MAC Monitor — September 27, 2021

Multi-Asset Class Risk Monitor Highlights | Week Ended September 24, 2021

  • Hawkish central banks boost global sovereign yields
  • Traders up probability of earlier BoE rate hike, lifting Gilt curve
  • Stock-market turmoil heightens portfolio risk

Hawkish central banks boost global sovereign yields

Global sovereign yields climbed to their highest levels in almost three months in the week ending September 24, 2021, following a flurry of ‘hawkish’ signals from major central banks. The Federal Reserve kept both its Fed Funds target and asset purchases at recent levels, but the so-called ‘dot plot’ indicated that half of the 18 FOMC members now expect higher rates next year, with at least another two upward steps predicted for 2023. The Bank of England also held its main policy rate at 0.1% but reiterated its view from August that “some modest tightening of monetary policy…was likely to be necessary.” And Norway’s Norges Bank became the first Western central bank to raise its interest rate since the onset of the coronavirus pandemic, stating that “a normalising economy now suggests that it is appropriate to begin a gradual normalisation of the policy rate.”

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated September 24, 2021) for further details.

Traders up probability of earlier BoE rate hike, lifting Gilt curve

The British government curve surged in an almost parallel upward shift for the second week in a row, with yields for maturities greater than six months rising by an average of 8 basis points, as traders significantly upped the implied probability of a base-rate hike by next February. In their policy statement from Thursday’s MPC meeting, Bank of England rate setters stressed that recent developments “appear to have strengthened [the] case” for tighter monetary conditions. They reaffirmed their inflation projection of 4% for the final three months of 2021 but added that cost pressures could remain elevated well into the second quarter of next year.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated September 24, 2021) for further details.

Stock-market turmoil heightens portfolio risk

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio soared 1.6 percentage points to 6.8% as of Friday, September 24, 2021, as the near collapse of Chinese property developer Evergrande sent shockwaves through stock markets around the world. The impact was felt most for US equities, which saw their share of overall volatility surge from 41% to over 50%. In contrast, percentage risk contributions from non-US shares remained unchanged, as increased price vacillations were offset by weaker exchange-rate fluctuations. The latter also helped non-USD fixed-income securities, which further benefitted from a more negative correlation of interest-rate and share-price returns.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated September 24, 2021) for further details.