While the ongoing cruciVIXion unleashed by the renewal of hopes for more easing by the ECB and BOJ as a result of the latest global economic swoon, coupled with the confirmation of a US slowdown which has pushed the Fed's rate hike into 2016 (if not 2017 as Goldman argues) has unleashed a bigger USDJPY-driven stock surge than the aftermath of Bullard's infamous October 2014 "QE4" speech, there are numerous instances where the far more rational credit market is simply not buying it.
Here are ten such instances.
As BMO's technician Mark Steele points out, "the divergences that have built up recently, with equities priced optimistically, and CDS priced pessimistically, are dramatic both in magnitude and breadth."
- While equities were rebounding last Friday, the CDS market kept pricing credit insurance higher. The equity rebound was not confirmed by credit risk improvement.
- Credit risk is still low, and as such, has yet to demand attention to the point where equity markets swing tightly with CDS contracts on an intraday basis. It does however need to be heeded.
BMO next looks at representative companies from each sector where it thinks equity investors need to be cognizant of where the CDS market prices risk. It finds the following:
- Large short-term divergences, where equity is priced optimistically, relative to CDS are found with Kinder Morgan, GM, Tesco, Ally Financial, Hewlett-Packard, Sprint and AES.
- Glencore sports an inverted curve
- Bombardier remains a member of the Mile High Club, where CDS is over 1000bps
- In the 14 days since Biogen CDS started trading, its quote went from 50 to 140bps. This contract is as liquid as a truck, yet that’s quite a downgrade.
And the evidence:
Kinder Morgan:
Glencore:
Bombardier:
General Motors:
Tesco:
Biogen:
Ally Financial:
Hewlett-Packard:
Sprint:
AES:
