Print Data Brief

Which Countries Move Together

Thursday, May 22, 2008

As the popularity of readily-available exchange-traded funds has increased, we have seen more and more interest among traders looking to diversify away from U.S. equities.  Anyone can now buy a share of the Russian stock market or a claim on Gold almost as easily as they can a share of IBM.

With that has come a demand for more sentiment data on those other markets.  We've stepped up our effort to gather some of that data, which will be rolled out as we get more of a history and a feel for how reliable it is.

In the meantime, it might be useful to take a look at the correlation among stock markets in a selection of countries, via tracking funds.  This can give us, in one quick glance, an idea of how much we might be able to export sentiment data on U.S. indices to other stock markets.

The table below is called a correlation matrix.  It shows the daily correlation over the past year of one market to another, color-coded based on the degree of correlation.  For those who are color-blind, the highest correlations have a solid border; the lowest correlations have a double-lined border.

In the world of correlations, a figure of +1.00 would be a perfect correlation; for every +1% move in one market, the other should also move +1%.  A perfectly negative correlation would be equal to -1.00, meaning that a +1% move in one should correspond to a -1% move in the other.  We rarely see such perfect relationships, but just remember that the closer the number is to +1.00, the more the markets move together.

From the table, we can see that the U.S. has had the highest correlation to the UK and Mexico.  It had the lowest correlation to Japan and China.

The highest correlation among them all was the U.S. / Mexico relationship, while the lowest was the Japan / Canada pairing.

Japan had the lowest overall correlation to all other markets, while the U.S. and UK were tied for the highest.

This can be a handy reference for extrapolating news events in other markets.  For example, a bad economic report in Japan that sends that market down 1% overnight might not be the best tell to guide trading in the U.S. the next day.  Or, if we see conditions of excessive optimism here in the U.S., then we might want to be a little more guarded about any stocks we have that are traded in Mexico.

Here is the list of tickers used to determine the correlation matrix:

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