MAC Monitor — February 2, 2021

Multi-Asset Class Risk Monitor | Week Ended January 29, 2021

Bund curve steepens on rate cut speculation; Dollar strengthens as share prices fall; Portfolio risk flat as rise in correlation offsets lower FX volatility

Bund curve steepens on rate cut speculation

The term spread between 30-year and 2-year German Bund yields rose to its widest in more than four months in the week ending January 29, 2021, after European Central Bank officials stressed that another rate cut may still be on the cards, despite a surprise surge in consumer prices. Preliminary German inflation estimates released by the Federal Statistical Office on Thursday indicated a year-over-year change of 1.0%, beating market expectations of 0.7% and signalling a strong rebound from the -0.3% recorded in the previous month.  That said, officials from the European Central Bank were quick to point out that speculation regarding a tightening of monetary policy was unwarranted and premature. The monetary policy-sensitive 2-year benchmark rate even fell to a 5-week low of -0.76%, after ECB President Christine Lagarde seemingly left the door open for another rate cut, noting that policy makers stood ready adjust all available tools, if the economic situation did not improve sufficiently.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated January 29, 2021) for further details.

Dollar strengthens as share prices fall

The US dollar gained 0.4% against a basket of major trading partners in the week ending January 29, 2021, as most of its rivals fell in sync with their local stock markets. The British pound was one of the few exceptions, ending the week 0.4% in the black at $1.373—a level not seen since April 2018. It extended the familiar pattern of opposing exchange-rate and share-price movements, which the pound had resumed in December, following a brief period of co-movement in October and November, when market participants became concerned about the slow progress of the Brexit negotiations. Predicted short-horizon risk for GBP/USD, meanwhile, continued to fall to 9.5%, in line of the overall market trend of declining FX volatility.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated January 29, 2021) for further details.

Portfolio risk flat as rise in correlation offsets lower FX volatility

Short-term risk in Qontigo’s global multi-asset class model portfolio remained almost flat at 6.8% as of Friday, January 29, 2021, as benefits from lower exchange-rate volatility were offset by a closer co-movement with share prices. Nevertheless, the former effect appeared to have prevailed for non-US developed equities, which saw their share of overall portfolio risk fall by 2 percentage points to 23.8%. The oil holding also experienced a similar decline in its overall risk contribution, from 5.6% to 3.7%, due to a combination of lower standalone volatility and a weaker correlation with the stock market.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated January 29, 2021) for further details.