Correlation breakdown tells a cautionary tale

According to the bank's carry index, since January conditions have been good for the trade, with the yen resuming its role as a funding currency. "That being said, we do see signs risk is cautious in corporate credit, which is moving back up. Pricing in the credit default swaps markets is projecting that higher risk corporates might be coming into trouble," says Hardy.

Similarly, typically correlated with the S&P index, high-yield exchange-traded funds (ETFs) are showing signs of divergence. "High-yielding ETFs are not really going into new highs, while the S&P has done so. Normally, the ETFs are correlated with the S&P," he says.

He adds that a lot of the upside seen in the market to date has been as a result of central bank easing. "So it's curious that, while the rug has come out, that risk is still on," he says.

Hardy also sounds a note of caution about the Australian dollar, which has come off against the US dollar amid speculation over whether China will experience a hard or soft landing.

However, he highlights that the US dollar has held up well despite the risk-on environment. "The US dollar has been flat across the board, but that flatness can be viewed as outperformance given its negative correlation with risk appetite," says Hardy.