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MAC Monitor — December 11, 2023

Multi-Asset Class Risk Monitor Highlights | Week Ended December 8, 2023

  • Dovish ECB comments send Bund yields tumbling
  • Strong jobs report lifts dollar to 3-week high
  • FX diversification reduces portfolio risk

Dovish ECB comments send Bund yields tumbling

Eurozone sovereign yields dropped to their lowest levels in over six months in the week ending December 8, 2023, following comments from European Central Bank board member Isabel Schnabel that the recent sharp deceleration in consumer-price growth for the region had “made a further rate increase rather unlikely.” Schnabel’s remarks during an interview with Reuters on Tuesday sent the 10-year benchmark Bund rate tumbling by 10 basis points, while short-term interest-rate futures traders added the same amount to their rate-cut expectations over the next twelve months, implying up to 1.4 percentage points worth of easing by the end of next year.

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated December 8, 2023) for further details.

Strong jobs report lifts dollar to 3-week high

The dollar strengthened to a three-week high against a basket of major trading partners in the week ending December 8, 2023, as traders once more revised their monetary policy expectations in yet another U-turn. Initially, the implied probability for a Fed rate cut in March had risen to 65% on Thursday, but then plummeted to 45% the day after in the wake of stronger-than-expected jobs figures. Friday’s non-farm payroll report showed that American employers had added 199,000 new positions in November, almost 50,000 more than in the previous month and comfortably beating the consensus analyst prediction of 180,000. More importantly, average hourly earnings growth doubled from 0.2% in October to 0.4% last month, raising concerns that monetary conditions may have to remain restrictive for longer than anticipated in order to sufficiently subdue underlying inflationary pressures.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated December 8, 2023) for further details.

FX diversification reduces portfolio risk

The predicted short-term risk of the Axioma global multi-asset class model portfolio plunged another 1.3 percentage points to 8.8% as of Friday, December 8, 2023, which marks its lowest level in two months. The risk reduction was primarily driven by a further contraction in equity volatility, as stock markets on both sides of the Atlantic recorded their sixth consecutive weekly gains. There was some further diversification benefit from exchange-rate losses of most currencies against the dollar, which meant that non-USD assets appeared less volatile than their American counterparts. This was also reflected in the slight reduction of the percentage risk contribution on non-US developed equities from 21.7% to 21.2%.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated December 8, 2023) for further details.