The risks of high cross-asset correlation

Correlation between asset classes has remained at high levels this year, despite a fall in volatility. This presents a potential opportunity for traders, but could also pose significant risks. By Christopher Whittall

The S&P 500 index hit a year-low of 676.53 on March 9, 2009 – four days after the euro slumped to its own year-low against the dollar, with one euro buying just $1.2543. It was a sign of a new market dynamic in which these two underlyings had become risk barometers. When investors were bearish, equities would plummet and the euro would weaken as investors piled into the dollar; when sentiment improved, the reverse would happen.

This paradigm continued into the second half of the year. In