Correlation of UK and international stock markets

The following charts show the correlation of monthly returns between the FTSE All-Share index and six international indices for the period 2000-2014.



Correlation of FTSE All-Share Index and DAX [2014]

Correlation of FTSE All-Share Index and CAC40 [2014]


Correlation of FTSE All-Share Index and Nikkei 225 [2014]


Correlation of FTSE All-Share Index and Hang Seng [2014]


Correlation of FTSE All-Share Index and All Ordinaries [2014]


Correlation of FTSE All-Share Index and Bovespa [2014]


The first observation is that all the markets are positively correlated with the UK market.

The next question is how closely correlated are they?

The following table summarises the R2 values for the correlation between the FTSE All-Share Index and the six international indices; the equivalent values are also given for the previous year. The higher the R2 figure the closer the correlation (R-Squared is a measure of correlation – in effect, how close the points are to the line of best fit).

Index R2 R2 (2013)
CAC40 0.78 0.79
DAX 0.69 0.70
All Ordinaries 0.61 0.62
Hang Seng 0.48 0.49
Bovespa 0.45 0.47
Nikkei 225 0.37 0.39

By visual inspection it can be seen that in the charts of CAC40 and DAX the points are more closely distributed around the line of best fit. This is confirmed in the table where it can be seen these two markets have the highest R2 values with the FTSE All-Share (the CAC40 value of 0.78 is now higher than that of 0.76 for the S&P 500). The index with the lowest correlation with the UK market (in the sample) is the Nikkei.

The practical impact of this is that if a UK investor is looking to internationally diversify a portfolio they would do better by investing in markets at the bottom of the table (low R2) than at the top. And the good news for investors looking for diversification is that the correlation between the UK market and all the international markets in this study has fallen in the past year.

See also correlation between the US and US stock markets.

UK Stock Market Almanac cover [160 x 240]The above is an extract from the newly published UK Stock Market Almanac 2015.

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US holidays and European markets


European stock markets tend to have positive and high returns on days when the NYSE is closed. The effect is significant when the previous day’s return on the NYSE has been positive.

Brief overview

The US has six holidays every year that are not holidays in Europe:

  • Martin Luther King Day (the third Monday in January)
  • President’s Day (the third Monday in February)
  • Memorial Day (last Monday in May)
  • Independence Day (the fourth of July)
  • Labour Day (the first Monday in September)
  • Thanksgiving day (the fourth Thursday in November)

How do the European equity markets  behave on these days when the US markets are closed?

This was the question asked by the authors of an academic paper (Casado, Muga and Santamaria, 2011).

The authors analysed open and close values for the CAC40, DAX, FTSE 100, IBEX35 and EUROSTOXX50 (for the euro-zone stock market)  for the period 1991-2008. Their results were remarkable.

Their research found the average daily returns for the European markets when the US market was closed was 0.32%, which was 15 times greater than the daily returns on all days.The greatest (NYSE-closed) daily returns were 0.42% for the German market.

Interestingly they found similar results for the open to close data on the NYSE-closed days. Meaning that the information from the previous day’s US market had been fully absorbed at the market open, and the effect is attributable to European trading.

Because the effect is so great it has a clear economic significance as it is possible to obtain significant returns after deducting trading costs by trading index futures.

The following figure from the paper shows the result of systematically buying FTSE 100 futures at the open on a NYSE-closed day and where the previous day’s NYSE return was positive, and then closing the position at the close on the same day. The red line is the equity chart for the strategy (left axis), and blue line the FTSE 100 Index (right axis).

Casado_The effect of US holidays on the European marketsThe strategy had positive returns in both bull and bear periods for the market.


Casado, Jorge and Muga, Luis and Santamaria, Rafael, The Effect of US Holidays on the European Markets: When the Cat’s Away (2011)


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Sovereign rating downgrade effect on equity markets

What is the effect on equity markets when sovereign debt loses its AAA rating?

The following chart shows the effect on five equity markets when the related sovereign debt lost its triple-A rating.


  1. The date of the downgrade is taken as the first date that the sovereign lost its AAA rating. For example, Moodys downgraded Japan in November 1998 but Standard & Poor’s kept Japan at its highest rating of triple-A until February 2001. In this study the first date (November 1998) is used.
  2. The time period analysed is from two months before the downgrade to 12 months after. The downgrade is announced in week 9 – as indicated by the dotted line in the chart.
  3. The five indices are indexed to 100 at the end of week 9.


  1. In the short term (two months) following the downgrade all the equity markets except Japan performed strongly.
  2. After the first two months, Japan then rebounded strongly, although the French market then suffered a period of weakness.
  3. 12 months after the downgrade all equity markets were higher, with an average increase of 17.7% from the time of the downgrade.

The data is summarised in the following table-

Date of losing AAA Country Index Index change 12 mnths after downgrade(%)
Apr 1993 Canada S&P/TSX 18.5
Nov 1998 Japan Nikkei 225 23.5
Apr 2010 Spain IBEX 17.0
Aug 2011 US S&P 500 18.0
Jan 2012 France CAC40 11.6
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International markets in 2012

Equity and commodity markets

The following chart shows the returns on a range of international stock markets and commodities in 2012.


  1. The German market was the strongest (+29.1%), followed by the Asian markets of India, Japan, and Hong Kong.
  2. The FTSE 100 was ranked 22 out of the 25 markets appearing here.
  3. Over half the markets increased by more than 10% in 2012.

Currency markets

The following chart shows a sample of currency moves against the British pound in the year. For example, the British pound increased 16.5% against the Japanese Yen, and fell in value 6.7% against the Polish Zloty.

Equity and commodity markets (sterling)

The following chart shows the returns on the same range of markets shown above, but this time in sterling terms (i.e. showing the returns for a UK investor).


  1. The German market remains the strongest for 2012, with its returns reduced from 29.1% to 26.4% due to the slight appreciation of GBP against EUR over the year.
  2. A big difference is the return for the Nikkei Index in sterling terms – falling from 22.9% to 5.5%.
  3. In sterling terms the FTSE 100 climbs from 22nd position to 15th.
  4. And in sterling terms the FTSE 250 Index climbs to 2nd position.
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