When the Correlations Crack

Intermarket analysis puts the pieces of the puzzle together and connects themes in markets but the pieces don't fit every day. On Thursday, stocks and oil fell 2% but the FX and bond markets were much more subdued. A busy day of central bank speakers continues in Asia-Pacific trading.  

Volatility rose to the highest in 8 months in stocks as a 40 point intraday rally Wednesday was followed by a 40 point decline today. The yen was naturally the best performer but it failed to gain 100 pips on any cross.

A major talking point in the stock market was fear about slowing global growth and/or the end of QE3 but that's tough to square with Treasury yields that rose throughout the course of US trading. If anything, the Fed is beginning to signal lower rates for longer and that should be supportive for stocks, like we saw in Wednesday's rally.

Meanwhile, US oil prices have now fallen 21% since June and that's a powerful stimulant for stock markets.

What we've seen increasingly in markets since the start of September is these kinds of disconnects. Periods like this are rare but not unprecedented and they tend to precede larger turns in the market. This type of volatility is the kind of thing that sends stock market bulls to the sidelines even if declines haven't been substantial.

What's crystal clear is that every data point and central bank utterance is magnified at the moment. Comments from 8 major central bank members crossed Thursday and the most notable was Draghi underscoring lower rates for longer but that just served to underline the poor economic forecasts from Germany earlier in the day.

US traders are likely to be suffering a bout of indigestion in the day ahead. Asia-Pacific traders might get some guidance from the BOJ minutes from Sept 4 and the tertiary industry index at 2350 GMT. Later it's the RBA's Edey at 0145 GMT.