MAC Monitor — March 14, 2022

Multi-Asset Class Risk Monitor Highlights | Week Ended March 11, 2022

  • Accelerating US inflation depresses stocks and bonds alike
  • Euro strengthens as European stocks recover
  • Higher volatility and cross-asset correlations boost portfolio risk

Accelerating US inflation depresses stocks and bonds alike

American stock and bond prices fell in unison in the week ending March 11, 2022, as US inflation surged for the sixth month in a row. Data released on Thursday showed that consumer prices had grown 7.9% in the 12 months ending February. With the recent upward shock in energy and commodity prices likely to add even more upward pressure over coming months, breakeven-inflation rates for the 5-year and 10-year maturities rose 0.32% and 0.27%, respectively, lifting the corresponding nominal US Treasury yields by similar amounts. The monetary policy-sensitive 2-year rate also climbed 0.29%, as traders revised their monetary-policy expectations yet again. Federal-funds futures have now priced in an additional rate hike to 1.75% by the end of the year, with the implied probability of a 50-basis point step in May rising to 40%.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated March 11, 2022) for further details.

Euro strengthens as European stocks recover

The euro strengthened 0.4% against the US dollar in the week ending March 11, 2020, as European equity benchmarks recouped some of their losses in previous weeks. The EURO STOXX 50® and the STOXX® Europe 600 gained 3.7% and 2.4%, respectively, outperforming the STOXX® USA 900, which ended the week 3% in the red. The common currency received additional support from higher interest rates and bond yields, as the European Central Bank announced after its monthly meeting on Thursday that it would scale back its bond-buying program faster than initially planned, paving the way for a potential rate hike in the second half of the year. In response, the 10-year German Bund yield climbed into positive territory once again, while Euribor futures now indicate that the central-bank deposit rate may rise from -0.5% to -0.25% by as early as July.

Please refer to Figures 4 & 6 of the current Multi-Asset Class Risk Monitor (dated March 11, 2022) for further details.

Higher volatility and cross-asset correlations boost portfolio risk

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio soared more than 2 percentage points to 12.3% as of Friday, March 11, 2022, driven by stronger share-price fluctuations, combined with a more intense co-movement with exchange rates against the US dollar. The effect was most pronounced for non-US equities—developed and emerging markets—which saw their combined share of overall risk surge by 8.3 points to 35.7%. Non-USD denominated corporate bonds, meanwhile, were hit by a perfect storm of higher risk-free rates, widening credit spreads, a strengthening dollar, and a higher correlation with stock-market returns. This was in contrast to the oil and gold holdings, which both significantly reduced overall portfolio volatility, due to their increasingly inverse interactions with share prices.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated March 11, 2022) for further details.