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MAC Monitor — November 29, 2022

Multi-Asset Class Risk Monitor Highlights | Week Ended November 25, 2022

  • European stocks rally despite yield curve inversion
  • Dovish Fed minutes depress dollar
  • Ongoing stock-market recovery reduces portfolio risk, but diversification remains limited

European stocks rally despite yield curve inversion

European stocks climbed to a 3-month high in the week ending November 25, 2022, boosted by a better-than-expected report on business confidence in the continent’s largest economy. The regional STOXX® Europe 600 rose for the sixth week in a row, as the ifo business climate index—a confidence survey of 9,000 German companies—improved more than analysts had predicted. The strong reading and the accompanying share-price gains seemingly contradicted signals from the bond market, where the German Bund curve exhibited its deepest inversion since the run-up to global financial crisis. The term spread of the 10-year benchmark yield over the 2-year maturity dropped to -18 basis points on Thursday—its lowest level since June 2008. The rise in short rates indicates that the European Central Bank is expected to raise interest rates more than previously anticipated to reign in inflation, whereas the lower long-term borrowing costs reflect the associated costs in terms of weaker economic growth or even a potential recession.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated November 25, 2022) for further details.

Dovish Fed minutes depress dollar

The US dollar continued to weaken against a basket of major trading partners in the week ending November 25, 2022, as the minutes from the Federal Reserve meeting earlier this month showed that a “substantial majority” of rate setters judged that a slowing in the pace of monetary tightening “would likely soon be appropriate.” The euro traded above $1.04 for the first time since the end of June, boosted by the improvement in business confidence in the currency bloc’s economic powerhouse. Despite the strong recovery from its low of $0.96 in late September, predicted short-horizon volatility for the EUR/USD exchange rate continued to climb to a 6-year high of 9.7%.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated November 25, 2022) for further details.

Ongoing stock-market recovery reduces portfolio risk, but diversification remains limited

The predicted short-term volatility of Qontigo’s global multi-asset class model portfolio plummeted to 18% as of Friday, November 25, 2022, compared with 19.8% a week earlier. Most of the overall risk reduction was observed in the equity categories, as global stock markets kept recovering, especially in Europe. That being said, correlations across asset classes and major risk factors remained mostly positive, so that diversification opportunities continued to remain severely limited. Oil showed the smallest risk contribution—both on an absolute level and relative to its market-value weight—as its price was uncoupled from all other securities in the portfolio. Corporate bonds also benefitted from a weak interaction of credit spreads with FX returns, share prices and interest rates alike.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated November 25, 2022) for further details.