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MAC Monitor — December 5, 2022

Multi-Asset Class Risk Monitor Highlights | Week Ended December 2, 2022

  • Dovish Fed comments depress Treasury yields
  • Lower rates weigh on dollar
  • Back-to-back monthly equity gains reduce portfolio risk further

Dovish Fed comments depress Treasury yields

US government borrowing rates fell across almost all maturities in the week ending December 2, 2022, following remarks from Federal Reserve Chair Jerome Powell that “the time for moderating the pace of rate increases may come as soon as the December meeting.” Market participants interpreted this as an indication that the central bank could raise its policy rate target by 50 basis points this months, rather than by 0.75% as it did at each of its previous four meetings. As a result, the 1-month Treasury bill rate plummeted 25 basis points to 3.91%. Yields with maturities greater than two years also declined by an average of 20 basis points in an almost parallel fashion, as short-term interest-rate futures priced in rate cuts of at least 50 basis points in the second half of 2023. That being said, the 6-month curve point was unmoved, indicating that the effective federal funds rate is still expected to peak around 5% in May.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated December 2, 2022) for further details.

Lower rates weigh on dollar

The ongoing downward revision of monetary-policy expectations continued to weigh on the US dollar, which depreciated another 1.3% against a basket of major trading partners in the week ending December 2, 2022. The move constitutes the fourth consecutive weekly downturn for the Dollar Index, extending the drawdown from its most recent high on October 12 to 7.7%. The biggest winner among the G10 currencies was the Japanese yen, which gained almost 3% last week and has now recouped more than 10% from its October low. Predicted short-horizon volatility for the USD/JPY exchange rate, in turn, continued to rise to 10.7%—its highest level since April 2017.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated December 2, 2022) for further details.

Back-to-back monthly equity gains reduce portfolio risk further

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio fell another 0.5% to 17.5% as of December 2, 2022, mostly due to a percentage-point drop in standalone equity volatility. US equities experienced the biggest decline in their share of total portfolio risk from 39.4% to 38.1%, as the STOXX® USA 900 recorded its first back-to-back monthly gains since the summer of 2021. The percentage risk contributions of most other security types, on the other hand, were largely unchanged, as cross-asset correlations remained stable and mostly positive.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated December 2, 2022) for further details.