Reader Request: Correlation of the Euro and S&P 500
November 25, 2011 9:19 am
We recently wrote about the high correlation of the intra-day moves between the Euro and the S&P 500 index. A reader commented that they would like to know more about the longer term correlation of the two.
We went back and took a look at a few indices and put them against each other to see if there was something occurring that was simply a coincidence. Correlations will have a range of +1 to -1. If two prices move with together exactly, the correlation will show a +1. If they move exactly inversely, it will be -1. A random relationship is considered if the correlation is 0.
We took a look at different time periods and found that the correlation of the Euro and the S&P 500 index is getting closer and closer the closer we get toward today. In other words, the +.63 correlation is significant more recently. This shows that the relationship of the two are tight and the question that it raises is: Why?
There are several possible answers that we have explored previously. But the most logical are:
- Risk off and risk on trading
- Euro weakness signals fear of Europe debt crisis intensifying
- Carry-trades unwinding
- Macro fund sector rotation
No matter what the reason, this is something to watch as for now one or the other is pushing /pulling with a high degree of correlation.
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