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MAC Monitor — June 13, 2022

Multi-Asset Class Risk Monitor | Week Ended June 10, 2022

  • Eurozone yields soar as ECB raises forward guidance
  • Yen tumbles over BoJ divergence
  • Cross-asset co-movement partly offsets lower stock volatility

Eurozone yields soar as ECB raises forward guidance

Yields on Eurozone government bonds continued to soar in the week ending June 10, 2022, as the European Central Bank raised its forward guidance on interest rates. In an unusually explicit monetary-policy statement on Thursday, President Christine Lagarde announced that the governing council “intends to raise the key ECB interest rates by 25 basis points at its July monetary policy meeting.” She then added that if “the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting.” As a result, German Bund yields surged across all maturities, with the biggest increase of 0.37% recorded at the 3-year point.

Increases in borrowing rates were even more pronounced for peripheral issuers, as Lagarde also announced the end of net purchases under the ECB’s asset-buying program from next month. Italian BTPs recorded the greatest widening in their risk premia over Bunds, with the 10-year yield pickup expanding to 228 basis points—its highest level since May 2020.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated June 10, 2022) for further details.

Yen tumbles over BoJ divergence

The Japanese yen fell to its lowest level against the US dollar in more than 20 years in the week ending June 10, 2022, as the Bank of Japan remains the last major central bank to keep an accommodative monetary-policy stance. With rate setters in most other major economies firmly committed to a further tightening of financing conditions amid sky-rocketing commodity and consumer prices, the BoJ believes that the country’s economy is still too fragile to withstand higher borrowing costs. In addition, it expects a weaker exchange rate to boost the competitiveness of domestic companies.

That said, the current yen depreciation is also part of a wider strengthening of the greenback, as investors are seeking save havens amid tumbling stock and bond markets.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated June 10, 2022) for further details.

Cross-asset co-movement partly offsets lower stock volatility

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio fell slightly from 12.9% to 12.5% as of Friday, June 10, 2022, as the benefits of lower stock-market volatility were partly offset by a stronger co-movement share prices, bond returns, and exchange rates against the US dollar. This meant that non-USD developed equity and fixed-income securities experienced increases in their percentage risk contributions, while US stocks saw their share of overall portfolio volatility drop by 2.5% to 59%. Oil and gold also added less to total risk, as their prices bucked the general downward trend in other asset classes.

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