MAC Monitor — June 14, 2021

Multi-Asset Class Risk Monitor | Week Ended June 11, 2021

  • Stocks and bonds rise for third straight week, despite inflation surge
  • Bund yields fall, as ECB reaffirms asset purchases
  • Lower equity volatility reduces portfolio risk, but correlations remain stable

Stocks and bonds rise for third straight week, despite inflation surge

Stock and bond prices rose together for the third consecutive week in the seven days ending June 11, 2021, despite another surge in realized inflation. US consumer prices climbed 5% in the past 12 months—the biggest rise since August 2008. That said, a deeper dive into the numbers revealed that this was driven by boosts in energy costs, airline fares, and prices of used cars. The latter was attributed to a global shortage of semiconductors, which, together with last year’s widespread lockdowns, has slowed production of new vehicles. A large part of the increase in consumer prices could, therefore, be attributed to pandemic-related one-off effects, reinforcing the notion that the current surge in inflation will be transitory and that central-bank rates are likely to remain low for the foreseeable future.

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated June 11, 2021) for further details.

Bund yields fall, as ECB reaffirms asset purchases

Yields on long-term euro-sovereign bonds fell to their lowest levels in almost two months in the week ending June 11, 2021, as the European Central Bank confirmed at its monthly meeting on Thursday that it would maintain the pace of its bond purchases well into the next year. President Christine Lagarde confirmed in the concluding press conference that the bank “will continue to conduct net asset purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of €1,850 billion until at least the end of March 2022”. She also stressed that headline inflation is expected to remain below the 2% target, despite an upward revision in GDP-growth projections for 2021 and 2022. Italian BTPs were among the biggest beneficiaries of the announcement, with their yield pickup over German Bunds dropping below 100 basis points for the first time since the start of April.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated June 11, 2021) for further details.

Lower equity volatility reduces portfolio risk, but correlations remain stable

Short-term risk in Qontigo’s global multi-asset class model portfolio dropped another percentage point to 6.2% as of Friday, June 11, 2021, as equity volatility continued to decline. In contrast, contributions from other factor types, such as interest rates and credit spreads, were largely unchanged, both in terms of standalone volatilities and correlations with other factors. As a consequence, reductions in risk contributions were mostly limited to the equity portion of the portfolio. Cross-asset diversification opportunities, meanwhile, remained limited, due to the ongoing co-movement of stock and bond prices.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated June 11, 2021) for further details.