Bloomberg News

Crisis Drives Euro, S&P 500 to Part Ways, Brown Brothers Says

December 15, 2011

Dec. 15 (Bloomberg) -- The euro may be losing its tight relationship to the Standard & Poor’s 500 Index as investors shun the currency for the developed world’s best-performing stocks index, according to Brown Brothers Harriman & Co.

The 60-day correlation between the euro against the dollar and the S&P 500 reached a record of 0.85 this month. That may unravel as the 30-day correlation of the two assets, a shorter- time-period study, has dropped from its high reached in November, said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.

“It’s a glimmer that maybe investor climate is going to change,” Chandler said in a telephone interview. “We know that the euro-zone economy has decelerated and we know that the U.S. economy has accelerated in the second half of this year.”

The relative outperformance of the S&P 500 and Europe’s sovereign-debt crisis may drive investors to sell euros and buy U.S. stocks, causing a breakdown in their close relationship, Chandler said. A correlation coefficient of one means the two securities move in lock step; a reading close to zero means they are moving independently.

The S&P 500 has outperformed every Group of 10 nations’ major stock index this year, falling 3.6 percent, compared with a 28 percent drop in Italy’s benchmark FTSE MIB Index and a slump of 14 percent in Canada’s S&P/TSX Composite Index.

The euro fell 3 percent against the dollar this year to $1.2979 at 4:25 p.m. in New York. The 17-nation currency has weakened as the region’s debt turmoil spurs a slowdown in its economy. The European Central Bank said last week that the euro region’s economy will grow between minus 0.4 percent and 1 percent in 2012 versus an earlier estimated range of 0.4 percent to 2.2 percent.

--Editor: Kenneth Pringle, Paul Cox

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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