Central Bank Activities Driving Asset Price Correlations

The Wall Street Journal had an excellent piece out last week highlighting the negative correlation between risk asset sectors such as stocks and the U.S. dollar. The article, titled “Falling Dollar a Risky Premise for Rally in Other Assets,” points out that Morgan Stanley’s Global Risk Demand Index, which measures such markets as stocks, commodities and emerging markets, is moving in almost the exact opposite direction of the USD. The correlation touched -0.86 in April (a correlation of -1 means two assets move in opposite directions, while a +1 means they move in the same direction). To us this highlights the far-reaching impact that central bank policies (particularly the Federal Reserve) are having on financial markets around the world. The reversal in the U.S. dollar that occurred in February/March coincided with the Fed becoming much less hawkish in their outlook for 2016 rate increases, lowering their expectation for 2016 rate hikes from 4 to 2. Chairwoman Yellen also gave a speech to the Economic Club of New York during that time discussing the additional tools the Fed has to stimulate the economy, including low rates. With global economic growth as slow as it is, and large economies like China going through significant economic transitions, all eyes are on central bankers to drive asset prices. To sum it up, watch the Fed because as they go, so go financial markets.

U.S. Dollar Index

Sources: Bloomberg, Morgan Stanley, WSJ