MAC Monitor — November 10, 2020

Multi-Asset Class Risk Monitor Highlights | Week Ended November 6, 2020

Government yields see-saw amid election turbulence; Dollar falls, as risk appetites return; Portfolio risk surges, as global equity correlation intensifies

Government yields see-saw amid election turbulence

Sovereign yields around the globe fluctuated in the week ending November 6, 2020, as the outcome of the US presidential election proved to be considerably less decisive than opinion polls had suggested. The 10-year US Treasury benchmark dropped 11 basis points in its biggest daily plunge since March on Wednesday, after initial results in several battleground states showed a stronger-than-expected performance for Donald Trump and the Republican Party. However, yields rebounded later in the week, lifted by improving labor-market data and the prospect that the election may be nearing a result, reducing the weekly decline to just -0.04%. European sovereign rates, meanwhile, ended the week slightly in the black, reducing the 10-year Treasury-Bund gap by 6 basis points to 1.45%.

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Please refer to Figures 4 of the current Multi-Asset Class Risk Monitor (dated November 6, 2020) for further details.

Dollar falls, as risk appetites return

The US dollar depreciated almost 2% against a basket of foreign currencies in the week ending November 6, 2020, as American blue chips recorded their strongest weekly performance since the middle of April. The opposite movements of the US stock market and the value of its currency continued the predominant pattern observed over the past eight months, with the rise in share prices and the fall in the dollar indicating returning risk appetites. Underscoring that shift, the Japanese yen—also a barometer of risk tolerance—posted the lowest gain of “only” 1.2% among all major currencies. That said, the JPY still rose to its highest value since mid-March, while its predicted short-horizon volatility remained near 8-month lows of just above 7%.

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

Portfolio risk surges, as global equity correlation intensifies

Short-term risk in Qontigo’s global multi-asset class model portfolio soared 5.6% to 16.3% as of Friday, November 6, 2020, amid another surge in standalone equity volatility from 16% to 24% (calibrated on daily returns over three months). As the sharp rise in share prices last week was accompanied by a strong appreciation of most major currencies against the US dollar, global equities appeared to be even more correlated across regions than usual, resulting in bigger contributions to overall portfolio volatility. The relative increase was most notable for emerging-market stocks, which saw their percentage share of risk expand from 4.5% to 6.3%. USD-denominated investment-grade corporate bonds experienced a similar rise in their percentage risk contribution, as the co-movement of equity and credit-spread returns intensified, while sovereign yields were mostly decoupled from either. The latter also meant that US Treasuries no longer actively reduce overall portfolio volatility.

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Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated November 6, 2020) for further details.