Posts Tagged ‘Correlation’

Resurgent Yen a Global Destabilizer

Wednesday, October 29th, 2008

Once again, volatility favouring the Japanese Yen is having a pronounced effect on what happens in the stock market. There is a well documented history of the relationship that exists between global stock markets and the Yen. There appears to be a well-defined negative correlation between the yen and equity markets. When the yen surges, markets fall, and vice versa.

We have covered this topic on several occasions during this year:

From the Economic Times, The Group of Seven issued warnings on Monday the yen’s wild swings are threatening financial stability, fanning speculation central banks may intervene to halt a rally in the currency driven by a Japanese exodus from emerging markets.

The yen was the only currency mentioned in a brief G7 statement as it rallied to 13-year high against the dollar, not only threatening Japanese exports as the world’s second-largest economy tumbles toward recession amid the worst global financial crisis in 80 years, but leading to a destabilization of currency related transactions that need to be unwound.

As a matter of background building, we provide below a summary of milestones in the yen’s history:

1871 - The yen became Japan’s currency as part of the Meiji Restoration, which marked the start of Japan’s modernization and opening to the rest of the world. Japan adopted the gold standard.

1949 - After World War Two the dollar’s fixed rate is set at 360 yen via the Bretton Woods system, partly to help stabilize prices in the Japanese economy.

1959 - The dollar/yen exchange rate is liberalized and the margin of fluctuation is set at 0.5 percent on either side of its dollar parity.

1963 - The margin of fluctuation is widened to 0.75 percent. 1971 - United States abandons gold standard, bringing an end to the Bretton Woods system of fixed exchange rates and forcing a realignment of world currencies.

December 1971 - Under the Smithsonian Agreement, the dollar/yen exchange rate is set at 308 yen and is allowed to fluctuate in a wider band between 301.07 yen and 314.93 yen.

1973 - Japanese monetary authorities decide to let the yen float freely against the dollar, and the yen appreciates as far as 263 to the dollar.

1978 - The yen pushes through 200 to the dollar for the first time, strengthening as far as 177.

1980 to 1985 - The yen’s appreciation halts and partially reverses despite Japan’s big trade surpluses. Higher interest rates in the United States prompt Japanese investors to put money in dollar assets.

1985 - The Group of Five industrial nations, the predecessor to the G7, sign the Plaza Accord in which they agree the dollar is overvalued and to weaken it. The yen climbs from its pre-accord level of around 240 to 211 in October and 200 in November, a 20 percent rise in just a few months.

1986 - The U.S. currency falls further to around 190 yen in January, 167 yen in April and 153 yen in August.

1987 - In February, six of the G7 nations sign the Louvre Accord, which aims to stabilize currencies and halt the dollar’s broad decline. The dollar still falls from near 153 to 137 in April and 120.80 by the end of the year.

1988 - On January 4, the dollar falls to a post-war low of 120.45 yen in Tokyo trade, a level that holds as the low for more than five years. The Bank of Japan intervenes to buy dollars and sell yen that day on behalf of the Ministry of Finance.

August 17, 1993 - The dollar declines to a new post-war low of 100.40 yen in Tokyo.

June 21, 1994 - The dollar falls through the key 100 yen level and touches a record postwar low of 99.85 yen in New York trade before finishing at 100.30 yen.

April 19, 1995 - The dollar hits a record post-war low at 79.75 yen after U.S.-Japanese trade frictions spark heavy selling. By the end of the year it is near 103.40.

June 17, 1998 - As the dollar shoots above 144 yen, U.S. authorities join the Bank of Japan to buy yen, spending $833 million. By August the dollar rises to near 148 yen, partly due to yen carry trades in which investors borrow yen funds at Japan’s near zero interest rates to buy higher-yielding currencies.

1998 - After the global financial market strains from the near collapse of hedge fund Long-Term Capital Management, carry trades are unwound quickly. In one week alone in October, the dollar tumbles from near 136 yen to a low around 111.50 yen.

1999 - The yen strengthens further despite repeated intervention, reaching 102 in November.

2001 - Following the Sept 11 attacks, Bank of Japan intervenes to sell yen for dollars.

