Comments on: Equity-bond decoupling shows risks have changed http://blogs.reuters.com/breakingviews/2011/11/17/equity-bond-decoupling-shows-risks-have-changed/ Mon, 26 Sep 2016 03:26:00 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: whirdym http://blogs.reuters.com/breakingviews/2011/11/17/equity-bond-decoupling-shows-risks-have-changed/comment-page-1/#comment-8649 Sat, 19 Nov 2011 20:00:23 +0000 http://blogs.reuters.com/breakingviews/?p=7626#comment-8649 The correlation dynamics are interesting here, and certainly equity markets do seem to have “decoupled” from sovereign bond markets in (linear) correlation terms. But I think that this gives further testament to the non-linear, irrational and inefficient nature of financial markets (relative to what is conventionally assumed at least).

I think Equity-markets seem have simply become somewhat desensitized to the protracted & high-pitched state of crisis in the Eurozone, and have fallen back upon other elements of the investment mosaic. The apparent remoteness of the EU crisis affords this luxury where the fallout from any shock (EMU dissolution) will be felt through 2nd+ round effects (but felt nonetheless). EU Sovereign bond manager’s don’t have this luxury where the crisis is expanding on more and more fronts, and all its consequences are both proximate and acute (ptf mark-to-market, liquidity, counterparty-risk, wholesale/interbank etc).

I believe that were the situation to suffer another shock (e.g. uncovered peripheral govy auction), this US-equity reprieve will prove itself to be transitory and the consequences of an EMU dissolution vis-a-vis global recession/depression will be brought to the front very much once more for the Equity markets. Here consensus estimates (Reuters Starmine) will prove themselves to have been a totally useless indicator in the context of a latent but acute threat of global recession, which if actualized will then inevitably trigger earnings-revisions to allow valuation multiples to find a floor.

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