Thursday, April 10, 2008

Currencies, Interest Rates, and Stocks: It's All One Market

* Intermarket Relationships - The ES futures (top) and Yen (middle) charts look like mirror images. As the yen has strengthened vs. the US dollar, stocks have weakened. This relationship is carrying forward this morning as I write and provided some nice intraday tells regarding market direction on Wednesday. Similar tells have been evident in 10-year Treasury yields (bottom chart), which have paralleled stock moves of late. When there is a flight from stocks, we see a flight to quality in Treasuries (rising prices, falling yields). Not shown is the euro vs. the dollar, which is moving to new highs this morning. The falling U.S. dollar has not been helping stocks, as interest rate gaps among countries continue to weigh on the currency. By way of comparison, two-year rates are down to 1.73% in the U.S., but are 3.93% in the U.K.; 3.44% in Germany; and 6.18% in Australia--even as the Fed is expected to ease rates further. The charts show different asset classes but, in times of fear, these trade as one market--which suggests that intermarket correlations are not a bad measure of investor psychology.

* One of My Better Posts - This one came in handy on Wednesday and very much supports the above intermarket observations.

* A Word of Thanks - I've received a number of positive emails about the Twitter posts, which link daily themes in markets and summarize market indicators. My goal has been to create a blog within a blog via Twitter, and the rising number of people subscribing suggests that this has been useful. For those new to the blog, the last five Twitter "tweets" appear on the blog; the entire list appears on my Twitter page.