MAC Monitor — March 8, 2022

Multi-Asset Class Risk Monitor Highlights | Week Ended March 4, 2022

  • Ukraine crisis pushes Bund yields below zero once more
  • European stock market tumbles, dragging the euro with it
  • Portfolio risk falls, as equities and exchange rates decouple

Ukraine crisis pushes Bund yields below zero once more

Long Bund yields plunged back into negative territory in the week ending March 4, 2022, as investors abandoned stock markets for the relative safety of sovereign debt amid a further escalation of Russia’s invasion of Ukraine. Borrowing rates for the German government plummeted across all maturities, with declines ranging from 30 to 40 basis points. The monetary policy-sensitive 2-year yield fell 0.34%, as traders no longer expected the European Central Bank’s deposit rate—currently at -0.5%— to turn positive by the end of the year. That said, one rate hike of 0.25% is still priced into short-term interest-rate futures in the second half of 2022, as central bankers around the world face the ongoing quandary of fighting persistently high inflation without jeopardising economic recovery. A flash estimate from Eurostat on Wednesday indicated that consumer prices in the euro area had risen at a record pace of 5.8% in the 12 months ending February. In response, the 10-year breakeven rate—a measure of long-term inflation expectations derived from the prices of index-linked Bunds—soared 35 basis points to 2.39%, significantly exceeding the ECB’s 2% target for the first time since 2011.

Please refer to Figures 3 & 4 of the current Multi-Asset Class Risk Monitor (dated March 4, 2022) for further details.

European stock market tumbles, dragging the euro with it

The euro fell to its lowest level against the US dollar in 21 months in the week ending March 4, 2022, as European stock markets recorded their biggest weekly selloffs since the onset of the COVID crisis in March 2020. The EURO STOXX 50®, which tracks leading blue-chip stocks from eight Eurozone countries, and the German DAX® both lost more than 10%. Losses were less pronounced for the cross-regional STOXX® Europe 600 (-7%), due to its additional exposure to Switzerland, Norway, and the UK. The latter two countries have a higher proportion of energy companies, which benefitted from the continued surge in oil and gas prices. The Swiss franc, on the other hand, profited from its safe-haven status, which also lifted the Japanese yen.

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

Portfolio risk falls, as equities and exchange rates decouple

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio dropped 1.3% to 10.2% as of Friday, March 4, 2022, as exchange rates against the US dollar decoupled from share prices as well as each other, so that losses in some currencies were offset by gains in others. As a result, non-US developed and emerging-market stocks saw their combined share of total portfolio risk fall by 7 percentage points to 27.3%. However, these benefits were partly offset by greater price fluctuations in fixed-income markets, as well as a stronger co-movement of bond, gold, and oil prices, which all soared alongside the Japanese yen in the global flight to quality.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated March 4, 2022) for further details.