Crude is increasingly ‘the straw that stirs the drink’ of the current global macro risk regime, a Nomura strategist warns Oil is increasingly calling the tune in global markets, as rising energy prices and worries about how much consumers are paying at the gas pump are making investors nervous and affecting their portfolios. Since the U.S.-Iran war began in late February, higher oil prices have been bad news for both stocks and long-term Treasury bonds. When crude prices jump, stocks tend to fall.
The same is true for long-duration government debt, as higher oil prices have been accompanied by falling bond prices and, in turn, higher yields. That relationship has become much stronger over the past seven months, as shown in the charts below. The Iran war appears to have marked a turning point in the relationship between oil and both stocks and Treasurys.
Before the war, the relationship between U.S. benchmark West Texas Intermediate crude and the S&P 500 was basically neutral, with their rolling 63-day correlation at just 0.04 on Feb. 27. But by the end of March, it had fallen to minus 0.35, and by late April it had reached minus 0.48, according to Dow Jones Market Data. In other words, when oil prices rise, stocks have increasingly tended to fall.
Don’t Short Yourself offers weekly money tips to help you earn it, stack it and grow it. I would like to receive updates and special offers from Dow Jones and affiliates. I can unsubscribe at any time.
A value closer to minus 1 means a perfect negative correlation between oil prices and stocks, while a number closer to 0 shows the relationship is very weak or even nonexistent. The same pattern is showing up in long-term Treasurys . The rolling 63-day correlation between the U.S. oil benchmark and the iShares 20+ Year Treasury Bond ETF fell to minus 0.28 by the end of April, from minus 0.15 on Feb. 27.
It was at minus 0.55 on Tuesday morning, according to Dow Jones Market Data. Indeed, oil is increasingly behaving like a macro risk for equities, rather than simply another indicator of economic growth. Normally, higher oil prices can be bullish for stocks because they can signal stronger economic demand.
Extract — continue reading at the source.
