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MAC Monitor — July 31, 2023

Multi-Asset Class Risk Monitor Highlights | Week Ended July 28, 2023

  • Euro and short Bund yields drop as ECB eases language on further rate hikes
  • Bank of Japan relaxes yield curve control, boosting the yen
  • Continued stock-market gains squeeze portfolio risk

Euro and short Bund yields drop as ECB eases language on further rate hikes

The euro and short-dated German sovereign yields both fell in the week ending July 28, 2023, as traders interpreted a subtle change in tone in the latest monetary policy announcement as a signal that borrowing rates may have peaked. The European Central Bank raised its policy rates by 25 basis points on Thursday—in line with market expectations—but deliberately tweaked the wording of its accompanying statement. The press release after the preceding meeting in June had indicated that interest rates would “be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target”, whereas the latest version proclaimed that rates would “be set at sufficiently restrictive levels.” ECB President Christine Lagarde later confirmed in the subsequent press conference that the change in the verb was “not just random or irrelevant”, though she still stopped short of providing any guidance on whether this meant that the central bank was done with tightening monetary conditions. Instead, Lagarde reiterated that the governing council’s approach would remain “data dependent.”

Most market participants still chose a dovish interpretation, and the euro depreciated 0.7% against the US dollar in the wake of the announcement, while the 12-month Bubill yield ended the week 8 basis points lower.

Please refer to Figures 3 & 6 of the current Multi-Asset Class Risk Monitor (dated July 28, 2023) for further details.

Bank of Japan relaxes yield curve control, boosting the yen

The Bank of Japan surprised markets by slightly tweaking its yield curve control (YCC) policy on Friday, July 28, 2023, prompting a surge in both sovereign yields and the yen. Even though the central bank technically maintained its cap of 0.5% on the 10-year point of the JGB curve, it reframed the threshold as a “reference” rather than a “rigid limit”, indicating that it would only intervene if long-term borrowing rates were to breach above 1%. That being said, the BoJ did not seem ready to completely abandon its ultra-loose monetary policy just yet, leaving its short-term interest rate target at -0.1%.

Nevertheless, the yen received a boost from the announcement, rallying 0.7% against its American rival, as short-term interest-rate futures markets seemed to imply a 70% probability that the Federal Reserve was done with tightening borrowing conditions for the current cycle.

Please refer to Figures 4 & 6 of the current Multi-Asset Class Risk Monitor (dated July 28, 2023) for further details.

Continued stock-market gains squeeze portfolio risk

A drop in share-price volatility further squeezed the predicted short-term risk of Qontigo’s global multi-asset class model portfolio from 9.7% to 8.4% as of Friday, July 28, 2023, as US and pan-European stock markets recorded a third consecutive week of gains. Non-US developed equities recorded the biggest reduction in their share of total portfolio risk from 24.5% to 23.8%, as most major currencies—with the notable exception of the Japanese yen—were either flat or weaker against the US dollar. The countermovement of share prices and exchange rates also benefitted non-USD-denominated government bonds, which experienced a marginal reduction in their percentage risk contribution.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated July 28, 2023) for further details.