Read Axioma’s informed perspectives on the status of different potential risk sources around the globe.
At the outset, and for most of the second quarter, it appeared risk was re-entering a relatively benign period. Many components of risk (market, country, currency, style) had fallen in aggregate (of course, not all individual countries, currencies or styles followed suit). But two relatively unexpected events served to shatter the calm – a sudden spike in oil prices, which seemed to have the biggest impact on Canada but was felt elsewhere as well, and, of course, the vote by citizens of the UK to leave the European Union.
Markets experienced sharp increases in risk during the first quarter, with most, if not all, components of risk contributing to the increase. Global market risk ended the quarter higher than it has been since 2012, although clearly well below the levels seen during recent crises, including the global financial crisis and the European debt crisis. Factor volatilities – country, currency, industry, style – all rose, some quite substantially, with some reaching the top quartile or higher of risk relative to historical levels. Correlations between factors were mixed, with some lower correlations serving to dampen the impact of higher volatility, at least slightly. Correlations across asset classes also saw a few large changes.