We Told You So: Junk’s Correlation With Oil, Copper Suddenly Skyrockets

Those who frequent these pages will recall that as oil prices collapsed last week, we flagged the rising correlation between HY spreads, copper, and crude.

From Saturday’s “Junk Warning: You Are Here“:

Get. Out. Of. Dodge. Now.

CDX1

Rally

And from Thursday’s “More Trouble“:

Now, the reflation narrative is under siege not from rates (which are rising), but from plunging crude (and the concurrent widening of HY spreads), pressure on EM and commodities, and the distinct possibility that an overzealous Fed might move too aggressively and choke off the good thing we had going.

EMOil

CDXHY

Well file this one in the increasingly full “you heard it here first” folder, because just two hours ago, we got the following from Goldman.

Via Goldman

Last week commodities saw a sharp correction and the worst return across asset classes. The price of oil declined the most with a 10% drop but gold, copper and the GSCI also dropped 2%, 3% and 5% respectively.

Credit has suffered from the commodity price declines the most – US HY credit spreads have been very tight and thus they leave little buffer for shocks and suggest poor asymmetry of returns.

This week US HY lost 1.2% and its correlation with oil prices (and copper) has increased sharply – it is nearly back at its levels from 2015. On the positive side, the dollar/oil correlation has been relatively stable suggesting the vicious cycle between weaker oil, stronger dollar and weaker EM might not resume.

CorrelationHYCopper

 

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