MAC Monitor — January 31, 2022

Multi-Asset Class Risk Monitor Highlights | Week Ended January 28, 2022

  • Fed cites strong economy, boosting short Treasury yields
  • Higher interest-rate expectations propel dollar to 19-month peak
  • Ongoing stock-market turbulence fuels portfolio risk

Fed cites strong economy, boosting short Treasury yields

Short US Treasury yields soared to their highest levels since the onset of the pandemic in the week ending January 28, 2022, after the Federal Reserve Bank announced that an increase in its policy rate “will soon be appropriate.” In the press conference following the FOMC meeting on Wednesday, Chair Jerome Powell noted that economy and labor market are “now much stronger” than they were when the Fed last began raising rates in 2015, although the ultimate policy path still remained “highly uncertain.” As of Friday, short-term interest-rate futures implied a 94% probability that the federal funds target corridor will be at least 1-1.25% by the end of February next year, with a 76% chance that it will be another 25 basis points higher.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated January 28, 2022) for further details.

Higher interest-rate expectations propel dollar to 19-month peak

The expectation of higher interest rates in the United States propelled the Dollar Index—a measure of the USD’s value against a basket of major trading partners—to its highest level in nearly 19 months. The euro fell 1.6% to $1.115—its weakest value since June 2020—underscoring the widening gaps between the two regions, both in terms of monetary-policy and economic-growth projections. Data released by the Federal Statistical Office on Friday showed that the German economy had shrunk by 0.7% in the final quarter of 2021, partly offsetting positive growth in other parts of the single-currency area. Accordingly, the European Central Bank is not expected to adjust its refinancing rate before October, with only one 25-basis point hike priced into Euribor futures before the year is out.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated January 28, 2022) for further details.

Ongoing stock-market turbulence fuels portfolio risk

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio surged another 1.5% to 10.9% as of Friday, January 28, 2022, driven by a 2-percentage point upswing in equity volatility, coupled with a stronger co-movement of share prices and exchange rates against the US dollar. The combination of these two effects had the biggest impact on non-US developed and emerging-market stocks, raising their combined share of total portfolio risk from 20.8% to 25.8%. US Treasuries, on the other hand, saw their percentage risk contribution slashed almost in half from 1.3% to 0.7%, as equity and bond prices decoupled once more. Oil prices, meanwhile, rose for a sixth consecutive week, amid ongoing supply shortages and rising concerns about a potential Russian invasion of Ukraine, turning the commodity into the biggest (and only) detractor from overall portfolio volatility.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated January 28, 2022) for further details.