Decoupling, Interrupted

Tyler Durden's picture

Remember back in long distant memories (from a month ago) when all the chatter was for the US to decouple from Europe as the former (US) macro data was positive and a 'muddle-through' consensus relative to the European debacle took hold. Since 12/14, European markets have significantly outperformed US markets (both broadly speaking and even more massively in financials - which is impressive given the strength in US financials). Furthermore, we saw a decoupling of correlation (de-correlating) between EUR and risk as a weaker EUR was positive for risk as USD strength showed that the world was not coming to an end (and Europe was 'contained'). Well things are changing - dramatically. EUR and risk were anti-correlated for the first two weeks of the year and since then have re-correlated. The last few days have seen EUR weakness (Greek PSI and Portugal fears) coincident with risk weakness (ES and AUD lower for instance as US macro data disappoints and a dreary Fed outlook with no imminent QE). Given the high expectations of LTRO's savior status, European financials have been the big winners (+20% from 12/14 and +15% YTD in USD terms) compared to a meager +12% and +8.8% YTD for US financials - with most of the outperformance looking like an overshoot from angst at the start of the year in Europe (which disappeared 1/9). With EUR and risk re-correlating (and derisking very recently), perhaps it is time to reposition the decoupling trade (short EU financials vs long US financials) though derisking seems more advisable overall with such binary risk-drivers as Greek PSI failure, Portuguese restructuring (yields have crashed higher), and the Feb LTRO pending (which perhaps explains the steepness of vol curves everywhere).


EUR and risk have re-correlated in the last two weeks.

Heading into the new year, EUR and risk were once again re-correlated and then as the decoupling myth of a US economic miracle took off, we saw USD strength (EUR weakness) as a positive risk signal and EUR and risk de-correlated (red dotted square). This anti-correlation has reversed in the last week or so and with very recent EUR weakness (and JPY strength) risk has re-coupled and is now drifting lower post Bernanke.

European financials have taken off in the last two weeks relative to everything.

The same pattern can be seen in the behavior of risk assets themselves (rebased to USD returns) - the chart above shows percentage performance from the mid-December lows (and dotted YTD performance). From mid December to the start of the new year, US and Europe were highly correlated. For the first two weeks of the year, European markets (green - financials, and black - broad stocks) underperformed (and de-correlated) from US markets (pink - financials, and orange  - broad stocks). Since mid January they have re-correlated and Europe has leaped ahead as reflexivity has taken hold in a mutually reinforcing LTRO-has-saved-the-day and we've had no bad news cycle.

The most-watched European sovereign spreads have compressed in the last two weeks - all except Portugal!!

But quietly behind the scenes as everyone focuses on Italian 2Y yields dropping fast and German financials tearing higher (and for some reason people are surprised that auctions are going off well when everyone knows the ECB is there for banks to flip-that-bond to?), Portuguese bond yields (and spreads above) have crashed higher.

With the biggest fear not the impact of an isolated Greek default (given its pure size is relatively small) but the precedent it sets for other stressed European nations (and the Euro-zone itself), perhaps the canary is more like an Albatross-in-the-coalmine that is being ignored for now as momentum and short squeezes hide the harsh reality that LTRO solved nothing but a short-term liquidity problem leaving capital short and balance sheets in peril still for European (and US) banks broadly.

Charts: Bloomberg

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Mr Lennon Hendrix's picture

Girllll [ba bwaow bwaow bwaow], you'll be a woman....sooon

_ConanTheLibertarian_'s picture

So Valentine's Day and April Fools Day are in the top 3 ? How sick is that!

francis_sawyer's picture

I was just trying to do some research on this...

& stumbled across it...

flattrader's picture

On a related note--

FYI-an attorney friend advises me that if you want your divorce done quickly, schedule it for Feb. 14th as hardly anybody wants to get divorced on Valentine's Day.  No joke.

l.hauri's picture

It is a good thing! I really like it! Maybe I will follow your tips. dental problem

SheepDog-One's picture

A funny thing happened on the way to globalization masterplan, 'decoupling' now what?

Yea we're spending decades building a 'global economy'....until it proves problematic as hell and unprofitable. These people are lunatics I say we nuke it all from orbit and start over.

LawsofPhysics's picture

"problematic as hell and unprofitable."


Well duh, now where are all those aliens that are supposed to be buying our i-crap in exchange for a cheap energy source?

If your country had the highest standard of living in a state/nation-based economy and the world suddenly decides that it wants a "global economy", then there is only one direction for that standard of living to go.  Common sense.  Moreover, in a global economy, the only GDP that matters is that of the earth.  So tell me, who is the earth's customer?  Aliens on Mars? Aliens on Venus? Alpha centauri?  

Welcome to the shell game of the millenium.

Buck Johnson's picture

It is a shell game, and the game is running on empty. 

HD's picture

"I say we nuke it all from orbit and start over..."

Yea, that sounds good...until a balding, bearded Keynesian stowaways on your ship, lays central banker eggs in your chest, then causes your ship to crash land back on prison planet earth full of 99%ers. Your only hope at freedom is to throw yourself into molten lava to kill the last remaining money printers...thus ending the nightmare forever.

You've won! Until they clone you and the money printer together into a quantitative easing-unsustainable debt hybrid monster.  Also,  Winona Ryder is there for some reason.

It will happen.

