Intermarket Analysis
Funds flow from market to market, such as out of fixed income and into equities when traders see good readings on the economy. One step traders do is to create a quote page with all of the asset classes available for trading. In this example, U.S equity indices, International indices, key U.S. stocks, cash FX, U.S. debt futures, International debt futures, the yield curve, swap rates, energy futures, metals and commodity last prices are displayed. In addition, the CQG thermometer for each market is under the price. At one glance, a trader can tell whether the last price is near the high for the day, as a small amount of red shows and a large amount of green. Alternatively, if the last price is near the low for the day, then there is a large amount of red and a small amount of green. The arrow is the opening price.
Still, a chart is helpful, and to better understand the impact one market may be having on another market, as well as how often and how tight two markets are related, a correlation study is used. The example here shows a correlation study applied to each market. The top left-hand chart is the EUR/USD pair and the 21-bar correlation to the 10-year treasury yield. Currently, the dollar has been weakening against the Euro, the 10-year rate has been falling, and the correlation between the two markets is a negative 0.778. However, we can see that this relationship is not persistent, and can change over time.
The top right-hand chart is the Crude Light futures contract traded on Globex, and the correlation to 10-year Treasury yield. Again, the relationship changes over time, and currently there is a slight negative correlation between the two.
The bottom left hand chart is the S&P 500 index and the correlation study is using the 10-year Treasury yield. During late October, the correlation between the two markets hit 0.88 when both the S&P 500 and the ten-year yield were rising. Now, the two are running with an inverse relationship.
The bottom right hand chart is the ten-year yield along with three correlations: The Dollar Index, the Euro/USD pair and the USD/JPY pair. U.S. yields and the Euro/USD pair are running inversely, while the other two running with a high correlation to yields.
Tracking these relationships with simple correlation analysis can keep you alert to when one market may influence the price action of another, as well as times when the linkage between markets is low.