Why are european markets always trailing US markets?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
TheoLeo
Posts: 241
Joined: Mon Apr 02, 2018 11:39 am

Why are european markets always trailing US markets?

Post 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...
LEngineer
Posts: 4
Joined: Mon Sep 07, 2020 10:35 am

Re: Why are european markets always trailing US markets?

Post by LEngineer »

Well, I wouldn't jump to conclusions after just one occurrence...
Though I must say I've had the same feeling before :)
YRT70
Posts: 736
Joined: Sat Apr 27, 2019 8:51 am

Re: Why are european markets always trailing US markets?

Post by YRT70 »

I'm not sure that they really do.

Image

Source: https://awealthofcommonsense.com/2020/0 ... er-a-fall/
langlands
Posts: 600
Joined: Wed Apr 03, 2019 10:05 pm

Re: Why are european markets always trailing US markets?

Post 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.
YRT70
Posts: 736
Joined: Sat Apr 27, 2019 8:51 am

Re: Why are european markets always trailing US markets?

Post 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.
Anon9001
Posts: 718
Joined: Fri Dec 20, 2019 9:28 am
Location: भारत

Re: Why are european markets always trailing US markets?

Post 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.
langlands
Posts: 600
Joined: Wed Apr 03, 2019 10:05 pm

Re: Why are european markets always trailing US markets?

Post 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.
YRT70
Posts: 736
Joined: Sat Apr 27, 2019 8:51 am

Re: Why are european markets always trailing US markets?

Post 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?
User avatar
bertilak
Posts: 7920
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: Why are european markets always trailing US markets?

Post 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.)
Last edited by bertilak on Mon Sep 07, 2020 12:55 pm, edited 3 times in total.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
langlands
Posts: 600
Joined: Wed Apr 03, 2019 10:05 pm

Re: Why are european markets always trailing US markets?

Post 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.
YRT70
Posts: 736
Joined: Sat Apr 27, 2019 8:51 am

Re: Why are european markets always trailing US markets?

Post 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.
Seasonal
Posts: 2145
Joined: Sun May 21, 2017 1:49 pm

Re: Why are european markets always trailing US markets?

Post 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?
langlands
Posts: 600
Joined: Wed Apr 03, 2019 10:05 pm

Re: Why are european markets always trailing US markets?

Post by langlands »

UPRO and VOO daily correlation is near 1. Annual returns are not.
MotoTrojan
Posts: 10708
Joined: Wed Feb 01, 2017 8:39 pm

Re: Why are european markets always trailing US markets?

Post 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.
langlands
Posts: 600
Joined: Wed Apr 03, 2019 10:05 pm

Re: Why are european markets always trailing US markets?

Post 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.
JBTX
Posts: 7104
Joined: Wed Jul 26, 2017 12:46 pm

Re: Why are european markets always trailing US markets?

Post by JBTX »

Day to day correlation is pretty high. As you go farther out, years, the correlation is definitely still positive by probably lower.
Northern Flicker
Posts: 6613
Joined: Fri Apr 10, 2015 12:29 am

Re: Why are european markets always trailing US markets?

Post 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.
Risk is not a guarantor of return.
balbrec2
Posts: 360
Joined: Mon Nov 13, 2017 3:03 pm

Re: Why are european markets always trailing US markets?

Post 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
Valuethinker
Posts: 41439
Joined: Fri May 11, 2007 11:07 am

Re: Why are european markets always trailing US markets?

Post 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.
Post Reply