MAC Monitor — October 6, 2020

Multi-Asset Class Risk Monitor Highlights | Week Ended October 2, 2020

UK curve steepens, as BoE mulls negative rates; Dollar drops and share prices recover—again; Portfolio risk falls on weaker equity/oil interaction

UK curve steepens, as BoE mulls negative rates

The monetary policy-sensitive 2-year Gilt yield climbed to its least negative level in more than a month in the week ending October 2, 2020, as mixed messages from Bank of England officials left traders guessing about the future direction of short-term interest rates. Governor Andrew Bailey, when asked to clarify the Bank’s stance on negative rates, declared that no firm judgement had been reached. In the meantime, other rate setters, such as external MPC member Silvana Tenreyro (in favour) and Deputy Governor Dave Ramsden (against), explicitly voiced their particular preferences. The long end, meanwhile, rose more strongly, alongside US Treasuries, lifted by recovering share prices, resulting in a steeper yield curve.

Please refer to Figures 3 & 4 of the current Multi-Asset Class Risk Monitor (dated October 2, 2020) for further details.

Dollar drops and share prices recover—again

The US dollar depreciated 0.8% against a basket of foreign currencies in the week ending October 2, 2020, following the now familiar pattern of rising share prices and weakening currency (or vice versa), which we have observed in 21 of the past 30 weeks. The pound sterling was one of the biggest beneficiaries, gaining almost 2% against its American rival. This also resulted in a further decrease in predicted volatility for GBP/USD to under 10.5%, down from the risk levels of more than 12% observed between March and August. That said, the ongoing Brexit uncertainty still means that the pound is perceived as far more risky than, for example, the euro, the Japanese yen, or the Swiss franc, all of which exhibit short-horizon volatilities of around 7-7.5%.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated October 2, 2020) for further details.

Portfolio risk falls on weaker equity/oil interaction

Short-term risk in Qontigo’s global multi-asset class model portfolio fell 0.5% to 9.6% as of Friday, October 2, 2020. As the majority of asset-class volatilities and correlations was largely unchanged, most of the portfolio risk reduction was driven by a weakening in the interaction of oil and share prices. The value of oil is usually very closely tied to stock-market performance. However, last week’s drop in the oil price, while equities rebounded, meant that the two asset classes started to decouple. This was reflected in a lower risk contribution from the oil holding, which saw its share of overall portfolio volatility drop by 1.5 percentage points to 3.2%. Emerging-market equities also experienced a 1.1% reduction in their risk contribution to 6.0%, largely due to a decrease in standalone volatility, and a slightly weaker correlation with US share prices.

Chart

Description automatically generated

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated October 2, 2020) for further details.