RiskWatch for Q4 2023
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 is 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, consists 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 use the Axioma WW4 (worldwide) model: predicted volatility by currency, predicted volatility by country and country-country correlations. Data is as of Dec. 29, 2023. Change compares with the previous quarter.
U.S. market volatility*
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Index volatility
Predicted volatility by currency**
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Predicted volatility by country
Developed markets
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Emerging markets
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Country-country correlations***
Developed markets
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Emerging markets
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Energy sees reversal of fortune in Q4
U.S. sectors saw a reversal of fortune in the fourth quarter as the market rotated, although none more than the energy sector. Energy recorded a 15% active gain in the third quarter and a 20% active loss in Q4, vs. the U.S. market. In contrast, Q3 losers such as real estate and information technology were the best-performing sectors in the active space in Q4.
Sector rotation led to some big changes in risk from Q3 to Q4, with the risk of IT falling. Real estate's predicted volatility rose more than 20%, and the sector went from middle-of-the-pack risk to second highest (behind energy). Most other sectors also saw their risk go up.
The decrease in IT's risk meant its contribution to the STOXX USA 900 index risk fell almost 3 percentage points, even as its weight was up 1.5 percentage points, while its contribution to benchmarks risk was still higher than its weight. Real estate also saw a small increase in weight and an even higher increase in risk contribution (which was slightly higher than the sector’s weight). Energy's weight and risk contribution both fell.
Multiasset-class data
Risk
| Level | Change | Standard deviation | Change | |
|---|---|---|---|---|
| U.S. T-note 10-year (yield) | 3.81% | -68.91 bps | 1.17% | 0.01% |
| U.S. investment-grade (spread) | 91 bps | -7.48 bps | 0.48% | -0.01% |
| U.S. high-yield (spread) | 404 bps | -11.89 bps | 1.34% | 0.03% |
| European government 10-year (yield) | 2.02% | -75.08 bps | 1.06% | -0.10% |
| European investment-grade (spread) | 111 bps | -19.40 bps | 0.35% | -0.04% |
| European high-yield (spread) | 386 bps | -2.82 bps | 1.58% | -0.05% |
| Euro | 1.10 | 4.34% | 7.40% | -0.07% |
| British pound | 1.27 | 4.44% | 8.78% | -0.33% |
| Japanese yen | 140.98 | -5.53% | 9.04% | -0.31% |
Asset-class correlations
| U.S. 10-year T-note | U.S. inv.- grade | U.S. high yield | Euro gov't 10-year | Euro inv.- grade | Euro high yield | STOXX US | STOXX Europe 600 | STOXX Developed World | Euro | Pound | Yen | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| U.S. T-note 10-year (yield) | 1.00 | -0.55 | -0.49 | 0.66 | -0.33 | -0.18 | -0.32 | -0.14 | -0.34 | -0.27 | -0.29 | -0.40 |
| U.S. investment-grade (spread) | -0.55 | 1.00 | 0.70 | -0.30 | 0.41 | 0.26 | 0.17 | -0.07 | 0.06 | 0.05 | 0.10 | 0.15 |
| U.S. high-yield (spread) | -0.49 | 0.70 | 1.00 | -0.37 | 0.58 | 0.51 | 0.06 | -0.28 | -0.03 | 0.03 | 0.12 | 0.29 |
| European government 10-year (yield) | 0.66 | -0.30 | -0.37 | 1.00 | -0.56 | -0.40 | -0.40 | -0.43 | -0.48 | -0.03 | -0.14 | -0.38 |
| European investment-grade (spread) | -0.33 | 0.41 | 0.58 | -0.56 | 1.00 | 0.55 | 0.05 | -0.08 | 0.02 | -0.11 | 0.00 | 0.21 |
| European high-yield (spread) | -0.18 | 0.26 | 0.51 | -0.40 | 0.55 | 1.00 | -0.40 | -0.43 | -0.48 | -0.16 | -0.03 | 0.15 |
| Euro | -0.27 | 0.05 | 0.03 | -0.03 | -0.11 | -0.16 | 0.31 | 0.31 | 0.50 | 1.00 | 0.80 | 0.42 |
| British pound | -0.29 | 0.10 | 0.12 | -0.14 | 0.00 | -0.03 | 0.32 | 0.38 | 0.50 | 0.80 | 1.00 | 0.43 |
| Japanese yen | -0.40 | 0.15 | 0.29 | -0.38 | 0.21 | 0.15 | 0.09 | -0.02 | 0.19 | 0.42 | 0.43 | 1.00 |
U.S. and euro spread curves are defined as the spread over the swap curve.
*US4 MH risk model forecast for the STOXX USA 900.
**Numeraire: U.S. dollar.
***In excess of the global market.
Source:Axioma