Wednesday, March 13, 2013

Euro/S&P Correlation (decoupling now re-coupling)

From Marc-to-Market:
It is commonplace now to talk about break down of the risk-on/risk-off (RoRo) matrix and in particular the decoupling of the euro from the S&P 500. Be careful. Most observers were slow to recognize this decoupling, which we had been writing about for some time, and are missing the more recent trend in which the linkage has tightened. 

Our methodological point is that it is difficult to accurately eyeball correlation. Correlation is a statistical relationship. Many observers see the euro off 2.7% against the dollar this year and recognize that the S&P 500 is up 8% and see this as a sign of a weak correlation.

Look at the data though, and a different picture emerges. As investors, we are most interested in the correlation of returns. To gauge this we look at the correlation of the percent change in the euro and the percent change in the S&P 500. 
Over the past 60-days the correlation stands at 0.44. This is well above the low set in early February near 0.25, which was the lowest correlation since March 2011. The 60-day correlation finished 2012 near 0.41....MORE