Draghi QE Turns Stocks Into Bond Appendage As Correlation Jumps
By Namitha Jagadeesh and Inyoung Hwang
Mario Draghi?s quantitative-easing program is tying together the fate of Europe?s stock and bond markets to a degree not seen in almost two years.
Since the European Central Bank president began buying government debt, the correlation between moves in the Euro Stoxx 50 Index and a gauge tracking the region?s bonds has climbed to its highest level since September 2013. While that served bulls when fixed-income markets gained to start the year, lately it?s been all downside with equities following bonds to a loss of 6.7 percent.
The power with which signals from other markets still push stocks up and down in Europe is a frustration for investors waiting for equities to start reacting to influences such as earnings and takeover prospects. The stronger relationship between the asset classes is what?s exacerbating declines in shares, according to UniCredit Bank AG?s Christian Stocker.
?This is the main reason for the risk-off,? said Stocker, a strategist in Munich. ?The trend in bond prices has turned, and the euro is gaining some strength. With fading stimuli from the FX side, profit taking in equities prevails.?
For the first time this year, investors withdrew money from European equity funds, pulling $1.5 billion in the week ended May 6, according to EPFR Global data cited by Bank of America Corp. Government-bond funds lost $480 million in the same period, as investors turned against record-low yields and weighed the possibility that the ECB may end its QE sooner than indicated or cause too great a squeeze on supply.
The Euro Stoxx 50 climbed 0.1 percent at 8:21 a.m. in London.