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MAC Monitor — September 26, 2022

Multi-Asset Class Risk Monitor Highlights | Week Ended September 23, 2022

  • UK ‘mini’ budget boosts yields and flattens Gilt curve
  • Third ‘jumbo’ Fed hike propels dollar to fresh 20-year high
  • Portfolio risk soars as correlations intensify

UK ‘mini’ budget boosts yields and flattens Gilt curve

British sovereign yields rose at their fastest pace in nearly 13 years in the week ending September 23, 2022, as the new Chancellor Kwasi Kwarteng announced an expansive package of tax cuts in his ‘mini’ budget on Friday. As this will mostly be funded through additional borrowing, the 10-year Gilt yield soared more than 60 basis points in response—its steepest rise since the aftermath of the global financial crisis in early 2009—while the 5-year and 2-year rates jumped by 0.9% and 0.8%, respectively. The UK government curve is now mostly flat around the 4% mark from 2 years onward. The stronger increase in short and medium-term rates reflects the expectation that the Bank of England will have to raise rates even more aggressively than previously anticipated in order to curb further inflationary pressures from the additional fiscal stimulus.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated September 23, 2022) for further details.

Third ‘jumbo’ Fed hike propels dollar to fresh 20-year high

The Dollar Index—a measure for the USD’s value against a basket of major trading partners—climbed to a fresh 20-year high in the week ending September 23, 2022, as the Federal Reserve maintained its most aggressive tightening of monetary conditions since 1981. The Federal Open Market Committee raised rates by 0.75% for the third consecutive time, while also anticipating “that ongoing increases in the target range will be appropriate.”

The greenback’s gains were spread across a wide range of its major competitors, with the Japanese yen was the only notable exception. The JPY/USD exchange rate ended the week mostly flat after the Bank of Japan intervened in FX markets (for the first time since 1998) on Thursday in an attempt to stabilize the its faltering currency.

The British pound, meanwhile, was the biggest loser among the G10 currencies, depreciating around 5% against it American counterpart, as Thursday’s 0.5% rate hike from the Bank of England did little to counteract the adverse effect from the budget announcement the day after.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated September 23, 2022) for further details.

Portfolio risk soars as correlations intensify

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio climbed another 1.1% to 15.7% as of Friday, September 23, 2022, amid a simultaneous sell-off in stock, bond, and FX markets. The intensifying co-movement of major risk-factor returns meant that there were yet fewer opportunities for diversification and overall risk reduction. Most asset classes now contribute substantially to total volatility, with the exception of oil and the Japanese yen, which were the only two holdings that were largely uncorrelated with the other positions in the portfolio.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated September 23, 2022) for further details.