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Why are european markets always trailing US markets?

Posted: Mon Sep 07, 2020 9:34 am
by TheoLeo
Pretty much every day the european markets simply copy what the US markets did in the previous day after the european markets have closed. Why is that?

edit: the only difference is that up days are attenuated and down days usually exacerbated...

Re: Why are european markets always trailing US markets?

Posted: Mon Sep 07, 2020 10:40 am
by LEngineer
Well, I wouldn't jump to conclusions after just one occurrence...
Though I must say I've had the same feeling before :)

Re: Why are european markets always trailing US markets?

Posted: Mon Sep 07, 2020 10:47 am
by YRT70
I'm not sure that they really do.

Image

Source: https://awealthofcommonsense.com/2020/0 ... er-a-fall/

Re: Why are european markets always trailing US markets?

Posted: Mon Sep 07, 2020 10:55 am
by langlands
YRT70 I think you misinterpreted the OP. (The title is a little misleading.)

Yes, this is a well known phenomenon. There is certainly a strong correlation but it's not a given. Especially when there are large macroeconomic forces at work, Europe takes its lead from the US markets. It also has to do with the fact that Europe comes soon after US in terms of time zone.

Re: Why are european markets always trailing US markets?

Posted: Mon Sep 07, 2020 11:15 am
by YRT70
langlands wrote: Mon Sep 07, 2020 10:55 am YRT70 I think you misinterpreted the OP. (The title is a little misleading.)
I understand what you mean but I think I got what he meant. My thought was if the total returns can be so different surely Europe isn't always following US.

And yes I agree with your point that there usually seems to be a strong correlation.

Re: Why are european markets always trailing US markets?

Posted: Mon Sep 07, 2020 11:22 am
by Anon9001
These are mainly due to the Internet being controlled by American companies for everyone outside of China. I myself would not have found this niche site without using Google. I also use the Android Operating System and have a Gmail Account. Europe does not have this much dominance in the Internet so their performance is not so good in comparison. Also the currency returns might play a factor.

Re: Why are european markets always trailing US markets?

Posted: Mon Sep 07, 2020 11:29 am
by langlands
YRT70 wrote: Mon Sep 07, 2020 11:15 am
langlands wrote: Mon Sep 07, 2020 10:55 am YRT70 I think you misinterpreted the OP. (The title is a little misleading.)
I understand what you mean but I think I got what he meant. My thought was if the total returns can be so different surely Europe isn't always following US.

And yes I agree with your point that there usually seems to be a strong correlation.
You seemed to think he was referring to annual performance when he's actually talking about correlations in daily returns.

Re: Why are european markets always trailing US markets?

Posted: Mon Sep 07, 2020 11:33 am
by YRT70
langlands wrote: Mon Sep 07, 2020 11:29 am
YRT70 wrote: Mon Sep 07, 2020 11:15 am
langlands wrote: Mon Sep 07, 2020 10:55 am YRT70 I think you misinterpreted the OP. (The title is a little misleading.)
I understand what you mean but I think I got what he meant. My thought was if the total returns can be so different surely Europe isn't always following US.

And yes I agree with your point that there usually seems to be a strong correlation.
You seemed to think he was referring to annual performance when he's actually talking about correlations in daily returns.
Yes that's what I understood the first time. Do you understand my point?

Re: Why are european markets always trailing US markets?

Posted: Mon Sep 07, 2020 11:34 am
by bertilak
If the prices/returns fluctuate and the two markets are active at different times then there will be swings back and forth that could be lookked at as trailing or leading depending your your point of view. Is A behind B today or ahead of B the next day.

If there is a fluctuation every peak or valley can be looked at as either trailing the preceding or leading the next peak or valley.

(Fixed silly grammatical errors. You don't see e'm until you look away then back again.)

Re: Why are european markets always trailing US markets?

Posted: Mon Sep 07, 2020 11:35 am
by langlands
YRT70 wrote: Mon Sep 07, 2020 11:33 am
langlands wrote: Mon Sep 07, 2020 11:29 am
YRT70 wrote: Mon Sep 07, 2020 11:15 am
langlands wrote: Mon Sep 07, 2020 10:55 am YRT70 I think you misinterpreted the OP. (The title is a little misleading.)
I understand what you mean but I think I got what he meant. My thought was if the total returns can be so different surely Europe isn't always following US.

And yes I agree with your point that there usually seems to be a strong correlation.
You seemed to think he was referring to annual performance when he's actually talking about correlations in daily returns.
Yes that's what I understood the first time. Do you understand my point?
Unfortunately, not really. I don't see how providing annual outperformance data of US vs. Europe has any bearing on daily correlations between the returns of the two asset classes.

Re: Why are european markets always trailing US markets?

