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  • Writer's pictureMarc Bentin

What Cross Asset Correlation Is Telling Us...


-[1 ]The normally solid positive positive correlation between the stock market (risk appetite) and dollar yen has been turned upside down, meaning dollar yen now is negatively correlated with “runaway equity market gains”. This is just one more illustration of the structural nature of the dollar selloff currently at work. JPY is not even being sold as risk appetite roars which is unusual... because the dollar is so weak. - [2 ] Gold is now very largely positively correlated with stocks which is fairly unusual (and related to the dominating factor of dollar weakness). Gold and stocks rallying at the same time fits nicely with the inflation story building up...and gold likes inflation as much as it likes to go higher on dollar weakness... - [ 3] Bonds and stocks are very much negatively correlated now, more than their 5 years average. Negative correlation is not exceptional and good for portfolios generally but at such extremes, this negative correlation is more unusual. Bonds are underperforming while stocks are rallying hard. This negative correlation won’t hold over the longer term if the bond selloff accelerates. A bond crash ... if it happens would certainly bring stocks down with them crash a la 87. For now, the negative correlation of stock vs. bonds is good news because it means stocks do not care about bonds underperforming... - [ 4] EM and the s&p are correlated 1 to to 1 (in contrast with the eurostocks/us stocks correlation that weakens. This suggests the relative strength of EM markets as an alternative to US stocks at the moment as European shares lagg on dollar weakness. EM markets could not care less and are roating ahead, supported by commodities markets strength, itseld related to the synchronized recovery. Why does correlation matter and why choosing the S&P500 as anchor? * Just like the earth turns around the sun, most financial assets turn around the S&P500 not least because the S&P500 serves as a performance boggy for most asset managers. Most of them will trade the s&p500 to increase or decrease beta (market risk) exposure. * Another reason is that the s&p500 conditions bull/bear perceptions  in equities, risk appetite, wealth effects and to a large extent the health of the (world) economy.  * Last but not least, cross asset correlation (and volatility)  determines diversification benefits which is a key parameter  in any risk model, starting with ‘value at risk’ which is used extensively in the asset management industry to construct portfolios. In one word or two, the higher the correlation the higher the “var”. In a low yield and low volatility environment, diversified portfolios  are constructed and often leveraged such as in ‘risk parity’  portfolios. Whenever positive correlation increases across asset classes, value-at-risk numbers increase, all other things remaining equal. And whenever var models shout, risk and portfolio managers listen and they respond by reducing leverage and liquidating assets. Hence the interest to track correlation patterns (the same way as volatility which is the second most important variable in value at risk models) so as  to anticipate the impact on value at risk risk and how portfolio managers are likely  to respond. For a daily update and interpretation of these different parameters and much more, consider a subscription to the Bentin Daily, our premium research service.  Important Disclaimer © Copyright by BentinPartner llc. This blog is not intended as a recommendation, an offer or solicitation for the purchase or sale of any security or underlying asset referenced herein or investment advice. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situation, investment horizon and particular needs. This blog does not include information tailored to any particular investor. It has been prepared without any regard to the specific investment objectives, financial situation or particular needs of any person who receives this report. Accordingly, the opinions discussed in this blog may not be suitable for all investors. You should not consider any of the content in this report as legal, tax or financial advice. The data and analysis contained herein are provided "as is" and without warranty of any kind. BentinPartner llc, its employees, or any third party shall not have any liability for any loss sustained by anyone who has relied on the information contained in any publication published by BentinPartner llc. The content and views expressed in this report represents the opinions of Marc Bentin and should not be construed as guarantee of performance with respect to any referenced sector. We remind you that past performance is not necessarily indicative of future results. Although BentinPartner llc believes the information and content included in this report have been obtained from sources considered reliable, no representation or warranty, express or implied, is provided in relation to the accuracy, completeness or reliability of such information. This blog is also not intended to be a complete statement or summary of the industries, markets or developments referred to in the blog.  


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