GAFM Expert Opinion

Credit's Divorce From Stocks Signals End of Global Equity

By Michael Preiss

Wednesday, October 14, 2009 13:05:44 PM

For information only:

Dear all,

Our friends over at French Bank, BNP Paribas increasingly seem to join the camp of analysts and bearish strategists that warn that the stock rally might be riding on borrowed time:

The thoughts / opinion:

· A breakdown in the relationship between Standard & Poor’s 500 Index and the cost of protecting corporate bonds from default may signal the seven-month rally in U.S. equities is ending, according to BNP Paribas SA.

· “The entire financial crisis has been led by credit markets,” said Rajeev Shah, a London-based strategist. “Credit gave us the right signals.”

· “ Investors should sell both stock and credit indexes “ , Shah said.

· The cost of insuring debt against default started falling before stocks took off, and has now risen about +10 percent since its Sept. 23 low.


Credit’s Divorce From Stocks Signals End of Rally: Chart of Day
2009-10-13 07:13:43.869 GMT


By Abigail Moses

Oct. 13 (Bloomberg) -- A breakdown in the relationship between Standard & Poor’s 500 Index and the cost of protecting
corporate bonds from default may signal the seven-month rally in U.S. equities is ending, according to BNP Paribas SA.

The CHART OF THE DAY shows the S&P 500 in red and the inverted Markit iTraxx Europe Index of credit-default swaps on 125 investment-grade companies in white. Equities may lag behind credit as correlation returns over the next three months, BNP Paribas forecasts.

“The entire financial crisis has been led by credit markets,” said Rajeev Shah, a London-based strategist. “Credit
gave us the right signals.”

The S&P 500 soared 59 percent from a 12-year low on March 9 as governments around the world flooded the financial system with cash, helping to pull the global economy out of the worst recession since the 1930s. The cost of insuring debt against default started falling before stocks took off, and has now risen about 10 percent since its Sept. 23 low.

Investors should sell both stock and credit indexes, Shah said. They can then profit should stocks or the cost of default
protection fall and the correlation between the gauges increases, he said.

The Markit iTraxx Europe Index was trading at 86.25 basis points, according to JPMorgan Chase & Co. prices at 7:56 a.m. in London, from a record 221 basis points Dec. 5. That means it costs 86,250 euros ($127,000) a year to protect 10 million euros of debt from default for five years. The S&P 500 closed at 1076.19 yesterday, up from 676.53 in March.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a
company fail to adhere to its debt agreements.


For Related News and Information:
Top bond stories: TOPH <GO>
News on credit derivatives: TNI CDRV <GO>
Credit-default swaps sector graphs: GCDS <GO>
World credit-default swaps pricing: WCDS <GO>
Biggest credit-default swaps movers: CMOV <GO>

--Editors: Michael Shanahan, Paul Armstrong

To contact the reporter on this story:
Abigail Moses in London at +44-20-7673-2118 or
Amoses5@bloomberg.net

To contact the editor responsible for this story:
Paul Armstrong at +44-20-7330-7185 or
Parmstrong10@bloomberg.net