2003 - The MOF begins massive intervention to halt the yen’s rise against the dollar, partly to shield Japanese exporters as the economy remains stuck in its post-bubble slump and deflation. The MOF spends 20.4 trillion yen ($200 billion) over the year, nearly all of it to buy dollars and sell yen.

2004 - The MOF spends 14.8 trillion yen ($145 billion) intervening in the first quarter of the year, including 1.67 trillion yen buying dollars on January 9 alone. But the MOF ceases intervention in March and has never since resumed.

2005 - The yen reaches a high of 101.67 yen in January but then starts to fall, hitting 121.40 in December. Yen carry trades and Japanese investors shifting funds into foreign assets drive the slide.

June 2007 - The dollar hits a 4-1/2-year high of 124.14 yen. July 2007 - The yen’s broad depreciation takes it to a 22-year low on a real effective exchange rate basis. Since January 2005 the yen has lost 25 percent of its value on a REER basis.

August 2007 - Strains in financial markets from the U.S. subprime mortgage crisis spark an unwind of yen carry trades.

The dollar falls from near 120 yen to 111.60 yen. The high-yielding Australian and New Zealand dollars tumble nearly 10 percent.

March 13, 2008 - The yen hits an 12-year high of 99.77.

October 24, 2008 - Yen hits 13-year high of 90.87 versus the dollar, while setting an all-time high against the Australian dollar of 55.11, with the Aussie losing almost a third of its value in just a month on a massive unwind of carry trades.

October 27, 2008 - The yen’s surge to 13-year highs prompts the G7 to issue statement to single out the yen in warning on currency market volatility.

The yen has surged nearly 20 percent so far in October on a trade weighted basis, more than twice as big as any month going back to 1970, including the carry trade collapse in October 1998 and the Plaza Accord to weaken the dollar in 1985.

(Sources: Reuters, Bank of Japan, Bank of England)


People who read this post also read these:

Tags: , , , , , , , , , , , , , , , , ,
Posted in Markets | No Comments »

Donald Coxe’s Investment Recommendations, September 2008

Saturday, September 13th, 2008

We are big fans of Donald Coxe, Chief Strategist, BMO Capital Markets, whose track record on calling the “macro” market conditions and opportunities has, more often than not, been reliable. In this period, where it appears the market has no direction, his views are especially welcome.

 

Here, we provide a summary of his recommendations from Basic Points, September 2008, for your review.

  • The current commodity bear market will turnaround when financials rollover.
  • The “Frannie” bailout is Act II in a play whose plot will thicken
  • When financials roll over, gold and gold stocks will recover
  • Inflation remains above central bank targets
  • Oil will fall further. OPEC production cut not impressive enough to support prices.
  • Any civil strife in Nigeria could put upward pressure on oil
  • We expect oil to trade between $80 -130/bbl next year (though not a reliable forecast)
  • We are more confident in predicting $150/bbl in three years
  • The corn crop will be a “barn buster.” Corn in “modest” contango for next two years. Translation: Fertilizer, seed and equipment stocks are relatively cheaper now, than in the past four years.
  • The sharp drop in oil prices and “dramatic” bank bailouts should have been a catalyst for market
  • S&P needs to break 1310 to “take away the bearish condition of market.”
  • Real yield on 10-yr Treasuries is -145 bps. Treasuries are overvalued
  • Biggest near-term surprise could come from recovery in Natural Gas, barring sunspot activity, and/or historic correlations of oil/gas reassert themselves.
  • C$ under pressure from falling commodity prices, but Canada’s fiscal health makes C$ a strong alternative to the greenback
  • US election campaign could be a risky period geo-politically as “foreign adventurers” may try to take advantage of the distraction. Rogues should remember that Bush is still president for another 4 months
  • We have no idea how long it will be until we can say, “Wow, I wish I’d loaded up then!” on commodity stocks. “We remain certain that day is coming.”

The complete text can be read here.

