Equity market implied correlation is flashing a "panic" warning according to BMO quant Mark Steele as the little-known derivative indicator suggests traders fear a major "high correlation" event and are aggressively hedging systemic risk.
As Bloomberg notes, Steele warns that many asset classes are in a "funk" as weaker oil prices hurt high yield and Donald Trump"s staying power in the polls "pressures the status quo."
And the massive spike in implied correlation - soaring 7 straight days from 35 to 70 - indicates fear may have turned into panic.
Chart: Bloomberg
As a reminder, implied correlation measures the relative demand for macro overlays (index hedges) vs micro risk (individual stock hedges/concerns). The higher it is, the more systemically worried investors are and the more traders believe a high correlation "event" is due (typically the high correlation event is a big downturn in stocks).
But as BMO"s Steele concludes, just as we saw with Brexit, a rebound in sentiment "can be just as ferocious, and that carries the day for broad equity markets," seemingly suggesting to buy the dip as he notes there"s "no sign of a banking system threat" that pressures equities systemically.
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