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Equity Risk Monitors — December 6, 2021

Equity Risk Monitor Highlights | Week Ended December 2, 2021

  • Volatility and correlations soar on Omicron fears
  • Rising factor volatility drives increased risk
  • US risk jumps but remains well below historic highs

Volatility and correlations soar on Omicron fears

As Omicron concerns reverberated worldwide, stock markets fell as volatility and correlations soared last week. The latest charts of global volatility and correlation hotspots were littered with upward arrows, reflecting sharp increases in volatility and correlations at country levels. According to Axioma’s Worldwide short-horizon fundamental model, volatility rose more than one percentage point, while correlations increased by more than two percentage points, particularly for countries in Southern Africa, North America, and Europe.

See graphs from the Equity Risk Monitors as of 2 December 2021:

Rising factor volatility drives increased risk

Rising factor volatility spurred the increase in Developed Markets equity risk last week. The decomposition of the change in risk forecasted by Axioma’s Worldwide fundamental short-horizon model revealed that higher factor volatility was solely responsible for the increase in benchmark risk in the STOXX Global 1800 index last week. The decrease in factor correlations partially offset the rise in risk.

However, when looking at the decomposition in risk from a dense matrix standpoint, the rise in both stock correlations and stock volatility was responsible for the risk increase.

See graphs from the Global Developed Markets Equity Risk Monitor as of 2 December 2021:

US risk jumps but remains well below historic highs

Last week’s large swings in equity markets made the US the second riskiest country after Japan, ahead of China and Emerging Markets in aggregate, as measured by Axioma’s short-horizon fundamental models. Following the abrupt market drop, US indices recorded the highest increase in risk among major global benchmarks over the past five days. Still, the US’s equity risk remained well below historic levels.

The risk of the STOXX USA 900 Index (14%) is now two percentage points higher than that of the STOXX China A 900 Index and one percentage point higher than that of the STOXX Emerging Markets Index. Interestingly, China was the only region to see a decline in risk (among the georaphies Axioma models track closely), despite also experiencing a market loss.

See graph from the United States Equity Risk Monitor as of 2 December 2021:

For more insights and research from the Applied Research team, please click here.