Market Correlations Started to Break Down

Last week, we noticed that the volatility term structure was inverted on a low reading. In fact, Crystal Kim wrote:

Under normal circumstances, VIX futures curve upward. It's entirely logical -- the longer dated futures trade at a premium to shorter-dated futures. An inversion, as seen yesterday, suggests that the market expects more volatility in the short-term than the long-term.

The reason behind the volatility bid: upcoming elections in France. "The April VIX futures are bid ahead of the French elections, since they will settle into a 30-day VIX that captures both rounds of voting," he says. "The U.S. options market is finally starting to care about the French elections." The first round is set for April 23. If no one wins the majority, a run-off between the top two will take place on May 7. Read more

 
Vix futures term structure as of Apr 12, 2017. Source: Vixcentral.com

But these days  anomalies are happening not just in the volatility space.  As pointed out by Kathleen Brooks  yesterday, the CDS market is also acting out of sync.

On the one hand there is a smell of caution in the air, but on the other, capital is not yet moving away from risky assets.

The US corporate high yield spread should be used to time market moves rather than risk sentiment indicators. The US corporate high yield spread has a significant negative weekly correlation with the S&P 500 at -60% for the last two years. If this correlation is to hold, then we would expect the S&P 500 to continue to rally if the US corporate high yield spread continues to narrow, and vice versa. Read more

And finally today forex.com observed a breakdown in correlations

At the start of 2017 the correlation between the S&P 500 and the high yield corporate spread was -53%. This seems normal as you would expect these products to move inversely to each other: as the S&P 500 rises, high yield debt falls and vice versa. However at the start of April this correlation had reversed to 33%, so now the S&P 500 and the high yield debt spread move together a third of the time. This suggests that 33% of the time when the S&P 500 falls, so too does the price of credit for high risk US corporations. Usually you would expect the opposite to occur. Read more

Last and not least, these articles also gave a warning of an imminent market correction.