MAC Monitor — November 22, 2021

Multi-Asset Class Risk Monitor Highlights | Week Ended November 19, 2021

  • Europe toughens COVID restrictions, spurring safe-haven flows
  • Euro continues to drop as monetary policies diverge
  • Safe-haven flows drive down portfolio risk

Europe toughens COVID restrictions, spurring safe-haven flows

The yield on 10-year German sovereign debt fell 9 basis points to -0.35% in the week ending November 19, 2021, as investors sought safe havens amid tightening COVID restrictions in Europe. Governments across the continent announced tougher measures, such as regional and national lockdowns and working-from-home restrictions, as many countries recorded their highest daily case loads since the onset of the pandemic.

Yield increases were less pronounced in the United Kingdom, however, where the latest inflation release reinforced traders’ expectations that the Bank of England will raise its base rate to 0.25% as early as next month. The data from the Office of National Statistics published on Wednesday showed that British consumer prices had grown by 4.2% in the 12 months to October—the fastest pace in a decade.

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated November 19, 2021) for further details.

Euro continues to drop as monetary policies diverge

The euro fell to its lowest level against the US dollar since early July 2020 in the week ending November 19, 2021, driven by a widening gap in monetary-policy expectations in the Eurozone and the United States. The Dollar Index, which measures the greenback’s value relative to a basket of major trading partners, climbed to a 16-month high on Friday, mostly against its European rival. The move was prompted by remarks from Federal Reserve Vice Chair Richard Clarida that the Federal Open Market Committee would review the pace at which it will reduce its asset purchases over the coming month at its next meeting. Other rate-setters also supported the idea of more aggressive tapering, especially in the light of the recent surges in consumer-price inflation.

There was less unity among central-bank officials on the other side of the Atlantic, however, where European Central Bank President Christine Lagarde stressed that the bank “must not rush into a premature tightening” of monetary conditions, while outgoing Bundesbank President and ECB Governing Council Member Jens Weidmann insisted that “monetary policy should not commit to its current very expansionary stance for too long.”

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated November 19, 2021) for further details.

Safe-haven flows drive down portfolio risk

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio plummeted one percentage point to 5.9% as of Friday, November 19, 2021, as investors abandoned stock markets for the relative safety of sovereign debt, once more pushing the two assets in opposite directions. Part of this benefit was offset by higher exchange-rate volatility from a strengthening dollar, but a lower correlation between FX and equity returns also meant that the percentage risk contribution from non-US developed shares was only marginally higher than their monetary weight of 15%. The effect was even more pronounced for emerging-market stocks, whose share of overall portfolio risk of 2.4% was less than half their market-value weight of 5%. High quality sovereign and corporate bonds, on the other hand, saw their combined percentage risk contribution rise by 4 percentage point, whereas high yield securities continued to benefit from the ongoing inverse relationship of interest rates and credit spreads.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated November 19, 2021) for further details.