MAC Monitor — August 15, 2022

Multi-Asset Class Risk Monitor Highlights | Week Ended August 12, 2022

  • Rising euro inflation expectations lift short Bund yields
  • Dollar declines as inflation eases
  • Lower equity volatility further reduces portfolio risk

Rising euro inflation expectations lift short Bund yields

Short-term German sovereign yields climbed to their highest level in three weeks in the week ending August 12, 2022, as Russia suspended crude oil flows to Hungary, Slovakia, and the Czech Republic, because Western sanctions prevented the payment of the required transit fees. The news propelled the 2-year breakeven inflation rate for the Eurozone from 4.5 to 4.8%—its highest level since early May. Yet, monetary-policy expectations remained largely unchanged, with an anticipated peak of 1.5% in the European Central Bank deposit rate early next year.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated August 12, 2022) for further details.

Dollar declines as inflation eases

The US dollar depreciated 0.9% against a basket of major trading partners in the week ending August 12, 2022, following a stronger-than-expected deceleration in US CPI growth. The latest data from the Bureau of Labor Statistics showed that headline consumer prices had remained stable between June and July, taking the year-on-year change to 8.5%—down from 9.1% in the previous month and 0.2% lower than the consensus forecast of 8.7%. More importantly, core inflation (excluding the more volatile food and energy components) was also marginally lower at 5.9%, marking its fourth monthly decline since its recent peak of 6.5% in March. If the downward trend continues, it might assuage the Federal Reserve in its aggressive tightening of monetary conditions, especially in the light of the strong labor-market report from the week before. The lower rates expectations would then, in turn, make the dollar appear less attractive for foreign investors.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated August 12, 2022) for further details.

Lower equity volatility further reduces portfolio risk

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio dropped by nearly a percentage point to 12.5% as of Friday, August 12, 2022, mostly driven by a 1.7% decline in standalone equity volatility. That said, the risk reduction was largely limited to US assets, as a stronger co-movement of share prices and FX rates against US dollar meant that non-US equities did not see their volatility fall as much as their American counterparts. US Treasuries were the least risky securities in the portfolio, due to their zero correlation with stock markets. This was in contrast to the positive contributions from corporate bonds, as credit spreads remained strongly (negatively) correlated with share prices.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated August 12, 2022) for further details.