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Buying US stocks and Selling Emerging Market Stocks May Continue

Why is everyone buying US stocks and selling emerging market stocks? The Vanguard FTSE Emerging Markets ETF (VWO) has declined 6.53% while SPY has risen 8.24%, as of the close of yesterday and based on the close of last year. The main reason besides geopolitical instability affecting some emerging markets is provided here and it is their correlation with commodity prices.

DBC_VWO_20130418

The top pane above is a daily chart of VWO prices since the start of 2012, the middle pane is a daily chart of DBC prices and the bottom pane shows their rolling 60-day correlation of daily changes.  It may be seen that although the correlation dropped in February, it quickly rose to above its mean value and it is currently at +0.69 and rising. Given that commodity prices are under pressure because of the prospects of renewed deflationary pressures in the US and Europe, emerging market stocks have followed the decline.

Although US stocks are also correlated positively with commodities because of the high capitalization of listed oil companies and the fact that DBC is highly correlated with USO, the growing geopolitical instability has resulted in investors overlooking this and rushing to invest in US stocks and bonds.

This trend of moving funds from emerging markets to the US will stop and reverse as soon as inflation starts moving up and geopolitical tensions ease.

Disclosure: no relevant position at the time of this post.

Charting program: Amibroker (Charts created with AmiBroker – advanced charting and technical analysis software. http://www.amibroker.com/”)

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