MAC Monitor — September 13, 2021

Multi-Asset Class Risk Monitor Highlights | Week Ended September 10, 2021

  • Sparked by inflation fears, stocks and bonds fall
  • Bund curve steepens, as ECB raises growth forecast but maintains rate outlook
  • Index linkers offset equity losses, cutting portfolio risk

Sparked by inflation fears, stocks and bonds fall

Stock and bond prices plunged in unison in the week ending September 10, 2021, as a stronger-than-expected rise in producer prices revived inflation fears. American equities experienced their worst weekly performance in nearly three months, while global sovereign yields—which move inversely to bond prices—climbed to their highest levels since mid-July. The US Producer Price Index (PPI) for final demand climbed 0.7% in the month of August, slightly outstripping the consensus forecast of 0.6%. Factory-gate costs had been rising at an average of 0.67% in the past 12 months, taking the total year-on-year increase to 8.3%. To put this into perspective, medium monthly changes would have to decline to 0.17% for the annual rate to fall back to 2%.

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated September 10, 2021) for further details.

Bund curve steepens, as ECB raises growth forecast but maintains rate outlook

The term spread between long and short-dated German Bunds rose to its widest level in almost two months in the week ending September 10, 2021, as the European Central Bank lifted its inflation and economic growth projections for the single-currency area, while leaving its interest-rate outlook unchanged. In the press conference following Thursday’s governing council meeting, ECB President Christine Lagarde said that asset purchases under the pandemic emergency purchase programme would continue, though at “a moderately lower pace…than in the previous two quarters.” The 10-year benchmark yield declined 0.04% following the announcement, but still ended the week 2 basis points in the black, due to strong increases in the runup to the meeting. At the same time, the governing council stressed that it “expects the key ECB interest rates to remain at their present or lower levels until it sees inflation reaching two per cent…durably for the rest of the projection horizon.” As a result, the monetary policy-sensitive 2-year rate remained unchanged at -0.71%.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated September 10, 2021) for further details.

Index linkers offset equity losses, cutting portfolio risk

Short-term risk in Qontigo’s global multi-asset class model portfolio fell another 0.4% to 5.9% as of Friday, September 10, 2021, as losses in stocks and sovereign bonds were offset by gains in inflation-protected securities. The prices of the latter were lifted by a rise in breakeven rates, following last week’s strong PPI report. As a result, global index-linked bonds experienced the biggest drop in percentage risk contribution from 2.4% to 0.7%. Non-US developed and emerging-market equities also saw their share of overall portfolio volatility decline, due to a slightly lower correlation between stock prices and exchange rates, which dampened their return volatility in USD terms.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated September 10, 2021) for further details.