MAC Monitor — August 22, 2022

Multi-Asset Class Risk Monitor Highlights | Week Ended August 19, 2022

  • Double-digit inflation boosts Gilt yields
  • US rates expected to remain higher for longer, boosting the dollar
  • Lower FX-equity correlation increases portfolio diversification

Double-digit inflation boosts Gilt yields

Short-term Gilt yields climbed to their highest level since November 2008 in the week ending August 19, 2022, as UK inflation came in in double digits for the first time in four decades. The Office for National Statistics reported on Wednesday that British consumer prices had risen 10.1% in the 12 months to July, significantly beating analyst predictions of 9.8%. The monetary policy-sensitive 2-year rate soared more than 40 basis points over the course of the week, as traders bumped up their forecasts for Bank of England rate hikes. The bank is now expected to lift its base rate by another 2 percentage points to 3.75% by the second quarter of next year—50 basis points more than had been predicted at the end of the previous week.

Medium-term yields, meanwhile, remained below shorter rates, reflecting the prospect of an upcoming recession of the UK economy.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated August 19, 2022) for further details.

US rates expected to remain higher for longer, boosting the dollar

The US dollar gained 2.4% against a basket of major trading partners in the week ending August 19, 2022, amid indications that short-term interest rates could remain higher for longer. The minutes from the July FOMC meeting, released on Wednesday, indicated that “once the policy rate had reached a sufficiently restrictive level, it likely would be appropriate to maintain that level for some time to ensure that inflation was firmly on a path back to 2 percent.” Federal funds futures imply a peak around 3.75% in April next year, but the rate is then expected to remain above 3.5% for the remainder of the year.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated August 19, 2022) for further details.

Lower FX-equity correlation increases portfolio diversification

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio dropped 1.5 percentage points to 11% as of Friday, August 19, 2022, as a weaker co-movement of share prices and exchange rates against the US dollar resulted in an increased diversification effect. The impact was most notable for non-US equities, which appeared around 3% less volatile than their American counterparts. The lowest risk contribution, however, came from US Treasuries, due to the continued decoupling of stock and bond returns.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated August 19, 2022) for further details.