MAC Monitor — January 18, 2021

Multi-Asset Class Risk Monitor Highlights | Week Ended January 15, 2021

Italian risk premium rises after cabinet resignations; Dollar strengthens on safe-haven flows; Portfolio risk falls, as share prices and exchange rates decouple

Italian risk premium rises after cabinet resignations

The risk premium on Italian government securities rose to its highest level in almost two months in the week ending January 15, 2021, reflecting increased uncertainty over the country’s coalition government. The yield pickup of 10-year BTPs over same-maturity German Bunds climbed to 120 basis points—a level last seen in late November—on Thursday, after former Prime Minister Matteo Renzi announced that three ministers from his Italia Viva party were quitting the current cabinet. Meanwhile, the slower-than-hoped-for vaccine rollouts, combined with the prospect of extended lockdowns in many European countries, put additional downward pressure on high-quality sovereign yields. Consequently, the 10-year Bund rate—the risk-free benchmark for the Eurozone bond market—experienced a weekly decline of 2 basis points, the largest among all major governments.

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated January 15, 2021) for further details.

Dollar strengthens on safe-haven flows

The US dollar reinforced its status as a global safe haven in the week ending January 15, 2021, as US stock indices booked their biggest weekly loss since the end of October. The euro was among the hardest hit currencies, depreciating 1.3% against its American rival, amid concerns over slow vaccination progress and prolonged national lockdowns. Losses were even greater for the Norwegian krone, which faced additional downward pressure from a sharp drop in oil prices on Friday. That said, predicted short-horizon risk for EUR/USD was largely unchanged at around 6.4%, as volatility in the FX markets remained relatively stable.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated January 15, 2021) for further details.

Portfolio risk falls, as share prices and exchange rates decouple

Short-term risk in Qontigo’s global multi-asset class model portfolio fell another 0.9% to 7.0% as of Friday, January 15, 2021, as the co-movement between exchange rates and share prices weakened even further. As a result, non-US developed equities experienced a bigger decline in risk contribution relative to their market-value weight than their American counterparts. The inverse relationship between stock and bond returns, on the other hand, intensified, so that US Treasuries and investment-grade corporate bonds once more notably decreased total portfolio volatility, alongside gold, which also regained its risk-reducing properties. The Japanese yen, meanwhile, remained uncoupled from the US stock market, neither raising nor lowering overall risk.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated January 15, 2021) for further details.