Macro Wrap – Breakdown in Correlations, $SPY, $EEM, $FXE

by Enis June 10, 2013 7:41 am • Commentary

The last few months have seen a major breakdown in the correlation between asset classes and geographies to an extent we haven’t seen in the past 4 years.  It’s not just the reduced correlation between developed and emerging market stocks for example (a theme I discussed last week), but it’s also the reduced correlation between stocks, currencies and commodities.

Here is a chart tour of the 120 day correlation between major assets over the last 4 years.  First SPX vs. EEM, a major theme among equity managers:

4 year chart of 120 day correlation of EEM vs. SPY, Courtesy of Bloomberg
4 year chart of 120 day correlation of EEM vs. SPY, Courtesy of Bloomberg

It’s still a strongly positive correlation, but much lower than it has been for the past 4 years, mainly a reflection of continued weakness in EEM vs. continued strength in the SPX over the past few months.

The low correlation is not just between EEM and SPX though.  The correlation between the SPX and the Nikkei is at 4 year lows (essentially flat now), and the correlation between the Euro Stoxx 50 and the SPX is also at 4 year lows.

In currency markets, the correlation between the EUR/USD cross and the SPY is also at a 4 year low:

4 year chart of 120 day correlation of EUR/USD vs. SPY, Courtesy of Bloomberg
4 year chart of 120 day correlation of EUR/USD vs. SPY, Courtesy of Bloomberg

This pair was most correlated during the European sovereign crisis in the fall and winter of 2011, when all traders started their day by looking at what Italian and Spanish sovereign yields were doing.  In 2013 though, the EUR/USD has only been mildly correlated to moves in the SPY, and the EUR/USD is essentially unchanged so far in 2013, with some big moves in both directions.

It’s not just the EUR/USD pair against the SPY though.  Other crosses like the GBP/USD, AUD/USD, and USD/CAD are all at or near 4 year lows in correlation with U.S. stocks.  The only major cross that has seen increased correlation this year is of course the USD/JPY (see my post from Thursday).

Even Dr. Copper (the nametag due to copper’s supposed Ph.D. in Economics as a global economic indicator) has seen its correlation to the SPY fall to 4 year lows in 2013:

4 year chart of 120 day correlation of HG2 vs. SPY, Courtesy of Bloomberg
4 year chart of 120 day correlation of HG2 vs. SPY, Courtesy of Bloomberg

The correlation of other commodities like oil and gold is also mildly positive in 2013, but noise in a historical context.

In short, U.S. stocks have been moving to their own tune in 2013.  Gleaning signals from inter-market movements has not been a fruitful approach for much of this year.  I’m most curious as to whether that shifts in the second half of 2013.