Equity Risk Monitors — September 27, 2021

Equity Risk Monitor Highlights | Week Ended September 23, 2021

  • Factor volatility drives rise in US risk
  • Asset correlations spike in Asia-Pacific ex-Japan
  • Greenback strengthens following Fed’s tapering signals

Factor volatility drives rise in US risk

Rising factor volatility led to an increase in US equity risk, as the US market remained relatively flat last week. US stocks wavered as investors grappled with the Fed’s signals that it may start reducing pandemic stimulus measures, along with China’s issues in the property markets and the likelihood of tax increases to fund the proposed US budget package. The STOXX USA 900 index’s risk jumped nearly 200 basis points over the past five business days, as measured by Axioma’s US4 short-horizon fundamental model.

The decomposition of the change in risk from a factor model perspective revealed that higher factor volatility was solely responsible for the increase in the STOXX USA 900 index risk last week and last month. From the standpoint of a full dense matrix, last week’s rise in risk was driven by the increase in the stock correlations, while a small increase in stock volatility boosted the climb in total risk.

See graphs from the United States Equity Risk Monitor as of 23 September 2021:

Asset correlations spike in Asia-Pacific ex-Japan

Asset-asset correlations shot up in Asia-Pacific ex-Japan, as Asian stocks fell last week. The median pairwise realized 20-day correlation in the STOXX Asia-Pacific 600 ex-Japan index soared to nearly 0.19 by Thursday—triple the level at the beginning of September. The 60-day median asset correlation also rose over the past week, albeit to a lesser degree than its shorter-horizon counterpart.

An increase in correlations typically reflects concerns that macroeconomic and market events are driving stock prices rather than companies’ individual characteristics, a probable reflection of the uneasiness created by the lingering coronavirus crisis and the continuing concerns related to the fate of the Chinese property developer Evergrande and the ramifications of its possible collapse. The increase in both stock correlations and stock volatility contributed to the increase in risk for the STOXX Asia-Pacific 600 ex-Japan index last week, as measured by Axioma’s Asia-Pacific ex-Japan short-horizon fundamental model.

See graph from the Asia-Pacific ex-Japan Equity Risk Monitor as of 23 September 2021:

Greenback strengthens following Fed’s tapering signals

The US dollar strengthened against major developed currencies after the Fed signaled that it may soon begin to reduce its bond purchases, followed by an increase in rates as early as next year. Most developed currencies were positioned at or near the low-ends of their 12-month return ranges against the greenback last week. The Japanese yen, Swiss franc and the euro recorded negative one-year returns against the greenback as of last Thursday.

The yen was the biggest loser, down nearly 5% over the past 12 months, but the Japanese currency was still the second-least risky among developed currencies, after the Singapore dollar. The Norwegian krone kept the top spot as the riskiest currency, as measured by Axioma Worldwide fundamental short-horizon model.

See graph from the Global Developed Markets Equity Risk Monitor as of 23 September 2021:

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