By Amanda Cooper
LONDON, April 24 (Reuters) – The traditional global asset correlations that collapsed when the war in the Middle East erupted remain broken, leaving investors to piece together strategies to trade the road to resolution with a faulty instrument panel.
Record highs for Wall Street stocks belie concerns about fraught geopolitics, how long energy supplies might be disrupted for and long-term economic damage.
BMO chief FX strategist Mark McCormick reckons the next three to six months will not resemble the “pre‑conflict normal”.
“The growth factor is recovering, but remains below late‑2025 levels, the rates (monetary policy) factor remains elevated, correlations are shifting, and drawdown risk is rising. Something new is forming,” he said in a note.
Here’s a look at the disruption to classic correlations in stocks, bonds, currencies and commodities that have traditionally provided a steer on economic trends.
A HARD TEST FOR FIXED INCOME
Stocks and bond yields usually move together, as investors tend to hedge economic growth worries, which hit stocks, by buying bonds, sending yields lower and vice versa.
That relationship has been more erratic since the pandemic, as higher inflation and government debt undermine the ability of bonds to act as a hedge against equity risk.
The International Monetary Fund, in a pre-war blog in February, warned that investors and policymakers must rethink risk management for “a new era” where traditional hedges fail.
Two-year bonds, sensitive to inflation and interest rate expectations, have been in the eye of the storm.
The one-month rolling correlation between two-year Treasury yields and the S&P 500 has collapsed to around -0.8 from an average of 0.23 over the last five years. Since the war started, that metric is at -0.63. A near-identical pattern emerges for two-year German yields and European stocks.
“There definitely wasn’t a move into sovereign fixed income in March, which, at least at the front end, you might have expected,” said State Street head of macro strategy Michael Metcalfe.
“This was a hard test for fixed income, because it was an inflation shock and also potentially a growth shock, which doesn’t help the long-term fiscal concerns.”
GOLD IS MISBEHAVING
Gold has ditched its safe-haven credentials since the war began, moving unusually closely with equities and even volatile crypto. It remains 10% below pre-war levels.
Gold usually boasts a robustly negative correlation to the dollar. When volatility picks up to the point where investors ditch stocks, bonds and other markets, the dollar emerges as the main beneficiary, as has been the case during the war.
