Along with Playstations, iPhones, and deflation, stock market volatility appears to be America's newest major import from the Asian world.
Each day begins out east, but typically that's not what sets the tone for North American financial markets. However, analysts at Morgan Stanley, led by Chief U.S. Equity Strategist Adam Parker, note that the traditional relationship which sees the S&P 500 drive price action in Asian equity markets has been turned on its head; the tail is now wagging the dog.
Asian markets have never had such an influence over the gyrations of U.S. equities, according to the analysts.
Starting in July, the S&P 500's daily returns began to closely track the preceding performance of three major Asian equity indexes -- Japan's TOPIX, Hong Kong's Hang Seng, and China's Shanghai Composite:
"The TOPIX is now more correlated with the S&P than at any time since at least 2000, including the financial crisis," wrote Parker's team. "Meanwhile, the Hang Seng and Shanghai Composite returns are also at cyclical highs in terms of same day S&P 500 correlations."
In order to demonstrate that daily returns for the S&P 500 and select Asian equity indexes have done more than move together, the analysts used a Granger causality test to try to find which variable contains predictive information about the other.
"Amid continuing equity volatility, Asian equity markets now exert an unprecedented influence on daily S&P 500 returns," Parker & Co. concluded.
These findings support the notion that the U.S. equity market selloff in late August was not a made-in-America event; the S&P 500 was simply taking its marching orders from the moves across the Pacific.