Doña K's picture

The recipe is very simple.

Work, spend less than you make, take your money out of banks, do not participate in a rigged paper market, accumulate PM's and try to be as independent as possible.

The beast cannot survive without our participation.

.................if neither foes nor loving friends can hurt you,....................

Dr. Engali's picture

This mess is so intertwined that they can never unwind it. Without the whole thing falling apart.

Roy T's picture

Never mind the GDP miss, the consumers are CONFIDENT.  We got to turn this thing green today boys!


Cognitive Dissonance's picture

Reality bites................again and again and again.............

Let us create our own reality or one will most certainly be imposed upon us. I'll go first.

Mr Lennon Hendrix's picture

Risk always leaks out somewhere; Portugal, silver, oil; there is a huge risk in the system, and there really isn't a good buy for investors.  Bonds?  USTs are a bubble (when it bursts, who knows), and Euro debt has the risk of Contagion (you'll be hearing that word a lot).  No one will buy Japanese debt at this point either.  Own cash?  And lose to inflation.

There are no investments on market anymore, buit the retail investor has to do something with their IRA.  Talk about a rock and a hard place....

lizzy36's picture

If you couple, can you the decouple before recoupling?

In other amusing news some stories about greece planning an "orderly exit from the eurozone"......Like LEH planned an orderly exit from the financial system?

GeneMarchbanks's picture

The beauty of all this is, of course, that none of this will be traceable to any particular event because of the lack of the OTC derivatives regulation. Greece, defaults(officially) and then three months later there's a crunch of epic proportion. Good luck tracing it all back to Greece. ZH is good, but nobody is that good.

francis_sawyer's picture

during the lyrical part that goes:

"All around the mulberry bush...

The monkey chased the weasel...

The monkey stopped to pull up his sock..."

...It all seems fairly orderly...

falak pema's picture

Can this be a sign that the currency war is now turning in Euro favour? You can milk the cow once, but watch out if it grows horns! How many bullets left in HF panzer brigade? And what back up is FED gonna offer against Euro Maginot line defenses? Zirp to 2014 and weak dollar...but that means hyper inflation risk. Oh, boy...the commodity wall gets very high for Joe six pack.

Looks like FED is hedging its bets as Eurozone default is mega worse in contagion than carry trade rip off advantages for US oligarchs. Fed in a hard place. Oh, let them eat cake...sounds ominous...central banker's nightmare. Lucky that printing press still works...Never know how those Brics will react though, Iran and China, dangerous combination. 

decouple and recouple, is like coitus interruptus, with Jack Nicholson in Chinatown telling his chinese joke. Don't cut your nose on that one!

Bahamas's picture

decouple and recouple, is like coitus interruptus,

ha ha ha

The trend is your friend's picture

russell still holding on....hard to understand

oogs66's picture

goldman is still working the phones getting retail to buy it - they had a note earlier in the week, they have their short position but it would be too early to crash it

Irish66's picture

Pakistan chairman just said nuclear weapons are safe...thank goodness

Instant Wealth's picture

Some say, they're safe, because a whole British infantry regiment is sitting on top of their command bunker.

Texas Ginslinger's picture

Baltic Dry Index is dropping a regular 30 - 35 points per day.

Anyone have some inside info on the bulk shipping business..??

Are there more ships online now, or is the transfer of raw material really drying up..??

Dr. Engali's picture

It's been dropping like a rock. I blame pirates. That and nobody is buying anything because inventories have been built in Q4.

ucsbcanuck's picture

"The Baltic Dry Index measuring freight rates for ores, grains, and bulk goods, has fallen 44pc over the last year. Kasper Moller from Maersk in Beijing said weak Chinese demand for iron ore was the key culprit."

falak pema's picture

Wait for the chinese mega infrastructure boom to pick up, if it'll be Baltic dry index up. I think that China's home investment up move will be fed by Euro crisis resolution into Japan type recession, as that of USA, after 2013. 2012 will be a walk on the ledge type year, as it cannot feed the current hyperconsumption of first world. We will adjust without major break up and then go into big long slimming diet over many years. Only true problem is avoiding USA fed military wars. Lets hope the financial brake will help that. And the mind set change at home. (I am a born optimist, sorry).

China will pick up, as the West is desperate to find liquidity outlets which cannot be found in protectionist home environment with hi-cost structures and defensive re-industrialisation strategies. In 2012, we will see  more of this new paradigm fall in place in first world, to generate enough growth to avoid mega deflation, through biflation. So we stay in doldrums big time in USA/EU and try and thin down debt via inflation and more taxation. While the BRIC world eats up excess liquidity stashed in off shore SYSTEM D+ Corpocracy Oligarchy money, paying it higher returns through internal growth. There is 25 T of private money lying in Cayman type locations, think of that. It needs outlets. And it does not want to go up in mega deflation fire sale.

So it goes to Brics and the like, where the lean and hungry are. Simple as that. We slim they grow fat. The new NWO mantra.

ucsbcanuck's picture

I think what you're talking about will happen in 2-3 years from now. China will recalibrate to supply the emerging markets. However for now they are still big suppliers to the US and EU.

NEOSERF's picture

Yields for Portugal will plummet if Greece gets "handled" without the dominoes starting...

Wipeout2097's picture

Being Portuguese I rate the article 5* but the replies of forum members are way more informative

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