Continue active refreshing of this index's data?

Continue active refreshing of this index's data?

MAC Monitor — July 18, 2023

Multi-Asset Class Risk Monitor Highlights | Week Ended July 14, 2023

  • Surprise drop in US inflation crushes the dollar
  • Credit spreads continue to tighten as US stocks post 15-month high
  • Cross-asset class gains boost portfolio risk

Surprise drop in US inflation crushes the dollar

The US dollar lost more than 2% against a basket of major trading partners in the week ending July 14, 2023, as a larger-than-expected drop in US headline inflation prompted traders to scale back their expectations for further rate hikes from the Federal Reserve. While a 25-basis point increase in the federal funds target at the next FOMC meeting later this month is still considered a certainty, the implied probability of additional tightening by year end has fallen from a one-in-three chance to just over 20%.

The Bureau of Labor Statistics (BLS) reported on Wednesday that American consumer prices had grown by just under 3% in the twelve months ending in June, triggering the biggest daily and weekly drop in the Dollar Index since last November. That being said, the dip in annual inflation was mostly due to a base effect, as a monthly increase of 1.4% in June 2022 dropped out of the calculation, whereas overall price levels fell in both July and August last year. This means that even a moderate price increases in July and August would result in a resurgence in the year-on-year inflation rates.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated July 14, 2023) for further details.

Credit spreads continue to tighten as US stocks post 15-month high

Risk premia on USD-denominated corporate debt tightened to their lowest levels since early March in the week ending July 14, 2023, as US share prices reclaimed levels last seen in April 2022 amid more signs that inflation in the world’s largest economy may be cooling. The STOXX® USA 900 index climbed to a 15-month high on Thursday after another report from the BLS showed that US producer prices in June were almost flat (+0.1%) compared with the same month last year. Combined with the accompanying drop in sovereign yields, this meant that riskier corporate securities outperformed higher-quality debt.

Please refer to Figure 5 of the current Multi-Asset Class Risk Monitor (dated July 14, 2023) for further details.

Cross-asset class gains boost portfolio risk

The predicted short-term risk of Qontigo’s global multi-asset class model portfolio soared 3.5 percentage points to 11.2% as of Friday, July 14, 2023, as stock and bond prices rallied together with exchange rates against the US dollar, all propelled by the downward revision of monetary policy expectations. Non-USD-denominated sovereign securities took the brunt of the risk increase expanding their share of overall portfolio risk by nearly 4 percentage points to 9.6%. US investment grade debt also saw its percentage risk contribution almost double to 4.7%, as gains from lower risk-free rates were amplified by tighter credit spreads. With total portfolio volatility dominated by foreign-currency assets, US equities appeared much less risky relative to their monetary weight than their counterparts from other parts of the developed world.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated July 14, 2023) for further details.