MAC Monitor — September 12, 2022

Multi-Asset Class Risk Monitor Highlights | Week Ended September 9, 2022

  • UK rescue package inflates Gilt yields
  • Euro recovers after ‘jumbo’ ECB rate hike
  • Weaker cross-asset correlation reduces portfolio risk

UK rescue package inflates Gilt yields

Long-term British government yields rose by another 20 basis points in the week ending September 9, 2022, taking the total increase since the beginning of August to more than 1.25%. The move happened on the back of incoming Prime Minister Liz Truss laying out her plans for tackling the worsening cost-of-living crisis. The announced rescue package includes a £2,500 per year cap on average annual energy bills that will remain in place for two years. Previously, the maximum that utility companies could charge a typical household was due to increase to more than £3,500 in October, with even steeper increases projected for January and April. The program is estimated to cost £150bn, which will be mostly funded by borrowing, as the PM ruled out a windfall tax on energy companies’ profits.

The sharp rise in long-dated borrowing rates means that the Gilt curve is no longer inverted. However, the Bank of England still expects the UK economy to enter a technical recession this winter.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated September 9, 2022) for further details.

Euro recovers after ‘jumbo’ ECB rate hike

The euro once again held its ground against the US dollar in the week ending September 9, 2022, recouping losses from earlier in the week, as the European Central Bank raised its main policy rates by 75 basis points, emulating similar ‘jumbo’ moves from the US Federal Reserve and the Bank of Canada. The Bank of England was expected to follow suit this week, but the Monetary Policy Committee meeting was postponed to September 22 to observe the period of national mourning for Her Majesty The Queen. The common currency briefly fell to a 20-year low of $0.988 during intraday trading on Monday, following an announcement that Russia would not fully resume its gas supplies to Europe until Western sanctions against the country are lifted. But the euro eventually recovered, finishing the week on par with its American rival.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated September 9, 2022) for further details.

Weaker cross-asset correlation reduces portfolio risk

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio retreated to 12.6% as of Friday, September 9, 2022, down from 14.4% the week before. The decrease was caused by a weaker co-movement of share prices with both fixed-income securities and exchange rates against the US dollar. Non-US equities and government bonds were the biggest beneficiaries, as each saw their share of total portfolio risk go down by nearly a percentage point. That said, the interaction between stock and bond markets remained positive, so that US Treasury bonds continued to add to overall volatility. Credit spreads, meanwhile, were uncorrelated with risk-free interest rates, so that corporate yield premia were mostly driven by changes in share prices.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated September 9, 2022) for further details.