MAC Monitor — August 29, 2022

Multi-Asset Class Risk Monitor Highlights | Week Ended August 26, 2022

  • Soaring energy costs boost Gilt yields
  • Forceful Fed propels dollar to 20-year high
  • Portfolio risk surges, as stocks, bonds, and currencies tumble together

Soaring energy costs boost Gilt yields

Short-dated Gilt yields climbed to their highest levels since November 2008 in the week ending August 26, 2022, following an announcement that average energy bills for British households could rise by up to 80% from October, with additional reviews scheduled for January and April 2023. The industry regulator Ofgem announced on Friday the latest price cap of how much UK energy providers can charge retail customers, which could see a typical annualized bill soar to over £3,500—up from just under £2,000 at the previous review in April and triple the amount charged last winter. With gas prices staying at elevated levels, analysts predict a further increase in the average energy bill to almost £5,400 at the next reset in January, prompting some investment banks to raise their respective inflation forecasts to between 14% and 18%. In turn, fixed income traders once more upped their monetary policy projections, now expecting the Bank of England’s base rate to peak at 4.25% in summer next year—50 basis points higher than the implied forward rate at the end of the previous week.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated August 26, 2022) for further details.

Forceful Fed propels dollar to 20-year high

The Dollar Index—a measure for the USD’s value against a basket of major trading partners—ascended to its highest level in more than 20 years in the week ending August 26, 2022, as Fed Chair Jerome Powell confirmed price stability as the central bank’s most important job at the Jackson Hole Economic Symposium on Friday, stressing that it will use its tools “forcefully” until it is “confident the job is done.” Even though other major central banks appear set to catch up with or even surpass the Federal Reserve with regards to raising their policy rates, heightened geopolitical and recession concerns—especially in Europe—could keep the greenback attractive for foreign investors in the months to come.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated August 26, 2022) for further details.

Portfolio risk surges, as stocks, bonds, and currencies tumble together

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio surged 1.7 percentage points to 12.7% as of Friday, August 26, 2022, boosted by a triple whammy of falling stock and bond prices, accompanied by a strengthening dollar. Non-US government and investment-grade corporate bonds recorded the biggest increases in their percentage risk contributions of 2% and 0.9%, respectively, as their losses from higher risk-free rates were amplified by depreciating exchange rates against the USD. Holding oil, on the other hand, actively reduced overall portfolio volatility, due to a negative correlation of crude prices with most equity and fixed income assets.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated August 26, 2022) for further details.