Equity Monitor Insights

While many major markets have slowly-but-steadily climbed this year, the Canadian market, as represented by the TSX Composite, has remained largely flat – until the last few weeks, during which the market soared more than 4%. The strong one-month return exceeded what would have been expected, based on its risk forecast at the beginning of the period—although the magnitude of returns over other periods has remained in line with risk-model expectations. The unexpectedly strong return did not have a material impact on the TSX Composite’s expected volatility, and Canada’s level of risk from the short-horizon fundamental model, currently around 7%, continues to be the lowest among the major markets we cover closely.

While risk for the FTSE Developed index fell more than one percentage point over the past month, risk for its emerging-markets counterpart was up almost 50 basis points. Both markets posted positive returns on surging trading volume, but the increase in volume was much more apparent in Emerging markets, driven by renewed volume in the Consumer Discretionary and Information Technology sectors. Also of note was the level of short-term correlations, which have fallen from about 15% to close to zero for Developed markets, but moved in the opposite direction in Emerging markets.

In contrast to the risk levels of most emerging and developed market currencies, most of which are at or close to six-month lows, the highly regulated yuan has reached the high end of its volatility range against the US dollar.  The yuan weakened against the greenback following China’s central bank’s decision to end measures that supported its currency and after Fed indicated a possible increase in rates by December. The yuan’s downturn was also amplified by the PBOC’s targeted easing to encourage lending to small businesses.

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Melissa Brown, CFA

As Managing Director of Applied Research, Melissa Brown generates unique insights into risk trends by consolidating and analyzing the vast amount of data on market and portfolio risk maintained by Axioma. Brown’s perspectives help both clients and prospects to better understand and adapt to the constantly changing risk environment.