by Qontigo
- European recession fears weigh on sovereign yields
- Dollar continues to rise as investors brace for prolonged period of high rates
- Stocks break losing streak, dampening portfolio risk
European recession fears weigh on sovereign yields
Long-term government borrowing costs declined on both sides of the Atlantic in the week ending August 25, 2023, as several key economic indicators plunged deeper into recessionary territory. S&P Global’s composite purchasing manager index (PMI) for the combined manufacturing and services sectors in the Eurozone dropped further from 48.6 in July to a 33-month low of 47.0 in August, indicating an accelerating contraction in economic activity. The United Kingdom experienced even bigger drops, both in its composite PMI and the manufacturing subcomponent, with the latter shrinking from 45.3 to 42.5. As a result, Gilt yields plummeted between 15 and 25 basis points across all maturities, as traders once again reversed course and priced out an entire rate hike by the Bank of England. The base rate is now projected to peak at 5.75% by year end.
Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated August 25, 2023) for further details.
Dollar continues to rise as investors brace for prolonged period of high rates
A measure of the US dollar’s value against a basket of major trading partners climbed to its highest level since early June in the week ending August 25, 2023, as traders pushed out the projected date on which they expect the Federal Reserve to start easing monetary conditions again. The Dollar Index strengthened for a sixth consecutive week amid warnings from central bank officials that interest rates could rise even more and stay higher for longer. In his widely anticipated speech at the Jackson Hole symposium, Fed Chair Jerome Powell warned on Friday that the bank was “prepared to raise rates further” and that it intended “to hold policy at a restrictive level” until inflation was moving sustainably towards its 2% target. That being said, short-term interest-rate futures markets still expect the Fed not to raise its policy rate again from the current level of 5.25%-5.50%; but the first rate cut is now priced in for the June 2024 FOMC meeting instead of May.
Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated August 25, 2023) for further details.
Stocks break losing streak, dampening portfolio risk
The predicted short-term risk of Qontigo’s global multi-asset class model portfolio dropped by a full percentage point to 8% as of Friday, August 25, 2023, as global stock markets reversed their recent losing streak and recorded their first weekly gain for this month. The impact was most notable for US equities, which saw their share of total portfolio volatility contract from 40.4% to 39%. This was in contrast to their counterparts in other regions, where the declines in risk contributions were more subdued, due to a still relatively strong positive correlation between share prices, bond prices, and exchange rates against the US dollar.
Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated August 25, 2023) for further details.
