Nothing like a 3% down to 3% up swing in oil to sharpen the mind. But interestingly in this move oil appeared to be lagging and not leading the usual culprits. Oil started the US morning heading down yet stocks were resolutely unbudged to the down side and indeed it was they that started the pressure higher dragging oil reluctantly behind until oil snapped and flew. 7% up from its lows as I type.
After writing yesterday about looking for the crack in the correlations to appear to indicate a move from general stress, seeing China (the king of bear stories) fall hard I really thought things didn't look rosy for Europe and US equities. But yet they held in and rallied on the european open. Correlation break 1.
Meanwhile German Bunds were continuing to look bid, which is normally a sign of stress. Of course bunds up, equities up points to all the eggs resting in ECB action, which is somewhat worrying because it is pretty rare for central banks to exceed market demands, leaving scope for disappointment at the next ECB meeting. The other play could be, and here I am guessing, that long Bunds is the European hedge against Brexit. Little has been spoken of risks to Europe on a possible UK departure, instead finding it easier to point the grief finger at the smaller partner but if the UK were to go, Germany would be holding an even larger share of the EU grief. So if pressure increases on EU, buy Bunds. But they weren’t moving in the normal counter direction to equities. Correlation break 2.
The JPY has been bid throughout all of the stress and though oil was down, China down and Bunds up, JPY has been weakening with GBP/JPY doing exactly what it shouldnt do according to the narrative of the last 2 days by going up. Correlation break 3.
And look at AUD/USD, as Europe came in and saw what China had done AUD had shrugged it off and was higher than where London had left it, chosing to take its lead from DM rather than China. Correlation break 4.
I haven’t mentioned GBP as that has been playing it’s own Brexit game for the last few days but the screams of imminent GBP doom have vanished from the wires today as, basically, GBP stopped falling - which reassures me over yesterdays ‘GBP short squeeze’ thoughts.
So what do I take away from it all? The correlation wobbles and noticeable switch to oil playing second fiddle to equities has me thinking that though it is not so discernible on many other levels, the background fear expressed through tight correlations is abating and a drive higher in risk is next as this ‘bear market rally’ continues to squeeze out the next raft of shorts until it is no longer a bear market rally but rather flips, very expensively for the bears, into ‘just a range’. We saw the pattern in August and it is still in play today.
As for news? Was there any? I know there wasn’t because the best the Daily Telegraph could come up with was the rescuing of an escaped pigeon from the royal dove house, so we'll add the adage ‘never sell a quiet market’ to all of the above.
Finally, one last correlation that certainly hasn’t broken is clearly seen in the glaring similarity between Dame Janet Smith’ s investigation into sexual abuse in the BBC and Serious Fraud Office investigations into bank FX and Libor fixings. Where are they identical? “THE MANAGEMENT DIDN’T KNOW”.