Market Economics | Interest Rate Strategy - BNP PARIBAS ...

The question is whether the 110 resistance can
be broken on a sustainable basis; for us, it could
only happen if a majority of bears throw the towel
after a strong rally in equities. Can it happen in the
current macro environment? We have some doubts
and even if the tone of the earnings season
remains on the positive side (so far, the three blue
chips which reported, Alcoa, Intel and JPM, came
above forecasts), the outlook can not be
promising enough to trigger an equity rally that
sends MAIN below 100.
What’s the call? The only strategy which makes
sense to us for the moment is to play the 110-120
range.
MAIN vs. FIN SEN
The context remains favourable to FIN indices, SEN
in particular, given the decrease in systemic risk and
the progressive switch of the focus onto the earnings
and the macro economic data. FIN SEN continues to
outperform MAIN on a beta-adjusted basis as
indicated on chart3. That being said, the newsflow on
sovereigns –we had this week the downgrade by
Moody’s of Portugal and of 8 Portuguese financials
institutions – continues to have a bigger impact on
FIN indices than on MAIN.
What’s the call?
Playing FIN SEN vs. MAIN remains for us throwing a
coin in the air given the number of moving parts; in
the very short term, we nonetheless feel two factors
could play in favour of FIN SEN: 1/ upcoming results
of the stress tests than could allow some further
performance of Financials and 2/ stronger
“psychological” support on MAIN at 110 than on FIN
SEN at 130.
In this backdrop, we would rather play a basket of the
strongest banks that trade wide on a historical basis
vs. MAIN. For example, the basket (2 x BACR SUB,
1 x ACAFP SUB, 2.5 x RABO SUB and 1.5 x ISPIM
SUB) vs. 10 x MAIN offers 1/ similar pick-up and 2/
more upside in a rally and 3/ less downside in the
sell-off.
Chart 3: FIN SEN vs. MAIN since 1/1/10
FIN SEN
230
210
190
170
150
130
110
90
70
50
FIN SEN Wide
Source: BNP Paribas
FIN SEN Tight
y = 1.6645x - 42.21
R 2 = 0.9541
50 75 100 125 150
MAIN
Chart 4: Basket FIN vs. MAIN
-
40
30
20
10
-10
-20
-30
7/09 8/09 9/09 10/09 11/09 12/09 1/10 2/10 3/10 4/10 5/10 6/10 7/10
Source: BNP Paribas
Chart 5: FIN SEN - MAIN
-
70
60
50
40
30
20
10
-10
-20
07/09 08/09 09/09 10/09 11/09 12/09 01/10 02/10 03/10 04/10 05/10 06/10
Source: BNP Paribas
Last
Pierre Yves Bretonniere 16 July 2010
Market Mover, Non-Objective Research Section
44
www.GlobalMarkets.bnpparibas.com