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We show this Great Graphic again because it shows a clear break of a pattern than many investors had come to rely on. With emerging market panic underway, and the long awaited correction in the equity markets, many have resurrected the old risk-on/risk-off matrix. The relative strength of the yen and Swiss franc fit into this view.

However, a notable exception is the euro. For the last several years, the euro and the S&P 500 were positively correlated (60-day, percentage change basis). Perhaps both were responding to a third variable, the Fed's asset purchases, or so it was hypothesized at the time.

Yet, despite the tapering, the Fed is still going to be buying about 50% more long-term assets than was initially announced for QE3. As this chart shows, the euro and S&P 500 correlation has turned inverse. It did turn inverse briefly last September when the Fed disappointed many participants by refraining from tapering. It was not sustained. It is not clear that it will be sustained now. If it is, it has implications that may not simply say something about the euro and the S&P 500, but also about the fragmentation of the risk-on/risk-off matrix. In the past, the decoupling of the euro and the S&P 500 was seen as necessary, even if insufficient, basis for the long-awaited dollar recovery.

Source: Euro And S&P 500 Redux