Financial Market Highlights 2/14/12

Posted February 15, 2012 by Editor

[private][private]Attached is the latest update to DE’s financial markets chart package, and a set of slides with a focus on S&P 500 sector correlations.

• S&P sector returns showed further recovery in more-cyclical sectors – Industrials, Discretionary, Info Tech, and Financials.
• Treasury yields remain pinned at low levels.
• Credit spreads and CDS indices declined – particularly in Europe over the past month.
• Inflation expectations remain in check, but have risen from recent lows.
• The USD gave back some of its late-2011 gains, in 2012.

Sector Correlations High in 2011 on Macro Risks – 2012 Starting to Show Easing, But Markets Still Wary

2012 might finally be the year where more emphasis is placed on sector and stock fundamentals, and less on macro risks, but markets are not entirely convinced. That said, there remains optimism that sort of a declining correlation scenario can unfold, and markets are not necessarily – contrary to some views – pricing in too-rosy an outlook given the magnitude of recent gains.

• News to few investors, high correlations across sectors, and between sectors and the overall S&P 500 index made 2011 a less than favorable environment to express relative sector views. Macro risks dominated.
• Lower implied market volatility, and rallies more generally, tend to be associated with declining correlation. That pattern is beginning to re-emerge.
• Implied S&P 500 correlation – a market-based measure of average correlation derived from individual stock and index option prices – has come down relative to recent peaks, while implied volatility (VIX) has come down faster.
• That combination of moves is compatible the interpretation that while (1) near-term market risks are perceived to be lower, (2) investors are still willing to pay relatively more to hedge against large, correlated, market moves.

 FinMkt Highlights 2-14-12

Sector_Correl 2-14-12[/private][/private]