MAC Monitor — December 15, 2020

Multi-Asset Class Risk Monitor Highlights | Week Ended December 11, 2020

by Christoph Schon, CFA, CIPM

Eurozone yields drop as ECB expands bond buying; Sterling slumps after last-minute Brexit talks fail; Portfolio risk drops on lower equity and FX volatility

Eurozone yields drop as ECB expands bond buying

Peripheral Eurozone sovereign yields dropped to all-time lows in the week ending December 11, 2020, as the European Central Bank held rates steady on Thursday and announced that it would expand its pandemic emergency purchase programme by another €500bn to €1.85tn. Governments in Italy, Greece, Portugal, and Spain saw their borrowing rates decline to their lowest levels on record, while the German 10-year benchmark rate fell 10 basis points to -0.64%. Yield declines were even more pronounced in the United Kingdom, where the same-maturity Gilt benchmark plummeted almost twice as much, in the wake of failed last-minute top-level Brexit negotiations.

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated December 11, 2020) for further details.

Sterling slumps after last-minute Brexit talks fail

The pound lost almost 2% against the US dollar in the week ending December 11, 2020, after crunch talks between British Prime Minister Boris Johnson and European Commission President Ursula von der Leyen on Thursday failed to break the Brexit deadlock. Both sides subsequently acknowledged that “no deal” was now the most probable outcome when the transition period ends on December 31. That said, the pound recovered most of last week’s losses at the beginning of this week, as both parties agreed to go the “extra mile” and to continue negotiating. Predicted short-term volatility for GBP/USD, meanwhile, remained stable around the 9.5% mark.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated December 11, 2020) for further details.

Portfolio risk drops on lower equity and FX volatility

Short-term risk in Qontigo’s global multi-asset class model portfolio fell another 1.4 percentage points to 10.2% as of Friday, December 11, 2020, driven by a combination of lower stock-market and exchange-rate volatility. The biggest drop in the risk contribution was recorded in the non-US developed equity category, which saw its percentage share of overall portfolio volatility drop by 1.5% to 24.3%. US Treasuries neither added to nor subtracted from total risk, as sovereign bonds remained largely uncorrelated with share prices. The 4% risk contribution from non-US government securities was, therefore, largely due to the positive interaction of the euro and pound with stock markets.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated December 11, 2020) for further details.