MAC Monitor — August 23, 2021

Multi-Asset Class Risk Monitor Highlights | Week Ended August 20, 2021

  • The Fed drops a hint…and stocks & yields take a dive
  • Surprise slump in inflation takes down the pound
  • Portfolio risk surges, as equity-FX correlation soars

The Fed drops a hint…and stocks & yields take a dive

Eurozone sovereign yields fell to their lowest levels in almost seven months in the week ending August 20, 2021, as the pan-European stock market experienced its worst weekly drop since mid-June. The 10-year German Bund benchmark closed just above -0.5% — a level last seen on February 1 — once more offering the same expected return as an overnight deposit with the European Central Bank. Meanwhile, the STOXX® Europe 600 fell 1.5% on Thursday, following the release of the Federal Reserve’s July meeting minutes the night before, in which most rate setters seemed to agree “that it could be appropriate to start reducing the pace of asset purchases this year.” The fact that long-dated yields fell rather than rose on the expectation of tighter monetary policy indicates that investors are more concerned about the long-term economic impact of the central bank’s action than its direct effect on discount rates.

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated August 20, 2021) for further details.

Surprise slump in inflation takes down the pound

The British pound lost 1.7% against the US dollar in the week ending August 20, 2021, following a surprise drop in UK inflation. Year-on-year consumer-price growth fell to 2% in July, down from 2.5% the month before, and short of consensus expectations of 2.3%. That said, the Office of National Statistics pointed out that much of the slowdown could be attributed to a “base effect” relative to the corresponding period the year before, when prices rose sharply as the UK economy emerged from its first lockdown. According to projections from the Bank of England’s latest quarterly inflation report, CPI growth could still bounce back to 3% in August and climb toward 4% in the fourth quarter of this year. Nevertheless, Gilt yields still dipped across all maturities, with the monetary policy-sensitive 2-year rate falling 4 basis points to 0.1%—the same as the current level of the BoE base rate.

Please refer to Figures 3 & 6 of the current Multi-Asset Class Risk Monitor (dated August 20, 2021) for further details.

Portfolio risk surges, as equity-FX correlation soars

Short-term risk in Qontigo’s global multi-asset class model portfolio surged by one percentage point to 6.1%, mostly due to a stronger co-movement of share prices and some foreign-exchange rates against the US dollar. The correlation between equity and FX returns soared last week, as European large-cap indices plummeted nearly 1.5%, while the corresponding currencies lost between 1% and 2%, making these stocks seem both more volatile and more strongly tied to their US counterparts. The Japanese yen, on the other hand, remained uncorrelated to stock markets, as it was almost unchanged against the US dollar, thus neither adding to nor subtracting from overall portfolio risk.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated August 20, 2021) for further details.