- Europe outperforms as risk converges
- Risk appetites ebb
- The greenback strengthens, but less so against emerging currencies
Europe outperforms as risk converges
Europe remains one of the best performing equity markets in 2021, as most major markets fell last week at the prospect of a global economic slowdown, following a surge in coronavirus cases and as the Fed announced that it might begin the tapering process this year. After suffering one of the largest declines at the height of the Covid-19 crisis in March 2020, Europe did not see a strong recovery immediately after the market rout. But it has been catching up in 2021, outpacing the US, Asia Pacific and the overall Global market so far this year. The STOXX Europe 600 index has posted a cumulative year-to-date return of about 19%, followed by the STOXX USA 900 index at 15%. In contrast, it is Asia Pacific that has been struggling this year, barely remaining in positive territory (at 2%) last week.
Risk ticked up in both Asia Pacific and Europe last week and in the Global market overall. In contrast, US risk continued to decline slightly for the past five business days ending Thursday. Risk levels in all regions are now close to pre-pandemic levels. The US recorded the lowest volatility last week, compared with Europe and Asia, but risk levels have converged, falling in the range of 10% and 12% for all three regions, as measured by Axioma’s short-horizon fundamental local models.
See graph from the Europe Equity Risk Monitor as of 19 August 2021:
Risk appetites ebb
Returns to the Market Sensitivity and Volatility style factors plunged last week in all geographies Axioma’s models track closely, indicating a decline in risk appetites. Investors turned to low-beta and low volatility stocks, shunning high-beta and high-volatility alternatives. The two style factors’ returns started falling before the Fed’s announcement on Wednesday of last week and dipped even lower afterward, recording returns that were more than two standard deviations below average, based on the volatility expectations at the beginning of the week in multiple regions.
Emerging Markets and Asia Pacific ex-Japan saw weekly outsized returns for both Volatility and Market Sensitivity. The US recorded the largest negative returns in both Volatility and Market Sensitivity last week among all geographies, but only US Market Sensitivity’s weekly return breached two standard deviations. Despite last week’s drop, Market Sensitivity’s 12-month return remained positive in all regions, though Volatility’s 12-month return turned negative in most regions.
See graph from the Global Developed Markets Equity Risk Monitor as of 19 August 2021:
The greenback strengthens, but less so against emerging currencies
The US dollar pushed higher following the release of the minutes from the Fed’s July meeting, with currencies of both developed and emerging markets falling against the US dollar, as investors appeared to be turning to the greenback as a safe haven. The strengthening of the dollar could be interpreted as another sign that risk appetites are declining.
Most developed currencies were positioned at or near the low ends of their one-year return ranges against the US dollar last Thursday, with a majority posting negative 12-month returns. The Japanese yen and euro were the big losers among developed currencies, falling more than 2.5% against the US dollar over the past year. Among emerging currencies, only the Turkish lira and Thai baht recorded negative 12-month returns against the greenback. The Turkish lira, South African rand and Norwegian krone remained the most volatile currencies, as measured by Axioma’s Worldwide short-horizon fundamental model.
See graphs from the Equity Risk Monitors as of 19 August 2021:
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