MAC Monitor — June 27, 2022

Multi-Asset Class Risk Monitor Highlights | Week Ended June 24, 2022

  • Fed recession warning weighs on bond yields
  • Dollar stalls over lower interest-rate and economic growth expectations
  • Lower equity volatility partly reverses spike in portfolio risk

Fed recession warning weighs on bond yields

Bond yields tumbled on both sides of the Atlantic in the week ending June 24, 2022, as traders aggressively slashed their expectations by how hard central banks are going to hit the monetary brakes. In his testimony to the Senate banking committee on Wednesday, Fed Chair Jerome Powell acknowledged that a recession was not an “intended outcome” but “certainly a possibility.” Market participants interpreted this as an indication that policy rates may not rise as much as previously anticipated. Short-term interest-rate (STIR) futures now imply that the federal funds rate will top out around 3.5% in early 2023, down from a forecasted peak of 4% in the middle of next year only two weeks earlier. Bond and STIR markets in the Eurozone and the UK experienced similar adjustments, with 25 basis points and 50 basis points, respectively, shaved off the anticipated high points of the corresponding base rates.

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated June 24, 2022) for further details.

Dollar stalls over lower interest-rate and economic growth expectations

The US dollar recorded its first weekly decline this month, with traders revising down both their interest-rate and economic-growth projections for the United States, as the Fed’s warning about a possible recession was underpinned by another decline in purchasing manager indices. The Dollar Index—a measure of the USD’s value against a basket for major trading partners—had climbed to its highest level in nearly two decades on June 14, boosted by the fastest rise in the federal funds target rate since 1994. The latest weakening of the greenback was spread across all other G10 currencies, with the Norwegian krone being the biggest beneficiary, as Norges Bank raised its policy rate from 0.75% to 1.25%—beating the consensus forecast of a 25-basis point hike—while the Swiss franc also expanded its gain from the previous week. The Japanese yen, on the other hand, was mostly flat against its American rival, as the country’s central bank retains its accommodative monetary stance.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated June 24, 2022) for further details.

Lower equity volatility partly reverses spike in portfolio risk

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio reversed some of the previous week’s upward spike, falling 2.6% to 19.9% as of Friday, June 24, 2022. Most of the decline was due to a drop in standalone equity volatility, as stock markets posted their first weekly gain of the month. Non-US shares experienced the biggest decrease in their percentage risk contribution, as their positive returns were augmented by gains in FX rates against the US dollar. On the flipside, the simultaneous rise in bond prices—which move inversely to yields and interest rates—meant that non-USD sovereign and investment-grade corporate bonds saw their combined share of overall portfolio risk grow by half a percentage point to 16.1%.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated June 24, 2022) for further details.