Divergent cyclical assets… until when?

Posted on 11. jan, 2012 by Riskelia in Weekly Focus | Commentaires fermés

We have been observing since December 2011 a set of important disconnections among cyclical assets:

  1. The cost of risk in equities markets shows signs of easing while the strain on banks’ funding remains unchanged (Figure 1)
  2. Emerging and European currencies are in negative spirals against the US dollar while oil products display strongly positive trends (Figure 2)
  3. Some equity sectors, like food and beverage, display strongly positive trends while the trends on other sectors like banks keep their negative orientation (Figure 3)

A similar disconnection has been observed in the recent history: in particular, in Nov 2010- Mar 2011, the equities markets remarkably ignored the problems faced by the banks in their funding, but in June 2011, the banks had the last word and risky assets were eventually reconciled in the summer bearish orientation (Figure 1).

As the fears on euro zone banks’ equity raising resurface (UniCredit slump adds to equity raising fears, Spain sees €50bn of new bank provisions), one may question the long-term viability of the current equities and oil rally, particularly as the level of integration across risky assets approaches its 2008 peak (Figure 4). Does it announce a temporary easing of banks’ funding problems (as in Jan and Feb 2011) or is it a new illustration of the ‘normalcy bias’* in equities volatility market already documented by Artemis Capital Management in this excellent research?

*according to Wikipedia, the normalcy bias refers to a ‘mental state people enter when facing a disaster, causing people to underestimate both the possibility of a disaster occurring and its possible effects’

Figure 1: The divergence of risk perception in equities and banks’ debt markets: the graph represents the normalized VIX and banks’ CDS since Jan 2010. The global stress indicator averages the normalized risk aversion indicators across a large spectrum of cyclical assets.


Figure 2: The divergence of Riskelia’s trends within cyclical assets


Figure 3: Trend divergence among sectors: the example of Food & Beverage vs. Oil

Figure 4:
The level of financial integration plotted below
corresponds to the proportion of the global asset price variations (i.e. the equities, corporate credit, currencies, bonds, interest rates futures, and commodities’ price variations) which can be explained by a common risk factor, viewed as the average dynamics of risky assets against bonds.

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