Project Topic

Financial markets are important to society. People and companies invest their savings for the future and companies and countries finance their operations via financial markets. Financial markets are complex with many intricate and dynamic relationships between the markets, market participants and financial instruments and evolve over time in a dynamic way.

I will explore the relationships between a number of financial market variables and explore trends in the data.

The variables are global interest rates, oil prices and equity markets.

Topics to analysed

  1. What are the latest trends in interest rates and equity markets
  2. What are the long term trends in interest rates and equity markets
  3. What are the relations between the interest rates in different countries
  4. What are the latest trends in the European equity market
  5. What are the relations between different major equity markets
  6. What is the relationship between equity markets and interest rates
  7. Explore the relations between segments of the yield curve
  8. Is there a relationship between the price of oil and the energy sector in Europe

Data Sources

The source of the data for the project is the European Central Bank (ECB). The ECB provides access to a wide variety of data including data of financial markets. Access to data is provided via the ECB Data Portal.

ECB Data Portal

A number of financial markets times series have been downloaded from the portal and will form the basis for the project. Data on the portal is maintained by the ECB.

Description of the Data

Please provide specific details about your data.

Ideas about the figures that you will create to visualize this data

The dataset will be explored via

Analysis

Topic 1

Figure 1

Figure 1

The chart above shows changes in equity markets and real interest rates in 2024. The average monthly return in 2024 is highest for the US Equity market followed by the Japanese market. Both equity markets have witnessed an average monthly return in excess of 1 %. The European Equity markets is the laggard with an average monthly return of around 0.5 %. The US and Japanese markets have experienced a bull market in 2024. Real interest rates (inflation adjusted interest rates) have gone up in all three regions. Monthly changes in real interest rates have been less than changes in equity indices.

Topic 2

Figure 2

Figure 2

Over a longer time horizon, average monthly returns on the three equity markets are more modest than the average returns seen in 2024 indicative of strong markets in 2024. The average monthly returns are positive in all three regions but are less than 1 %. The US Equity markets has experienced the strongest returns among the regions. Changes in real interest rates have, on average, been positive in the US and EU and have fallen in Japan. The changes seen over a long-time horizon are smaller than the changes seen in 2024 for all regions.

Topic 3

Figure 3

Figure 3

Over the 10-year period 2014 to 2023, there is a positive correlation between changes in real interest rates in all regions. Changes in Japanese real interest rates appear less sensitive to changes in the other regions. The highest correlation is found between the US and EU, where there is correlation of 0.88 between monthly changes in real interest rates. There is a tendency for real interest rates in the US and EU to move in the same direction. The higher correlation could be the result of more intertwined economies and greater synchronization of monetary policy and financial conditions.

Topic 4

Figure 4

Figure 4

The chart above shows the development in selected sectors of the European stock index EUROSTOXX over the year 2024. There is a divergence between the sectors with Energy and Financials increasing with more than 20 % over 2024 whereas the sectors Consumer Discretionary and Energy has fallen since the start of the year. The technology sector has been driven by a positive market sentiment towards technology stocks driven by the AI theme and the Financial sector has been driven by falling short term interest rates and higher long term interest rates improving profitability in European banks.

Topic 5

Figure 5

Figure 5

Over the period 2010 we can see a positive correlation between the three Equity Markets. The highest correlation is found between the US and the EU equity market. The Equity markets in the two regions appear more synchronized.

Topic 6

Figure 6

Figure 6

The chart above shows a scatterplot of changes in interest rates in the EU and returns to the EUROSTOXX equity index over the last 10 years. There is a somewhat weak negative relation between changes in interest rates changes and returns of the equity market with a modest adjusted r-square of 0.0880759. When rates rise there is tendency for returns to fall. Theoretically, increases in interest rates causes the value of future earnings to be worth less today and the value of the stream of earnings of a company will generally fall as interest rates rise. The chart loosely illustrates this theoretical relation though it is not a decisive piece of evidence. Changes in interest rates are only one of many factors driving the returns to the Equity Market. Inflation, economic growth, investor sentiment are also important factors influencing the equity market.

Topic 7

Figure 7

Figure 7

The chart above shows the covariance matrix of monthly changes of segments of the European Government Yield Curve. The segments measures spreads between parts of the yield curve. Three segments are defined: 1) the spread between the 10 year interest rate and the 5 year interest rate (Y10-Y5), 2) the spread between the 10 year interest rate and the 2 year interest rate (Y10-Y2) and 3) the spread between the 5 year interest rate and the 2 year interest rate (Y5-Y2).

The returns are calculated over the 10 year period 2014-2024. The diagonal shows the variance of the three spreads and the off-diagonal elements shows covariances.

The highest variance is found in spread between 10- and 2-year rates. The long segment of the yield curve is the most fluctuating part whereas the spread between shorter maturities fluctuates markedly less. The spread between 10- and 2-year rates also has the highest covariance with other parts og the yield curve. Generally, as the maturity of bonds increase so does the sensitivity to changes in interest rates and the more variable the interest rate is.

Topic 8

Figure 8

Figure 8

The chart above explores the last topic and show the relationship between changes in oil prices and returns to the Energy sector of the EUROSTOXX index. There appears to be a weak positive relation between oil prices and Energy Sector returns, so that increasing oil prices translates to increasing returns to Energy companies. The association between the two variables is weak with a modest adjusted r-square of 0.0743848. The Energy sector is a diverse sector comprised of many different types of companies with a multitude of business models, some more dependent on Oil than others and yet other companies not dependent at all on the development in Oil prices. The returns to Energy sector are also affected by other factors like the price of other commodities such as Natural Gas, interest rates, market sentiment, the macroeconomy etc.