July 23, 2018 01:00 AM
Riskwatch for Q2 2018
RiskWatch provides recent data on volatility and correlation, the two components of risk, for U.S. and global equity and fixed-income markets. The equity data are derived from Axioma's medium-term fundamental risk models. One set of tables is designed to capture U.S. market sectors plus countries and currencies with the highest and lowest levels of volatility and how that component of risk has changed since the end of the prior quarter. The highest and lowest correlated countries within developed and emerging markets are also highlighted. Another table illustrates how currency volatility can be a major driver of risk in multicountry benchmarks and can often change substantially from one quarter to the next. The fixed-income data, detailed in the multiasset-class section, consist of U.S. and eurozone government yields, investment-grade and subinvestment-grade spreads as well as correlations among those asset classes and selected currencies. Note that the following charts are now using Axioma's new WW4 (worldwide) model: predicted volatility by currency, predicted volatility by country and country-country correlations. Data are as of June 29, 2018. Change compares to the previous quarter.
U.S. market volatility*
Predicted volatility by currency**
Predicted volatility by country***
Small-cap risk premium hard to find in 2018
Small-cap stocks are typically deemed to be riskier than their large-cap brethren, but lately that hasn't been the case. The small-cap risk is higher for several reasons — smaller companies are typically less diversified; fewer financing options can make them more vulnerable to increasing interest rates; and the lower levels of liquidity could make them more susceptible to shocks than a larger company. But small caps also tend to be more domestically focused and therefore less vulnerable to big moves in the dollar or — importantly right now — a trade war, although their input costs could rise. Russell 2000 volatility is based on Axioma's U.S. Small Cap (USSC4) model; Russell 1000 volatility is based on Axioma's U.S. 4 (all-cap) model.
|U.S. T-Note 10-year (yield)||2.84%||10 bps||52.81%||0.01%|
|U.S. inv.-grade (spread)||68 bps||5 bps||18.78%||-0.04%|
|U.S. high-yield (spread)||346 bps||60 bps||53.22%||0.02%|
|European gov't 10-year (yield)||0.34%||-17 bps||45.09%||0.00%|
|European inv.-grade (spread)||66 bps||11 bps||25.38%||-0.04%|
|European high-yield (spread)||265 bps||60 bps||77.74%||0.01%|
|Russell 1000||Russell 2000||FTSE||Euro||Pound||Yen|
|U.S. T-Note 10-year (yield)||1.00||-0.41||-0.57||0.72||-0.36||-0.24||0.26||0.32||0.25||-0.08||0.02||-0.41|
|U.S. inv.-grade (spread)||-0.41||1.00||0.49||-0.26||0.14||0.14||-0.13||-0.13||-0.13||0.01||-0.08||0.14|
|U.S. high-yield (spread)||-0.57||0.49||1.00||-0.43||0.19||0.34||-0.40||-0.37||-0.53||-0.03||-0.16||0.30|
|European gov't 10-year (yield)||0.72||-0.26||-0.43||1.00||-0.45||-0.31||0.13||0.17||0.17||0.12||0.09||-0.34|
|European inv.-grade (spread)||-0.36||0.14||0.19||-0.45||1.00||0.52||-0.09||-0.08||-0.06||-0.09||0.00||0.16|
|European high-yield (spread)||-0.24||0.14||0.34||-0.31||0.52||1.00||-0.12||-0.08||-0.21||-0.08||-0.06||0.17|
U.S. and euro spread curves are defined as the spread over the swap curve (previously spread over the government curve). Emerging markets sections include only countries in the FTSE Emerging Markets index.
*US4 medium-horizon fundamental forecast.
**Numeraire: U.S. dollar.
***In excess of the global market.