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German DAX vs. CoCo Bonds: Tracking One to Forecast the Other

by Editorial Staff
Updated: May 10, 2021

Risky assets always rise during stock market rallies. When investors en masse feel confident about the future, they buy just about everything -- even investments with the word "junk" right in the name. (Looking at you, junk bonds.)

Contingent convertible bonds -- or CoCos -- are not "junk" bonds per se, but they are definitely riskier than, say, U.S. Treasuries. Interestingly, CoCos have a strong correlation with the broad stock market.

Watch our Global Market Perspective contributor Brian Whitmer explain more as he shows you the European equivalent of the DJIA, Germany's DAX stock index.

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“Correlation does not equal causation.”

True.

In other words, if for example CoCo bonds crash and the stock market follows, it won't be that CoCos caused the crash. So, what might it be?

Over our 40+ years in the business, we've observed that the root cause of booms and busts in all markets is the same -- investor psychology. Where it goes, markets follow.

The question then becomes, how do you know where investor psychology goes next?

Answer: Watch Elliott waves. In fact, we've done the work for you.

For a uniquely clear view on 50+ of the world's biggest markets, read our new, May Global Market Perspective now.

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