- US ADP rose 201k in March vs 208k expected and 217k previously. Median expectations for NFP is 190k vs 192k previously.
- SEC voted unanimously to advance a proposed rule that would require banks to retain at least 5% of the credit risk on securities backed by mortgages on all but the safest loans. – Dealbook
- Euro-zone data:
- March Economic Confidence at 107.3 vs 107.5 expected and 107.8 previously
- March Industrial Confidence at 6.6 vs 6.0 expected and 6.5 previously,
- March Service Confidence at 10.8 vs 11.5 expected and 11.1 previously
Swiss KOF LEI printed 2.24 in March vs 2.18 expected
- Partially as a result of High Frequency trading, we’ve seen a sharp increase in realized correlation across single stocks over the past few years. Less publicized is the higher correlation between asset classes. Prior to 2008, commodities were touted as a great portfolio diversifier because of their low correlation to stocks. That has been true if one uses daily data over rolling yearly time periods. Since 2008, however, the correlation between the S&P and GSCI has skyrocketed, and has remained elevated.
Whether this observation should lead to a portfolio adjustment depends on one’s view of the reason for this as well as its expected persistence. It is pretty easy to point fingers at the Fed’s QE program as a cause for this, as well as the secular shift of global growth from developed economies to commodities intensive EM economies. The sudden jump in correlation, however, suggests that the cause is non-secular in nature.
- The increase in realized single stock correlation over the past few years has not, as many have expected, had a big negative impact on Long-Short Hedge Fund returns. The main reason for this appears to be that L/S HF’s as a whole are not really picking stocks – at least not since 2003 or so. The below chart shows the rolling 12m returns of the HFRI Equity Hedge index vs a 60% position in the MSCI World. Average annual alpha since 2003 has been just 0.1%.