If the October rebound in US stocks fails to hold, don’t blame corporate earnings,the Federal Reserve or President Obama. They don’t have nearly as much sway over the market as a single currency across the ocean.
Right now, the S&P 500 Index , the benchmark for U.S. stocks, is closely tied to movements in the euro, underscoring the need for a sweeping recapitalization of European banks—and the lastest sign that every twist and turn in the crisis is dominanting the markets.
The rolling 60-day correlation between the currency and the S&P 500 is 0.72, according to the BBH Global Currency Strategy Team, the highest since they began keeping data in 1992.
“Guess I have to be nicer to them,” said Stephen Weiss of Short Hills Capital of his European peers. “And my guess is that if China had a free floating currency, we would have a one-to-one correlation with their news flow too. Such is the curse of a global market and quantitative trading.”
The euro was stuck in place Tuesday—as was the S&P 500—as the Slovakian parliament in Bratislava postponed a voteon the expansion of the euro zone’s bailout fund. After the markets closed Tuesday, the parliament rejected the expansion, though the package is expected to eventually pass.
Expanding the so-called EFSF is the first step in a grand plan that investors on both sides of the Atlantic are hoping is being hatched by German Chancellor Angela Merkel and French President Nicholas Sarkozy.
The temporary setback by Slovakia, one of the European Union’s smallest members, is an example of just how much the European debt crisis is dominating Wall Street's mood.
“A lot of traders have told me the correlation has to do with risk management,” said Brian Kelly of Shelter Harbor Capital. “If it has anything to do with Europe then positions are being cut by risk managers. This is fueling a feedback loop: when the euro drops, all positions are cut.”
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