Intermarket Analysis
Intermarket Analysis is the study of the relationships between equities, bonds, commodities, and currencies to forecast market trends, with the premise that all four asset classes are interlinked and that price movements in one lead or confirm movements in the others.
John J. Murphy codified Intermarket Analysis in his 1991 book of the same name, drawing on research by Martin Pring and others. The framework identifies four primary asset classes — equities, bonds, commodities, and currencies — and maps the typical sequence of their turning points across an economic cycle.
The foundational relationship is between bonds and equities. In normal economic environments, bond prices and stock prices move in the same direction: falling interest rates (rising bond prices) reduce the discount rate applied to future earnings, lifting equity valuations. However, this relationship can invert when inflation expectations dominate — as occurred globally in 2022 — because rising inflation fears push bond yields higher (prices lower) even as equities initially continue rising.
Commodities and currencies interact through the 'commodity-currency' relationship. Countries that are significant commodity exporters — notably Australia, Canada, and Brazil — tend to see their currencies appreciate when commodity prices rise. For India, which is a net commodity importer, rising crude oil prices exert depreciation pressure on the Indian Rupee (INR). A weaker INR increases import costs, feeds into inflation, and historically exerts negative pressure on Nifty 50 by squeezing corporate margins in energy-intensive sectors and triggering FPI outflows.
The US Dollar Index (DXY) is a critical intermarket variable for Indian equities. A rising DXY typically coincides with capital flows from emerging markets toward dollar-denominated assets, which reduces FPI allocation to Indian equities and exerts downward pressure on the Nifty. The correlation was particularly evident during the 2013 'taper tantrum' when the US Federal Reserve signalled a reduction in quantitative easing.
Gold plays a dual role as a commodity and a 'safe haven' currency substitute. In periods of risk aversion — such as the COVID-19 crash of March 2020 — gold and equities initially fell together as institutions liquidated all assets for dollar cash. However, gold typically recovers faster and often leads equity recoveries as monetary easing begins.
For Indian traders and investors, monitoring the INR/USD rate, Brent crude prices, US 10-year Treasury yields, and the DXY alongside domestic technical signals provides a multi-dimensional context that purely domestic price-based analysis misses. SEBI's FPI flow data and RBI intervention patterns add an additional Indian-market-specific layer to standard intermarket frameworks.