"The Leaders Are Crashing" - It's Not Just Junk Bonds That Have Given Up

We have been warning about significant divergences between equity prices and other asset classes for a few weeks (most notably the decoupling from equity risk and credit risk, junk bonds), but as BofA notes its not just these assets that are breaking away from soaring Nasdaq levels, in fact many of the rally's leaders are crashing... in a way we have not seen recently.


High yield risk has suddenly decoupled from equity markets...



And Jeffrey Gundlach has been warning something's got to give. Based on the past two days, looks like we have our answer.


Stocks fell around the world a second day and high-yield bonds headed for a fourth straight loss, resuming a historic correlation that the hedge fund manager on Wednesday had warned was alarmingly out of whack.





“JNK ETF down six days in a row, closing near its seven month low,” the DoubleLine Capital LP co-founder wrote on Twitter Wednesday. “SPX up five of last six days, closing at an all time high. Which is right?”



In fact the correlation between these two leaders has crashed...



In the past decade, there were only three other instances where the relationship between JNK and mega-cap tech broke down to this degree. Each time, the two assets began to resume their positive correlation within four to 12 days, data compiled by Bloomberg show.


But given the last few days in equities and credit... High Yield Bond prices (HYG) are at 8 month lows...



On record dollar volumes of trading...



Gundlach is calling a win...






“A material pullback would be something we need to watch for, as a deteriorating credit market has led each of the largest equity pullbacks since 2014,” said Frank Cappelleri, a senior equity trader and market technician at Instinet LLC.


 


“With divergences once again apparent now, the bulls face their latest test.”



It's not just credit risk, but equity risk has decoupled from equity prices too...



VIX has started to creep higher but has further to go to fit with credit risk...



But it's not just high yield bonds, price leadership has been stung in recent days: Oct 26th/27th ECB announced "tapering", Brent broke $60/b…concerns of "peak policy" stimulus & "peak profits"caused toppling of credit, bank, tech "leadership"; sell-off sequence past few weeks = 1st EMD, 2nd HYG, 3rd SX7E, 4th BKX, and #5 SOX...



As BofA's Michael Hartnett notes, watch EMD & HYG in particular...needs to stabilize... but the recent pullback also follows insane gains...



FAANG+BAT market cap up $1.5tn YTD, a sum larger than entire market cap of DAX ($1.4tn); and Aug saw all-time low yields in US HY tech bonds (4.3% H0TY) & EU HY corp bond yields hit low in Oct (2.1% HE00, i.e. lower than yield on US Treasuries).


Finally, in case you think this is all much ado about nothing. The last time we saw such a divergence between credit and equities was in Aug 2015...


Just two weeks before the huge ETF  flash crash.







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