MAC Monitor — September 29, 2020

Multi-Asset Class Risk Monitor Highlights | Week Ended September 25, 2020

Credit risk premia rise, as share prices continue to sink; Dollar appreciates as Europe frets; Portfolio risk surges, as FX/equity correlation intensifies

Credit risk premia rise, as share prices continue to sink

Risk premia on European and US high-yield bonds rose to their highest levels in more than two months in the week ending September 25, 2020, as American blue-chip benchmarks posted their fourth consecutive weekly loss, despite a rebound in tech stocks on Friday. That late rally, however, did not benefit European markets, which suffered a double whammy from surging coronavirus cases and disappointing economic survey data. Bottomline, the EURO STOXX 50® ended the week 4.4% lower, compared with -0.5% for the STOXX® USA 900. Growing concerns in Europe were also reflected in a bigger increase in EUR credit spreads, as well as a steeper decline in German sovereign yields, as investors shifted their funds into less risky securities. A notable exception to this were Italian BTPs, which saw their risk premium over Bunds fall to the lowest level since late February, after the far-right League party suffered a number of setbacks in several key regional elections, while the anticipation of ongoing fiscal and monetary assistance provided additional support.

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Please refer to Figures 4 & 5 of the current Multi-Asset Class Risk Monitor (dated September 25, 2020) for further details.

Dollar appreciates as Europe frets

The US dollar gained 1.8% against a basket of foreign currencies in the week ending September 25, 2020, primarily driven by signs of weakness among its European rivals, caused by concerns over resurging numbers of COVID-19 cases and the possibility of renewed lockdowns. Lower-than-expected readings of the Eurozone services sector PMI and the German ifo Business Climate Index, released on Wednesday and Thursday, respectively, added further downward pressure. The Japanese yen, which customarily benefits from increasing risk aversion, experienced the smallest loss of all major currencies, depreciating around 1% against its American competitor.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated September 25, 2020) for further details.

Portfolio risk surges, as FX/equity correlation intensifies

Short-term risk in Qontigo’s global multi-asset class model portfolio surged 1.5 percentage points to 10.1% as of Friday, September 25, 2020, as a further intensification of the co-movement of share prices and foreign-exchange rates against the US dollar reduced diversification benefits. The rise was most notable in the non-US equity category, which saw its share of overall portfolio risk soar by more than 6 percentage points to 19%. US stocks, on the other hand, did not see their standalone volatility increase, thanks mostly to the late rally of tech companies on Friday, which meant that their percentage risk contribution decreased by 10 points to 47%.

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Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated September 25, 2020) for further details.