MAC Monitor — September 15, 2020

Multi-Asset Class Risk Monitor Highlights | Week Ended September 11, 2020

Sovereign yields end the week lower; Currency moves confirm investors’ unease about rising uncertainty; Portfolio risk rises for the second week in a row

Sovereign yields end the week lower

Yields on high quality sovereign bonds ended the week of September 11 in the same direction, giving up all the prior days’ gains. The continued absence of details about new stimulus packages on both sides of the Atlantic, combined with rising volatility in the equity market, drove some investors to seek the safety of government bonds. The yield on the 10-year US Treasury benchmark ended the holiday-shortened week down about 6 bps, reversing its climb of the previous week on the back of a better-than expected jobs report for August. Continued delays in the post-Brexit trade agreement between the UK and the EU weighed on risk appetites in Europe, causing a similar preference for government bonds and resulting in lower long-bond yields for both the Euro and GBP 10-year government bonds. At the same time, the leadership transition in Japan prompted investors in that country to favor the safety of government bonds over riskier asset classes, pushing the yield on the 10-year closer to negative territory.

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Please refer to Figures 3 & 4 of the current Multi-Asset Class Risk Monitor (dated September 11, 2020) for further details.

Currency moves confirm investors’ unease about rising uncertainty

Failure to pass a second stimulus package in the US weighed on the USD, with Japanese investors returning to the safety of the JPY and driving the JPY up against the dollar. Similarly, in Europe, the deadlock in the post-Brexit trade negotiations impacted the GBP, as investors feel a no-deal Brexit would be worse for the UK than for the EU. The GBP declined another 4 bps against the USD, which itself was not favoured by investors last week and has now broken the uptrend started in May to finish the week below its recent 1.30 support level. The GBP remains the most volatile of the big four currencies by far, despite becoming less risky since June. Currency volatility is at its lowest point of the last six months, but with deadlines looming on key geopolitical decisions with the US presidential election, Brexit trade negotiations, and the leadership transition in Japan, FX markets may soon become more volatile again.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated September 11, 2020) for further details.

Portfolio risk rises for the second week in a row

Short-term risk in Qontigo’s global multi-asset class model portfolio jumped 2.3% to 9.30% as of Friday, September 11, 2020. The increase resulted from a combination of higher standalone volatility for US equities, Oil, and Emerging Market equities, as well as a less negative interaction of equity and bond returns and a higher positive interaction between equity and currency returns in the portfolio. US Equities now comprise 58% of portfolio risk, despite being only 30% of its weight. Oil jumped to a risk contribution of 7% from just 3% last week, despite being only 2% of the portfolio. The diminishing diversification between equities and bonds means that the negative contribution to portfolio risk from US Treasuries and US investment-grade bonds has now become a positive contribution. Every asset class in the portfolio now contributes positively to portfolio risk. This resulted in a 37-bps loss in portfolio diversification, which together with the 192-bps increase in volatility increased portfolio risk by 230 bps this past week.

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Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated September 11, 2020) for further details.