MAC Monitor — October 27, 2020

Multi-Asset Class Risk Monitor Highlights | Week Ended October 23, 2020

Treasury yields surge further, lifted by stimulus hopes; Pound strengthens over Brexit progress; Portfolio risk drops, as equity volatility and exchange-rate interaction fall

Treasury yields surge further, lifted by stimulus hopes

US Treasury yields surged to their highest levels in over four months in the week ending October 23, 2020, lifted by expectations that a fiscal stimulus package would be agreed upon by Democrats and Republicans over the weekend—a hope later dashed. The 10-year benchmark rate climbed 10 basis points to 0.86%. Increases in the Eurozone, in contrast, were considerably more subdued, with the same-maturity German Bund rate rising only 6 basis points to -0.56%, as an increasing number of countries and regions within the single-currency area reintroduced lockdown measures. This meant that the gap between the two major risk-free benchmarks expanded to 1.42%—the widest since the peak of the liquidity crisis in March.

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Please refer to Figures 4 of the current Multi-Asset Class Risk Monitor (dated October 23, 2020) for further details.

Pound strengthens over Brexit progress

The pound sterling strengthened nearly 1% against the US dollar in the week ending October 23, 2020, buoyed by indications that a Brexit deal might be reached before the end of the transition period on December 31. The British currency surged more than 1.5% on Wednesday—its strongest daily gain since March—following comments from both sides that intensive talks would resume, if the other party were prepared to compromise. Bank of England Deputy Governor Dave Ramsden provided further fuel for the rally, saying that now was not the “right time” to lower interest rates below zero in yet another apparent U-turn from the rate setters on Threadneedle Street.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated October 23, 2020) for further details.

Portfolio risk drops, as equity volatility and exchange-rate interaction fall

Short-term risk in Qontigo’s global multi-asset class model portfolio dropped 1.3% to 7.9% as of Friday, October 23, 2020, thanks mostly to a further decrease in share-price volatility and a less positive correlation between equity and FX returns. Three quarters of the risk reduction was recorded in the three equity buckets, with the biggest percentage risk decline in the non-US equity category, which benefitted from both effects. Non-USD fixed-income assets also saw their volatility contributions decrease, as the weaker interaction between exchange rates and share prices made their returns appear less correlated with the US stock market.

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Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated October 23, 2020) for further details.