If “Risk-On/Risk-Off” has been supplanted by anything in the past two years, it's been supplanted by the “Great Rotation”. It isn't the first time that the vernacular has changed so quickly – no sooner was 1993's year of “the end of the Cold War is bullish” over than 1994 became the year of “the Global Capital Shortage”. Interestingly, though, asset allocation prior to the “Risk-On/Risk-Off” era that had its first beginning in 1989 was very much “Great Rotation” (albeit we didn't call it that back then), the idea that as a business cycle matured from expansion through peak and through contraction to trough, so a portfolio's optimal asset allocation choice varied from bonds to stocks to property to cash. This earlier era, of course, had much different correlation characteristics across asset classes than we became used to in the “Risk-On/Risk-Off” era. If the recent data is to be believed, perhaps we are returning to a similar correlation state now.

Eoin Treacy's view This is the first report I have seen that attempts to explain the change in market correlation that has been evident since the end of last year. Since the 2008 and 2009 lows, risk assets have tended to rally and pull back together. However, this correlation broke down from early this year.

European indices felt the brunt of the corrective phase. Some of the Asian markets experienced a shallow pullback. Concurrently, Japan is soaring and Wall Street continues to move steadily higher. Meanwhile commodities have pulled back sharply

This is quite different from the environment that prevailed over the last four years and suggests that not only are risk assets responding to abundant liquidity but that investors are weighing potential differently. What we can be assured of is that overextensions relative to the trend mean will eventually be unwound.