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MAC Monitor — December 4, 2023

Multi-Asset Class Risk Monitor Highlights | Week Ended December 1, 2023

  • Slower Eurozone inflation could allow for faster rate cuts, weighing on the euro
  • Long Treasury yields plummet as traders bring forward rate cut expectations
  • US and European stocks shine in November, further reducing portfolio risk

Slower Eurozone inflation could allow for faster rate cuts, weighing on the euro

The euro lost 1% against both the US dollar and the pound in the week ending December 1, 2023, following a larger-than-expected drop in Eurozone inflation. The headline consumer price index for the region was estimated to have grown by 2.4% in the 12 months ending November, down from 2.9% in the previous month and significantly undershooting average analyst predictions of 2.7%. The drop was even more pronounced in the core index, which plummeted from 4.2% in October to 3.6% in November, according to a flash estimate from Eurostat, due to prices falling month on month. The news prompted traders to significantly mark down their monetary policy expectations, with the first rate cut of 25 basis points from the European Central Bank now tentatively priced in for March and another full percentage point of easing projected over the remainder of next year.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated December 1, 2023) for further details.

Long Treasury yields plummet as traders bring forward rate cut expectations

Long-term US Treasury yields plunged to their lowest level in three months in the week ending December 1, 2023, amid growing expectations that the Federal Reserve could start lowering interest rates in the first quarter of next year. The CME FedWatch Tool now assigns a probability of around 60% to a 25-basis point rate cut at the March 19-20, 2024, FOMC meeting, up from a one in four chance at the start of last month. The recent drop takes the total decline in the 10-year benchmark rate for November to 50 basis points, which is the steepest monthly drop since August 2019.

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated December 1, 2023) for further details.

US and European stocks shine in November, further reducing portfolio risk

The predicted short-term risk of the Axioma global multi-asset class model portfolio dropped another 1.3 percentage points to 10.1% as of Friday, December 1, 2023, as US and European equities added a fifth up-week to their recent winning streak on the back of increasingly dovish monetary policy expectations. This made November the strongest month for the STOXX® USA 900 index since the announcement of the first COVID vaccine exactly three years earlier. As a result, the US equity portion of the portfolio experienced the biggest contraction of 1.8% in its percentage risk contribution to 43.7%. Most other asset classes again saw little change in how much they added to total portfolio risk, as correlations remained stable and predominantly positive.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated December 1, 2023) for further details.