China leading other markets?

September 2, 2009

It’s becoming increasingly common to blame Chinese stocks for recent volatility in global markets.

In some places, numbers do back up why China and other markets are increasingly moving in tandem.

According to Brown Brothers Harriman, the correlation based on percentage change between Shanghai stocks and the S&P 500 index has risen to 18 percent in the last three months. This compares with year-to-date correlation of 9 percent and 4.5 percent in the past two years.

The correlation between the front month copper futures and the Shanghai composite has risen to above 30 percent in the past three months from 27.4 percent since January and 16.5 percent over the past two years.

Over the two past years, the correlation between the euro/dollar exchange rate and the Shanghai Composite is 12 percent, same as the year to date. In the most recent 3 months the correlation has risen to just above 21 percent, its highest since Q2 2007. The highest over the past decade was recorded in Aug 2005 with a correlation of about 40 percent.

The yen’s correlation with the Chinese equity market is not statistically significant. Over the past two years, the correlation is about 4 percent and year to date it has fallen to a little more than 2 percent, but in the past three months has risen to about 5.5 percent.

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I have been noticing a lot of selling pressure in China. It seems we may have a correction shortly.