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Equity Risk Monitors — December 11, 2023

Equity Risk Monitor Highlights | Week Ended December 8, 2023

  • US Energy emerges as one of the biggest losers and riskiest sector
  • Global trading activity picks up
  • Currency risk remains steady as global risk climbs

US Energy emerges as one of the biggest losers and riskiest sector

After a stellar last year, when it gained over 60%, US Energy is emerging as the second-biggest loser after Utilities in 2023. Energy’s year-to-date return dipped below -4% last Friday. In contrast, Information Technology gained 54% so far this year.

While its performance flipped from year to year, Energy was the riskiest US sector for most of 2022 and 2023. Still, after dropping for most of the year, Energy’s current risk forecast is about 30% lower than it was at the beginning of the year.

Nonetheless, the impact of the sector on the US market is relatively minor. Energy makes up less than 5% of the STOXX US index, its contribution to the benchmark risk is lower than its weight would otherwise suggest and also lower than one year ago.

See graphs from the STOXX US Equity Risk Monitor of 8 December 2023:

Global trading activity picks up

As sentiment has been improving, equity trading activity has been increasing since October. The current average daily volume of stocks in the STOXX Developed World is higher than it was at the beginning of the year. Yet, it is lower than the near-term record seen in June. To keep things in perspective, the June peak is also much lower than trading volume highs seen over the past couple of years.

This recent rise in volume may indicate that investors are shifting back into equities as bond yields fall, and the rotation we have seen in style factors could also point to a change in leadership that may be requiring more trading.

The most active sectors in terms of trading have been Information Technology, Consumer Discretionary and Consumer Staples, whose current levels of trading are higher than their respective one-year average.

See graphs from the STOXX Developed World Equity Risk Monitor as of 8 December 2023:

Currency risk remains steady as global risk climbs

While global markets risk has climbed since October, currency risk was not one of the culprits for the rise. When looking at the major components of risk, it was market and country risk that drove up aggregate risk, with currency risk remaining relatively steady, as measured by Axioma fundamental medium-horizon model.

The US dollar strengthened against major developed currencies, with the Japanese Yen and Norwegian krone recording the largest negative 12-month returns against the greenback. In contrast, the Swiss franc and British pound eked small gains over the same period. Most developed currencies are now positioned at or near the low ends of their one-year volatility ranges.

See graphs from the STOXX Developed World Equity Risk Monitor of 8 December 2023: