Tuesday, September 01, 2009

Intermarket Correlations and the Influence of the Global Macro Trade

I recently took a look at intermarket correlations with respect to weekly closes; here is a more detailed look at intermarket correlations during 2009. What we're looking at are the correlations among daily percentage changes for the cash market closes across the various instruments.

What we see is that the wry observations of money managers that "It's all one market" are understandable. If global macro participants are bullish on risk, they are selling U.S. dollars, selling U.S. Treasuries (hiking 10-year yields), buying commodities such as crude oil and copper, and buying stocks.

If global macro participants become risk averse, they seek relative safe haven in the U.S. dollar and U.S. Treasuries and selling commodities and stocks. Of particular note are the correlations between stocks and commodities (copper and crude) and between stocks and the U.S. dollar. A sizable proportion of variance in the daily returns of stocks is shared with these other instruments.

What that tells us is that flows of funds from global macro participants are indeed influencing markets and making it more challenging to achieve portfolio diversification.