 

 

People who read this post also read these:

Tags: , , , , , , , , , , , , , , , ,
Posted in Markets | No Comments »

Asset Class Correlations

Sunday, August 10th, 2008

July 22, 2008 - July 21’s Wall Street Journal had an interesting article about asset class correlations.  With that in mind, below we highlight (click here for PDF) a correlation matrix of various asset classes including the S&P 500 sectors, oil, gold, the dollar, the yen, emerging markets, the 10-year note and the FTSE 100.  The first matrix highlights the correlation between the daily percent changes of asset classes since the S&P 500 peaked on October 9th, 2007.  Each column (vertical) is color coded from green to red based on highest to lowest correlations.

The second matrix highlights the correlations between the same asset classes, only from a much longer time horizon (1990-present).  Then, in the bottom chart, we highlight the difference between the short-term and long-term correlations to see where differences arise.  Correlations that have increased since the bear market began in 10/07 are shaded in light green, while correlations that have decreased are shaded in light red.  In each column, the biggest increase and decrease in correlation is highlighted in dark green or red.  As shown, correlations have generally increased among sectors, while stocks have become less correlated with oil, gold and Treasuries.  Correlations between stocks and the yen have increased the most in the short-term compared to their long-term correlations.  To view the matrices in PDF form, please click here.  It’s definitely an interesting data set to analyze and it’s better to let the info speak for itself.

Correlation721

Thanks Bespoke.

(Courtesy: Bespoke Investment Group)

MEDIA ENCLOSURE: http://feeds.feedburner.com/~r/GreenlightadvisorBlog/~5/343022913/acc-bespoke.pdf

People who read this post also read these:

Tags: , , , , , , , , ,
Posted in Markets | No Comments »

Asset Class Correlations

Tuesday, July 22nd, 2008

July 22, 2008 - (Courtesy: Bespoke Investment Group) Today’s Wall Street Journal had an interesting article about asset class correlations.  With that in mind, below we highlight (click here for PDF) a correlation matrix of various asset classes including the S&P 500 sectors, oil, gold, the dollar, the yen, emerging markets, the 10-year note and the FTSE 100.  The first matrix highlights the correlation between the daily percent changes of asset classes since the S&P 500 peaked on October 9th, 2007.  Each column (vertical) is color coded from green to red based on highest to lowest correlations.

The second matrix highlights the correlations between the same asset classes, only from a much longer time horizon (1990-present).  Then, in the bottom chart, we highlight the difference between the short-term and long-term correlations to see where differences arise.  Correlations that have increased since the bear market began in 10/07 are shaded in light green, while correlations that have decreased are shaded in light red.  In each column, the biggest increase and decrease in correlation is highlighted in dark green or red.  As shown, correlations have generally increased among sectors, while stocks have become less correlated with oil, gold and Treasuries.  Correlations between stocks and the yen have increased the most in the short-term compared to their long-term correlations.  To view the matrices in PDF form, please click here.  It’s definitely an interesting data set to analyze and it’s better to let the info speak for itself.

Correlation721

Thanks Bespoke.

People who read this post also read these:

Tags: ,
Posted in Markets | No Comments »

Oil and Energy Stock Correlation

Tuesday, July 22nd, 2008

July 22, 2008 - (Courtesy: Bespoke Investment Group) Below we highlight the rolling one-year correlation between the daily price changes (%) in oil and the S&P 500 Energy sector.  As shown, from early 2004 through the middle of 2006, oil and oil stocks became more and more correlated.  But after the peak in correlation in 2006, it has been steadily decreasing.  Interestingly, the correlation increased during the first big run-up in oil from about $35 to $75.  However, the most recent run-up from $60 to $140 has seen the correlation between oil and oil stocks decrease, as oil the commodity has left the stocks behind.  For bubble theorists, this decline in correlation helps their argument because it shows that the commodity has taken on a life of its own.  It will be interesting to see how this relationship does going forward.

Correlation722

People who read this post also read these:

Tags: , ,
Posted in Markets | No Comments »

Oil vs. Stocks

Monday, June 30th, 2008

July 1, 2008 - (courtesy of Bespoke Investment Group) If any one tries to tell you differently, all you need to do is show them the chart below.  As last week’s trading illustrates, every time oil went up, stocks went down, and every time oil pulled back, the market gained steam.

Weekly_chart_oil_vs_stocks

People who read this post also read these:

Tags: , , ,
Posted in Markets, Oil & Gas, US Stocks | No Comments »