Many traders say that the only thing that goes up in bear markets is correlation.
So it’s not a great surprise that the big falls, and then recoveries, in global markets in January was also associated with the co-movement in many assets across global financial markets.
In particular, the movements in the price of oil, the US dollar and stocks, their fall and recovery have been closely correlated during the past few months and key to the heightened sense of fear that traders and investors have felt.
During January, this relationship has increased such that oil and stocks were almost moving in lock step during the month.
But the current strength of this relationship is “nonsense”, according to Deutsche Bank analysts Stuart Kirk and Rineesh Bansal.
Writing in the bank’s “db140Weekender” note, the analysts highlight that stock traders should be cheering lower oil prices not selling down their holdings. That’s because counter to the current theory that lower oil prices is a wash for the US and global economy (not gaining traction) in the long run lower prices will be good for consumers, and growth.
Here’s their hypothesis (our emphasis):
Lock-step but opposite movements in the dollar and oil have shocked investors into dumping shares on both sides of the Atlantic. Indeed, three-month correlations between Brent and US equities have quadrupled to 40 per cent over the past six months; for European equities the correlation is now 34 per cent whereas previously it was negative. That is nonsense. High oil prices contribute to recessions, such as in 1973 and 2008; falling oil prices do the opposite, as in the 1990s. Only last month, an IMF study forecast that a halving of oil prices would add 0.2 to 0.4 percentage points to global growth. Sure, energy companies comprise five and 15 per cent of the high-yield credit markets in Europe and the US respectively. But that means the vast majority of firms will directly benefit from cheaper inputs and stronger consumers.
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