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Europe is the main source of fear

The top chart compares the yield on 10-yr Treasuries (white line) with the level of the Euro Stoxx 50 Index, while the bottom chart compares the same yield on the 10-yr with the level of the S&P 500. 10-yr Treasuries are the beneficiaries of the risks plaguing economies (or the destination of capital flight as the case may be). The correlation between 10-yrs and European stocks is 0.97, while the correlation between 10-yrs and US stocks is 0.89. Both highly correlated, but the fit with European stocks seems pretty rock solid and constant, much more so than with US stocks. Once again, it appears that "it's Europe, stupid" that is the driving force these days.

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