Corporate bond purchases by the Federal Reserve have led to both lower credit-risk premia and higher share prices, but leveraged companies have benefitted to only a limited degree so far.
  • In some previous crisis—such as the bursting of the dotcom bubble and the Eurozone debt crisis—companies with a larger debt burden did benefit disproportionally from lower borrowing costs. But they did not recover to the same extent in the global financial crisis and the current environment.
  • Although Leverage is not considered a “rewarded” factor—and would thus normally be expected to revert toward its mean—it seems to exhibit significant downside risk in times of severe credit crises. And quantitative easing is not guaranteed to provide any extra support.
  • For more detailed information, see our recent blog post on how Fed bond purchases do little for leveraged firms.

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


Stay Connected


Webinar | Qontigo Insight™ Q2 2020 Risk Review

Date: July 8, 2020
Time: 11:00 AM ET | 4:00 PM BST

Although equity markets seem to have recovered much of the ground they lost in Q1, volatility remains high, certain style factors have been behaving “badly” and dispersion of risk and return across countries and currencies is widening. In this webinar, Melissa R. Brown will discuss all these aspects of the risk environment in the second quarter and more.

Register here >

Webinar | Qontigo Insight™ Q2 2020 Risk Review, APAC

Date: July 15, 2020
Time: 10:00 AM HKT | 11:00 AM JST

In this webinar, Olivier d'Assier will discuss various aspects of the risk environment in the second quarter and more.

Register here >

On the Blog

Fed bond purchases do little for leveraged firms

Much of the recent market turmoil has been driven by worries about debt. Granted, debt is not a bad thing, per se. But the fact that many households and corporations must now borrow extensively just to stay afloat is a major concern. This is reflected in both wider credit spreads and the fact that the shares of heavily leveraged companies have significantly underperformed the overall market.

CDS: Examining the negative basis

In our Fixed Income Chart of the Week for 8 June 2020, we noted that the CDS basis for names in the Markit iTraxx Europe index had gone significantly negative in March, which struck us as very unusual.

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.

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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.

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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