Great Graphic: Euro and S&P 500 Correlation Revisited

The outsized rally in the euro and the dramatic sell-off in the S&P 500 begs to review recent developments in this key relationship. Recall that a positive correlation was part of the ubiquitous risk-on/risk-off narrative.   

This Great Graphic, from Bloomberg, shows traces the 60-day rolling correlation of the percent change in the euro and the percent change in the S&P 500 since the beginning of last year.  This is a way to look at the correlation of returns, which is important for global investors.  

Last September around the dramatic reaction to the Fed's decision not to taper was the first time that the correlation became inverse since the collapse of Lehman.  It had been trending lower recently and is now negative or inversely correlated again.     The -0.013 correlation currently is likely to fall further.  The 30-day correlation is at -0.33.  

The 30-day correlation has been negative since before Christmas.  The correlation was also inverse for around a month from mid-August.  Before that, you have go back to before Lehman's demise to see a 30-day inverse correlation between the returns of the euro and S&P. 

The breakdown of the relationship between the euro and the S&P 500 should raise a yellow flag for Europeans investing in the US and has implications for hedge decisions.   For other investors it is warning that the investment climate may be changing.  Many longer term bullish dollar views are predicated on precisely this break down of the risk-on/risk off matrix.  A rising stock market, predicated on solid US fundamentals, could coincide with a dollar rally, though not today.