Emerging Markets and U.S. Markets Have Become Highly Correlated

Increasing levels of globalization have seeped deeply into the financial markets, and even emerging markets that traditionally moved in opposition to U.S. stocks now move in lockstep with ours.

The lack of diversity in global markets is striking. From Bloomberg:

Bloomberg’s Stock Correlation Tracker compares the benchmark equity indices in 84 countries with the S&P 500 index over a 10-year period and found that 88 percent of them were positively correlated with the U.S. market index in the first half of this year. That’s up from 82 percent a decade ago. Much of this convergence is happening in emerging or frontier markets, where economic growth has slowed dramatically — moderating closer toward the U.S. pace — including several Middle Eastern indices that used to move in the opposite direction to the S&P.

How bad has it gotten? The number of markets that aren’t highly correlated to U.S. equities has been whittled down nearly to single digits:

For traders looking to hedge their U.S. equity bets, there are but 10 markets left this year that are negatively correlated to the S&P 500, according to the Bloomberg Stock Correlation Tracker: Morocco, Tanzania, and Malta to name a few. Instead, they may want to take a closer look at those larger economies whose markets are now less correlated than a decade ago: Indonesia and Turkey, teetering on the edge of losing its investment-grade rating after a failed coup.

More and more, we’re seeing the factors that affect developed markets having the same effects on emerging markets as well. The trend speaks to the increasingly interconnected nature of the global economy, as well as the post-financial crisis groupthink that spawned an era of unprecedented level of low interest rates and fiscal stimulus that’s still pervasive to this day.

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The iShares MSCI Emerging Markets Index ETF (NYSE:EEM) fell $0.46 (-1.22%) to $37.37 per share in premarket trading Friday. The largest emerging markets ETF by assets has gained 17.5% this year, more than doubling the return of the S&P 500 in the same period.

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