Riskwatch for Q4 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 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*

U.S. indexesCurrentChange
Russell 100017.808.07
Russell 200018.698.45
 

U.S. sectorsCurrentChange
Energy25.846.70
Information technology23.569.05
Materials20.837.77
Industrials20.788.29
Consumer discretionary20.48.72
Communication services20.396.58
Financials19.836.82
Healthcare19.158.07
Real estate16.284.94
Utilities16.013.83
Consumer staples14.864.54
Index volatility
Predicted volatility by currency**

Developed markets
10 most volatileCurrentChange
Swedish krona8.94-0.68
Norwegian krone8.26-0.32
British pound8.19-0.18
New Zealand dollar8.090.51
Australian dollar7.66-0.19
Euro6.71-0.91
South Korean won6.710.28
Danish krone6.67-0.91
Canadian dollar6.55-0.21
Japanese yen6.4-0.31
 

Emerging markets
10 most volatileCurrentChange
Turkish lira23.37-1.10
South African rand15.64-1.10
Brazilian real13.24-0.49
Russian ruble12.48-0.71
Mexican peso11.58-0.74
Colombian peso10.86-0.27
Chilean peso10.32-0.32
Hungarian forint8.89-0.72
Czech koruna7.8-0.96
Romanian new leu6.83-1.00
Predicted volatility by country***

Developed markets

5 most volatileCurrentChange
Japan19.995.78
Italy17.494.16
Denmark17.316.36
Finland17.115.41
Switzerland17.026.62
 

5 least volatileCurrentChange
Canada12.865.19
Australia13.154.90
Singapore14.534.49
New Zealand14.694.86
United Kingdom14.725.32
Emerging markets

5 most volatileCurrentChange
Greece27.35.41
Egypt25.032.88
Pakistan24.385.13
Brazil20.821.64
Turkey20.56-1.74
 

5 least volatileCurrentChange
Russian Federation12.762.34
Czech Republic13.123.21
Hungary14.422.09
Kuwait14.73-0.49
South Africa15.221.67
Country-country correlations***
Developed markets

Highest correlationsCurrent
FranceGermany0.82
FranceNetherlands0.77
GermanyNetherlands0.75
GermanySwitzerland0.72
FranceBelgium0.72
 

Lowest correlationsCurrent
U.S.Hong Kong-0.58
U.S.Singapore-0.57
SpainU.S.-0.54
U.S.United Kingdom-0.52
U.S.Belgium-0.50
Emerging markets

Highest correlationsCurrent
MexicoColombia0.31
Czech RepublicHungary0.30
MexicoChile0.29
PolandHungary0.28
South AfricaTurkey0.27
 

Lowest correlationsCurrent
ChinaIndia-0.48
ChinaMexico-0.37
ChinaSouth Africa-0.34
ChinaBrazil-0.33
ChinaRussian Federation-0.33
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.
Multiasset-class data
Risk

LevelChangeStandard deviationChange
U.S. T-Note 10-year (yield)2.69%-35.12 bps52.83%0.02%
U.S. inv.-grade (spread)74 bps17.04 bps21.72%0.02%
U.S. high-yield (spread)425 bps91.31 bps71.63%0.09%
European gov't 10-year (yield)0.27%-22.04 bps43.59%0.00%
European inv.-grade (spread)74 bps13.53 bps22.79%-0.01%
European high-yield (spread)307 bps59.08 bps72.78%0.07%
Euro**1.14-1.586.71%-0.91%
British pound**1.27-2.348.19%-0.18%
Japanese yen**109.72-3.416.40%-0.31%
Asset-class correlations

U.S. 10-year T-noteU.S. investment gradeU.S. high yieldEuro gov't 10-yearEuro investment gradeEuro high yieldRussell 1000Russell 2000FTSEEuroPoundYen
U.S. T-Note 10-year (yield)1.00-0.52-0.570.69-0.40-0.400.280.290.310.030.08-0.31
U.S. inv.-grade (spread)-0.521.000.48-0.320.100.23-0.10-0.07-0.14-0.05-0.040.21
U.S. high-yield (spread)-0.570.481.00-0.430.210.48-0.39-0.34-0.56-0.16-0.210.30
European gov't 10-year (yield)0.69-0.32-0.431.00-0.52-0.470.150.170.240.280.27-0.30
European inv.-grade (spread)-0.400.100.21-0.521.000.62-0.12-0.16-0.12-0.19-0.180.16
European high-yield (spread)-0.400.230.48-0.470.621.00-0.22-0.17-0.32-0.19-0.190.25
Euro**0.03-0.05-0.160.28-0.19-0.190.100.120.231.000.660.30
British pound**0.08-0.04-0.210.27-0.18-0.190.040.070.190.661.000.16
Japanese yen**-0.310.210.30-0.300.160.25-0.15-0.13-0.180.300.161.00

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.
Source: Axioma