Riskwatch for Q4 2018
January 21, 2019 12:00 AM
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 WW4 (worldwide) model: predicted volatility by currency, predicted volatility by country and country-country correlations. Data are as of Dec. 31, 2018. Change compares to the previous quarter.
U.S. market volatility*
Predicted volatility by currency**
Predicted volatility by country***
Risk goes ballistic in fourth quarter
The recent 160% increase in risk that occurred in the fourth quarter is nearly unprecedented. A look at a chart of the distribution of 62-day risk changes in percent from 1982 through 2018 shows the quarter saw one of the biggest jumps since 1982, and likely is fueling a perception that risk is at an abnormally high point, though in reality the level isn't that much different than normal.
|U.S. T-Note 10-year (yield)||2.69%||-35.12 bps||52.83%||0.02%|
|U.S. inv.-grade (spread)||74 bps||17.04 bps||21.72%||0.02%|
|U.S. high-yield (spread)||425 bps||91.31 bps||71.63%||0.09%|
|European gov't 10-year (yield)||0.27%||-22.04 bps||43.59%||0.00%|
|European inv.-grade (spread)||74 bps||13.53 bps||22.79%||-0.01%|
|European high-yield (spread)||307 bps||59.08 bps||72.78%||0.07%|
|Russell 1000||Russell 2000||FTSE||Euro||Pound||Yen|
|U.S. T-Note 10-year (yield)||1.00||-0.52||-0.57||0.69||-0.40||-0.40||0.28||0.29||0.31||0.03||0.08||-0.31|
|U.S. inv.-grade (spread)||-0.52||1.00||0.48||-0.32||0.10||0.23||-0.10||-0.07||-0.14||-0.05||-0.04||0.21|
|U.S. high-yield (spread)||-0.57||0.48||1.00||-0.43||0.21||0.48||-0.39||-0.34||-0.56||-0.16||-0.21||0.30|
|European gov't 10-year (yield)||0.69||-0.32||-0.43||1.00||-0.52||-0.47||0.15||0.17||0.24||0.28||0.27||-0.30|
|European inv.-grade (spread)||-0.40||0.10||0.21||-0.52||1.00||0.62||-0.12||-0.16||-0.12||-0.19||-0.18||0.16|
|European high-yield (spread)||-0.40||0.23||0.48||-0.47||0.62||1.00||-0.22||-0.17||-0.32||-0.19||-0.19||0.25|
U.S. and euro spread curves are defined as the spread over the swap 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.