Thursday, September 17, 2015

Cross Asset Correlation

Cross asset correlation update. Note this is correlation at daily frequency (unlike weekly in previous cases) to capture the large moves seen in August across asset classes.

The vol correlation dynamics is interesting (the last column). This vol is usually dominated by equities, and naturally equities have a strong negative correlation. However, the spike in rates and vols correlation 3 months back has given away to commodities and more lately FX. Also it appears rates and inflation simply have diminished significantly.

While rates and inflation correlation has gone down, USD and GBP 5y and 10y breakeven swaps correlation to rates (belly and 10y) are still significant (60%+ ). Between rates and equities, US rates are still major drivers (correlation ~ 50% to equities across G3). However, GBP rates and EUR 5s30s have picked up correlation to European equities. However G3 rates has little correlation to EM equities (including China).

Also we have seen a general increase in correlation for USD rates. That includes a pick up of USD rates vs. equity vol, oil and CRB commodities Index and Yen and Euro FX. In addition US 5y/ 10y breakeven has been highly correlated to oil (Brent) and CRB commodities index (CRY) and Yen. In general break-even across G3 has picked up correlation to equities.

On the FX side, the major correlation maker has been JPY, with a strong correlation to equities across geographies - capturing the risk-off mood back in August. In fact there has been a substantial increase in correlation between equities and FX across the board. Separately, EM vols has in general been more correlated to commodities move than DM vols.

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