MAC Monitor — December 1, 2020

Multi-Asset Class Risk Monitor Highlights | Week Ended November 27, 2020

Credit risk premia fall as US election results are certified; Dollar weakens as risk appetites rise; Continued decline in equity volatility further blunts portfolio risk

Credit risk premia fall as US election results are certified

Risk premia on credit securities fell to their lowest levels since late February in the week ending November 27, 2020, as US stock markets climbed to yet greater heights. American blue-chip benchmarks posted their highest levels on record, as states certified their election results, despite President Trump’s continued assertions of election fraud and tampering. Risky assets received a further boost from the announcement of yet another potential coronavirus vaccine breakthrough.

The increase in risk appetites also benefitted fiscally weaker governments in the Eurozone, which received additional support from the European Central Bank. The 10-year risk premium of Italian BTPs over German Bunds, for instance, dropped to 116 basis points—its tightest since March 2016.

Please refer to Figure 5 of the current Multi-Asset Class Risk Monitor (dated November 27, 2020) for further details.

Dollar weakens as risk appetites rise

The Dollar Index—a measure of the USD’s value against a basket of its largest trading partners—depreciated 0.7% in the week ending November 27, 2020. The move extends the by now familiar pattern of rising share prices and weakening US dollar, as investors continued to withdraw their funds from lower-risk assets, amid increasing hopes of an impending economic recovery. The Japanese yen—another traditional safe haven—was the only major currency to record a loss last week, underscoring the notion that the move was driven by increasing risk appetites. That said, short-term volatility for the JPY/USD currency pair also declined by 0.2% to 7.1%.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated November 27, 2020) for further details.

Continued decline in equity volatility further blunts portfolio risk

Short-term risk in Qontigo’s global multi-asset class model portfolio fell 0.9% to 12.8% as of Friday, November 27, 2020, once more driven by a further drop in stock-market volatility. The biggest declines in absolute risk contributions were once again recorded in the three equity buckets. The oil holding, in contrast, saw its share of overall volatility rise by one percentage point to 4.8%, as its correlation with share prices increased slightly. This was offset, however, by a similar size drop in the percentage risk contribution from gold, which decoupled completely from stock markets. As a consequence, the precious metal neither added to nor subtracted from overall portfolio volatility, similar to other safe-haven assets, such as the Japanese yen and US Treasuries.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated November 27, 2020) for further details.