MAC Monitor — August 8, 2022

Multi-Asset Class Risk Monitor Highlights | Week Ended August 5, 2022

  • Gilt curve partially inverts over stagflation fears
  • Dollar rises as traders revise rates expectations
  • Stock market recovery reduces portfolio risk

Gilt curve partially inverts over stagflation fears

The Bank of England raised its base rate by 50 basis points to 1.75% in the week ending August 5, 2022, following similarly big steps from the European Central Bank and the US Federal Reserve. The outsized move—the BoE’s biggest hike in 27 years—reflected the Monetary Policy Committee’s (MPC) updated economic projections, which now predict that the UK will enter 15 months of recession at the end of the year, following an increase in consumer-price inflation to 13% in the final quarter of 2022.

The conflicting expectations of yet stronger inflation and negative economic growth mean that traders anticipate another 125 basis points of base-rate hikes to a peak of around 3% by early 2023, which will immediately be followed by an easing of monetary conditions, as the predicted recession unfolds over the rest of the year. This was mirrored in the short end of the Gilt curve, with the 1-year yield soaring 30 basis points to over 2%, whereas the 5-year point saw a much more moderate increase to 1.86%.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated August 5, 2022) for further details.

Dollar rises as traders revise rates expectations

The US dollar gained 0.7% against a basket of major trading partners in the week ending August 5, 2022, reversing some of the previous weeks’ losses, but stopping short of its recent 20-year high. The greenback has steadily appreciated to its strongest level since the summer of 2002, as the Federal Reserve raised its policy rate at an unprecedented pace on the back of soaring inflation. Yet, the euro and the pound regained some ground, with the European Central Bank and the Bank of England following suit in also tightening monetary conditions aggressively.

Even though traders have significantly revised their monetary-policy expectations downward in the light of growing recession concerns—especially in Europe—the federal funds rate in the United States is still expected to rise to around 3.6% by the end of the first quarter of 2023, compared with peaks of 3% and 1.5% for the corresponding policy rates in the UK and the Eurozone, respectively.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated August 5, 2022) for further details.

Stock market recovery reduces portfolio risk

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio dropped further to 13.4% as of Friday, August 5, 2022, compared with 15.5% three weeks earlier. The decrease was mostly driven by a combination of lower equity, FX, interest-rate, and credit-spread volatility, as the US stock market booked three consecutive weekly gains for the first time since March. Non-USD investment-grade corporate bonds recorded the biggest decline of 4.5% in their percentage risk contribution, as they benefitted from weaker fluctuations in all major risk factors. Global index-linked sovereigns, in contrast, saw their share of overall portfolio volatility rise from 3.4% to 5.4%, due to higher long-term inflation expectations in the Eurozone and the UK.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated August 5, 2022) for further details.