Equity Derivatives Flash Brexit-Like "Panic Signal"

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.

(Click on image to enlarge)

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.