Posted: Mon Sep 07, 2020 11:55 am
by YRT70
langlands wrote: Mon Sep 07, 2020 11:35 am
YRT70 wrote: Mon Sep 07, 2020 11:33 am
langlands wrote: Mon Sep 07, 2020 11:29 am
YRT70 wrote: Mon Sep 07, 2020 11:15 am
langlands wrote: Mon Sep 07, 2020 10:55 am YRT70 I think you misinterpreted the OP. (The title is a little misleading.)
I understand what you mean but I think I got what he meant. My thought was if the total returns can be so different surely Europe isn't always following US.

And yes I agree with your point that there usually seems to be a strong correlation.
You seemed to think he was referring to annual performance when he's actually talking about correlations in daily returns.
Yes that's what I understood the first time. Do you understand my point?
Unfortunately, not really. I don't see how providing annual outperformance data of US vs. Europe has any bearing on daily correlations between the returns of the two asset classes.
My point was: if total returns can be so different (as shown in the graph) it stands to reason that daily correlations aren't always perfect.

Re: Why are european markets always trailing US markets?

Posted: Mon Sep 07, 2020 11:57 am
by Seasonal
langlands wrote: Mon Sep 07, 2020 11:35 am Unfortunately, not really. I don't see how providing annual outperformance data of US vs. Europe has any bearing on daily correlations between the returns of the two asset classes.
Daily correlation can not be all that significant if annual correlation is low.

Any actual statistics on daily correlation rather than some posters' impression that they are correlated?

Re: Why are european markets always trailing US markets?

Posted: Mon Sep 07, 2020 12:34 pm
by langlands
UPRO and VOO daily correlation is near 1. Annual returns are not.

Re: Why are european markets always trailing US markets?

Posted: Mon Sep 07, 2020 12:39 pm
by MotoTrojan
langlands wrote: Mon Sep 07, 2020 12:34 pm UPRO and VOO daily correlation is near 1. Annual returns are not.
+1. Correlation has nothing to do with magnitude of returns.

Re: Why are european markets always trailing US markets?

Posted: Mon Sep 07, 2020 12:40 pm
by langlands
langlands wrote: Mon Sep 07, 2020 10:55 am YRT70 I think you misinterpreted the OP. (The title is a little misleading.)

Yes, this is a well known phenomenon. There is certainly a strong correlation but it's not a given. Especially when there are large macroeconomic forces at work, Europe takes its lead from the US markets. It also has to do with the fact that Europe comes soon after US in terms of time zone.
Wait, I got this backwards didn't I. US comes after Europe in the time zone. And indeed, it seems that the US mostly follows Europe, not the other way around: http://stockmarketalmanac.co.uk/2016/06 ... ily-basis/

Although the interpretation of who is following whom is actually a little tricky. Quoting from the article:
...each day there is an overlap of a couple of hours between the Paris and New York exchanges, and longer for Frankfurt and New York. Each day European markets can be active at their open in the morning (reacting to overnight developments – including US stock movements), then often these markets can tread water for a while waiting for the US market to open in the afternoon. The European markets can then take their lead from the US for the rest of their trading day.

The higher correlation seen in the second chart above is therefore probably reflecting this overlap period when European stocks are influenced by what is happening in the US that same day.
In any case, I think time zone is the overriding factor here.

Re: Why are european markets always trailing US markets?

Posted: Mon Sep 07, 2020 2:19 pm
by JBTX
Day to day correlation is pretty high. As you go farther out, years, the correlation is definitely still positive by probably lower.

Re: Why are european markets always trailing US markets?

Posted: Mon Sep 07, 2020 4:02 pm
by Northern Flicker
The 37-year return of European stocks from 1970-2007 exceeded the return of US stocks over the same period. From 2008-present US stocks have outperformed European stocks.

On a daily basis, the markets overlap and the direction of one can lead or follow the other. Also, currency fluctuations affect the USD-valuation of European stocks, and forex markets are open 24/7 during business days.

Re: Why are european markets always trailing US markets?

Posted: Tue Sep 08, 2020 7:01 am
by balbrec2
langlands wrote: Mon Sep 07, 2020 10:55 am YRT70 I think you misinterpreted the OP. (The title is a little misleading.)

Yes, this is a well known phenomenon. There is certainly a strong correlation but it's not a given. Especially when there are large macroeconomic forces at work, Europe takes its lead from the US markets. It also has to do with the fact that Europe comes soon after US in terms of time zone.
No small part of the variation is also due to currency fluctuations

Re: Why are european markets always trailing US markets?

Posted: Tue Sep 08, 2020 7:32 am
by Valuethinker
TheoLeo wrote: Mon Sep 07, 2020 9:34 am Pretty much every day the european markets simply copy what the US markets did in the previous day after the european markets have closed. Why is that?

edit: the only difference is that up days are attenuated and down days usually exacerbated...
The US has the largest economy & the largest stock market.

There's news flow, and when the US market was up the night before the optimism tends to run to the European markets, and vice versa. Investors are global and trade on a 24 hour clock.

However there are big sectoral differences, so a move in, say, the S&P 500 future, which turns out to be simply the big 5 moving up may not have a corresponding impact on European markets, which have a relatively small tech sector.