Stocks and Bonds Stage Nude Love-In

Rolling Correlation between SPY and TLT ETFs

Rolling Correlation between SPY and TLT ETFs

The 2-week correlation between SPY and TLT hasn’t been this high since the end of January 2014, after which the SPY fell nearly 6% in two weeks. Stocks and longer dated US Treasury futures both closed higher today, with the S&P 500 gaining 6.25 handles and the 30-year up 9/32’s.

Normally stocks and bonds move in opposite directions; lately they have been dancing to the same tune. Recently, short term peaks in the stock market have been associated with periods of positive correlation between stocks and bonds:

Rolling Correlation (SPY vs TLT) plotted against the SPY etf

Rolling Correlation (SPY vs TLT) plotted against the SPY etf

The market is currently betting on stimulus from the ECB tomorrow. Mario Draghi has been slow to engage in all-out QE like other central banks. Given the market’s bullish expectations, anything short of QE will likely be a disappointment and cause heightened volatility. 

The ECB interest rate decision is at 7:45am EST tomorrow, but expect the real fireworks during the press conference afterwards at 8:30am. Markets will be reading Draghi’s introductory statement for clues on where the ECB will steer monetary policy going forward. As always, the Q&A session is where Draghi can drop the biggest bombshells, as the impromptu nature of the discussion allows for more candid responses from the central bankers.

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