MAC Monitor — January 17, 2022

Multi-Asset Class Risk Monitor Highlights | Week Ended January 14, 2022

  • March Fed hike a near-certainty as inflation surges
  • Dollar falls as US stocks post a second week of losses
  • Portfolio risk holds steady, as bond selloff offsets lower equity volatility

March Fed hike a near-certainty as inflation surges

Short-term US Treasury yields rose to levels last seen at the end of February 2020—shortly before the Federal Reserve started slashing interest rates in response to the outbreak of COVID-19. The monetary policy-sensitive 2-year rate climbed 11 basis points to 0.97% as of Friday, January 14, 2022, as traders raised the implied probability of a Fed rate hike in March to a near-certain 92%. The moves followed the release of the latest inflation data earlier in the week, which showed that US consumer prices grew 7% in the 12 months ending December—the steepest year-on-year increase in nearly four decades. Longer-dated debt, in contrast, remained largely unaffected, as the beneficial effect of tighter monetary conditions on consumer prices over the medium term was expected to outweigh higher borrowing costs in the immediate future.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated January 14, 2022) for further details.

Dollar falls as US stocks post a second week of losses

The Dollar Index—a measure of the USD’s value against a basket of foreign currencies—fell to its lowest level since early November in the week ending January 14, 2022, as the American stock market ended the second trading week of the year with another loss. The STOXX® USA 900 fell 0.5% (-2.8% year-to-date), weighed down by growth stocks, which are particularly sensitive to higher interest rates. The greenback’s losses were widespread against most of its major trading partners, with the Japanese yen and the Norwegian krone being the biggest beneficiaries, as both gained around 1.5% against the USD.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated January 14, 2022) for further details.

Portfolio risk holds steady, as bond selloff offsets lower equity volatility

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio remained unchanged at 7.5% as of Friday, January 14, 2022, as the benefits of lower share-price volatility were offset by stronger exchange-rate fluctuations and an increased co-movement of equity and fixed-income instruments. Prices of the latter two tumbled for the second week in a row, with higher inflation and interest rates eroding the future cash flows of growth stocks and debt securities alike. Non-USD government, corporate, and inflation-linked bonds experienced the biggest increases in their risk contributions, hit by the double whammy of higher FX volatility and increased correlation with stock markets. US equities, on the other hand, saw their share of total portfolio risk plummet from 57.2% to 46.5%.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated January 14, 2022) for further details.