Monday, 4 February 2013

Credit / Equities, different messages between the USA and Europe

"It is not best that we should all think alike; it is a difference of opinion that makes horse races." -   Mark Twain

In the US, High Yield credit has remained in line with equities since the beginning of the year. The de-correlation between credit and equities is nearly exclusively coming from Investment Grade credit where profit taking has been happening and weighting on the market for the last two weeks as per the chart below - source Bloomberg:
 Chart 1 - S and P 500 versus the two principal credit ETFs: HYG for High Yield and LQD for Investment Grade in the US.

In Europe, the message sent accross by the credit market has been more mixed. Investment Grade has under-performed High Yield year to date but less so than in the US (see chart below) - source Bloomberg:
Eurostoxx 50 (in red) versus Itraxx Main Europe CDS index (investment grade risk gauge) and Itraxx Financial Senior CDS index (investment grade financials senior risk gauge) as well as versus Itraxx Crossover CDS index (High Yield risk gauge).

In Europe, the financial part of the "investment grade" bucket has been clearly underperforming due to renewed pressure from peripheral countries (Spain and Italy). 

In the US it seems there has been a real signal of cross asset "rotation / re-allocation" with an inversion of the correlation between Investment Grade / Equities.

In Europe, the correlation between  Credit versus Equities seems to have moved back since Friday into negative territory with renewed nervousness in European equities markets.

Is it  indicating the end, or is it simply marking a pause, in the outperformance of European equities versus US equities which started last summer? We wonder.

One interesting point is that in the Investment Grade space, as indicated by the growing spread difference between the Itraxx Main Europe 5 year CDS index and its US counterpart CDX IG 5 year CDS index, now 25 bps apart, Europe investment grade is now underperforming US investment grade - source Bloomberg:

"It's the niceties that make the difference fate gives us the hand, and we play the cards."  
- Arthur Schopenhauer

Stay tuned!

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