In a recently published report Morgan Stanley highlights the massive and simultaneous drop in regional, cross-asset, individual stock and FX correlations, which is unusual and hasn’t been this severe in over a decade. The report notes “In just four months, we have gone from a market of unusually close linkages across markets, to one with usually divergent returns”. This means different markets aren’t moving together depending on whether it’s risk-on or risk-off mode for investors.

Morgan Stanley notes correlations are dropping because of more divergent policies, politics and currencies. Also the fact that we are in the late stage of the economic cycle means market-specific stories are bigger drivers than the binary question of ‘recession, or not?’

The Global Correlation Index below tracks several different correlations:

• Cross-asset correlation tracks how closely prices in different assets are moving relative to each other (i.e. stock vs. bonds, stock vs. FX, etc.)
• Cross-region correlation tracks how closely prices in different regions of the same asset class are moving relative to each other (i.e. US stocks vs. EM stocks, European stocks vs. Japanese stocks, etc.)
• Intra-market correlation tracks how closely prices of different securities within an index are moving (i.e. how closely stocks within the S&P500 are moving together).