Interesting Correlations

Performing a simple correlation study on various indices and the group of LME Base Metals, I have noticed a particularly interesting relation between European stocks, (English FTSE (.FTSE), French CAC 40 (.FCHI), Eurostoxx 50 (.STOXX50E) , Italian Index (.FTMIB), Swiss Market Index (.SSMI))  marked in red, and the Base Metals group. Interestingly the European indices had higher correlation factors than what traditionaly has been seen as commodity dependent economies marked in Blue (Toronto Stock Exchange Index (.GSPTE), Australia Stock Exchange Index (.AXJO), Russian Stock Exchange Index (.IRTS), South African Johannesburg top 40 Index (.JTOPI)).However, most Interesting is that Shanghai Stock Composite (.SSEC) has one of the lowest correlation factors among the group of indices.

 

BaseMetalIndicesCorr

 

The study included data from 02 Jan 2006 to 19 Oct 2015. English FTSE had the highest correlation to base metals among all indices included in the study. The highest correlation factor of 0.5215 is between copper and English FTSE, indicating that copper and FTSE have a fairly positive correlation and the two instruments tend to rise and fall simultaneously.

That said, this however doesn’t imply that the amplitude of the rise and the fall is the same. I have noticed that only the periods coincide. FTSE has been rising from June 24th 2013 to August 2nd 2013, Copper was rising from June 25th to August 16th 2013. Another recent examples FTSE began to fall from 27th April 2015 into August 24th 2015 and copper started its descend on May 5th and weirdly bottomed on August 24th 2015. Although both instruments in these two examples given were on longer term different trends.  Meaning if FTSE makes a new high or low it doesn’t mean Copper will do the same, it only means that it will likely go in a similar direction short term, short term movements tend to coincide time wise.

How useful is this?

This can be used as a proxy indicator, if say it is not clear on one instrument what the next step is, the other instrument might be offering a better clue.
Enjoy!