Europe Stocks Keep Getting Sucked Into Rest of World's Dramasby
Stoxx 600 and S&P 500 most correlated since August rout
European shares have been hit harder than U.S. this week
Traders looking at European stocks as potential relief from the China-fueled turbulence elsewhere have been sorely disappointed.
The Stoxx Europe 600 Index has dropped 3.1 percent since 2016 began, outpacing the 2.6 percent loss in the Standard & Poor’s 500 Index. Even with Europe’s accommodative monetary policy, the regional gauge is trading more in lockstep with the U.S. benchmark now than at any point since the global selloff in August, and there’s no sign of it breaking free any time soon.
Europe was clocked this week as more reminders of China’s slowing economy ignited losses around the globe, even as the European Central Bank’s decision to maintain stimulus levels stands in contrast to the tightening cycle started in the U.S.
“We’re all in this together,” said Walter Todd, who oversees about $1.1 billion as chief investment officer for Greenwood Capital Associates in South Carolina. “In the increasingly global world we live in, it’s getting more difficult to isolate or get differentiation between markets. Diversification is harder today than it’s ever been.”
While three days is little to go on, and strategists expect European shares to end the year higher, the current landscape echoes one laid out a month ago by HSBC Holdings Plc, which cut its equity allocation by almost 50 percent in favor of bonds.
The 80-day correlation coefficient between the Stoxx 600 and the S&P 500 rose to 0.62 Wednesday, according to data compiled by Bloomberg. That was the highest since Aug. 25 and above the measure’s nine-month average of 0.56, the data show. The European index has been tracking losses that have their nucleus in Asia, where China’s attempts to stymie a market selloff and re-balance its currency have shaved 3.7 percent off the MSCI Asia Pacific Index since the start of the week.
“Theoretically, financial conditions should be easier in Europe, but the theory is one thing and the reality is another,” said Todd. “If Asia and the U.S. aren’t trading well, it’s hard for Europe to separate itself.”