MAC Monitor — May 18, 2021

Multi-Asset Class Risk Monitor Highlights | Week Ended May 14, 2021

Inflation surges…and (predictably) stock and bond prices dip

Stock and bond prices fell in tandem in the week ending May 14, 2021, as a surprise surge in US realized inflation rattled financial markets across the globe. The Bureau of Labor Statistics announced on Wednesday that consumer prices had risen by 4.2% in the 12 months to April—more than twice the Federal Reserve’s average target of 2%. It was also the highest year-on-year growth rate reported since September 2008. As a result, the 10-year US Treasury benchmark rate climbed 6 basis points, while the STOXX® USA 900 blue-chip index fell 2.2% in its biggest daily drop since late February. Rising inflation rates erode the value of future cash flows, which is detrimental to both fixed income and equity securities—especially growth stocks, which are expected to deliver large portions of their earnings farther down the line. If sustained, the uptick would also likely induce central banks to tighten monetary policy conditions earlier and more decisively than previously anticipated.

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated May 14, 2021) for further details.

Pound rises, as UK continues to ease lockdown measures

The British pound rose to its highest level in more than three years in the week ending May 14, 2021, as Prime Minister Boris Johnson signed off on the third stage of lifting lockdown restrictions. The GBP/USD exchange rate surpassed $1.4140 for the first time since April 2018 on Tuesday, after Johnson confirmed that hotels, cinemas, and fitness centers could reopen from May 17 as planned, while pubs and restaurants will now be allowed to serve customers indoors. The currency was further bolstered by a series of victories for the Conservative party in several regional elections across England—fueled by the successful vaccine rollout—which strengthened the prime minister’s grip on power.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated May 14, 2021) for further details.

As volatilities and correlations increase, portfolio risk soars

Short-term risk in Qontigo’s global multi-asset class model portfolio soared 2.9% to 8.6% as of Friday, May 14, 2021, as an upsurge in consumer prices created a perfect storm of rising volatilities and intensifying cross-asset correlations. The effect was most notable for non-USD securities—equities and bonds—which had their losses amplified by exchange-rate losses against a strengthening dollar. Non-US sovereign bonds experienced the biggest rise in their percentage risk contribution from 4.8% to 6.9%. Oil, on the other hand, saw its share of overall portfolio volatility drop 1.4% to 1% (half its market-value weight), as crude prices ended the week slightly higher, thus offsetting losses in other asset classes.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated May 14, 2021) for further details.