by Qontigo
- Contracting UK economy sends Gilt yields tumbling
- ECB hints that rates may have peaked…and the euro tanks
- Portfolio risk falls as FX losses dampen equity gains
Contracting UK economy sends Gilt yields tumbling
Borrowing costs for the British government tumbled across most maturities in the week ending September 15, 2023, as a larger-than-expected contraction in economic activity reinforced the notion that the Bank of England (BoE) could be nearing the end of its current rate-hiking cycle. The Office for National Statistics reported on Wednesday that UK GDP had shrunk 0.5% in July, undershooting analyst predictions of -0.2% month-on-month growth. A major driver behind the weaker reading was industrial action in the education, healthcare, and transportation sectors, which now poses a serious dilemma for the BoE, as continuous strong wage growth could eventually embed higher inflation expectations in the overall economy. Short-term interest-rate forwards currently imply that the Bank will raise its base rate once more to 5.5%—most likely this week—and then leave it at that level for at least 12 months.
Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated September 15, 2023) for further details.
ECB hints that rates may have peaked…and the euro tanks
The euro fell to its lowest level against the US dollar in six months in the week ending September 15, 2023, after the European Central Bank (ECB) indicated that it may be done with tightening monetary conditions for this cycle. In the statement accompanying its decision to raise policy rates for a tenth consecutive time, the ECB governing council announced that interest rates had “reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.” The central bank’s staff projections see consumer-price growth remain slightly elevated around 3% throughout 2024, before it eventually reverts to the 2% target in 2025. Short-term interest-rate futures markets are tentatively pricing in a first rate cut for the middle of next year.
Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated September 15, 2023) for further details.
Portfolio risk falls as FX losses dampen equity gains
The predicted short-term risk of Qontigo’s global multi-asset class model portfolio plummeted a whole percentage point to 7.4% as of Friday, September 15, 2023, as local stock market gains in Europe were dampened by weakening exchange rats against the US dollar. This had the double benefit of lower share-price volatility as well as a less positive correlation between equity and FX returns. That being said, it was non-USD-denominated government bonds that saw the biggest decrease in their percentage risk contribution, as their returns seemed less correlated with US equities when converted into the portfolio base currency.
Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated September 15, 2023) for further details.
