Friday, March 21, 2014

Cross Asset Correlation

The cross market factor correlation as it stands now

This shows spot as well as rolling (for last 1 year, upper diagonal plots) weekly correlation among asset classes (based on Principal Component Analysis. For all asset classes, only the first factor is used, except rates, where first 3 traditional factors - level, slope and curvature/ fly - are used. The analysis covers all developed countries fixed income and currencies, equities for major developed and emerging markets and a selection of commodities and also consider volatilities as a different asset class itself )

The main observation from the recent changes are as below -

However, all these will change as soon as rate hikes comes back in to the picture. Which I think, not withstanding market reaction since this week's FOMC, a while away from now.

Nevertheless, the rate level vs. curvature correlation still going strong and expect to continue still the timing of the hiking cycle becomes clear to the markets.We also have seen a significant increase in correlation on cross market rates, especially of JPY and SCANDI long end rates to USD rates. However, the story in different in curve slopes, which has strengthened in correlation for JPY but weakened in EUR, reflecting the resilience of EURO curve steepening bias on expectation of ECB action. 

The strong correlation of SCANDI FX (especially NOK) to USD rates seen middle of last year (attributable, perhaps, to a knee-jerk reaction to taper last May) has vanished more or less. And overall the rates vs. equities correlation flipped sign, perhaps because market is now in a much better position to handle a sell-off. Also there has been an increased correlation between the swap rates and the break-even inflation swaps, signifying a more stable real rates in a relative sense 

No comments:

Post a Comment