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Financial stocks in Canada and the United States were back in the mud on Friday, a day after Moody's Investors Service downgraded the credit ratings of bond insurers MBIA Inc. and Ambac Financial Corp. by several notches.

The downgrade is not exactly new - Fitch Ratings and Standard & Poor's have already pulled the trigger - but the severity of it has renewed concerns among investors that other financial firms could be caught up in the ensuing volatility.

But there could be something else going on here: Clement Gignac, chief economist at National Bank, noted that oil and U.S. financial stocks have the highest level of negative correlation (at -0.85; -1 indicates perfect negative correlation) in 18 years, meaning that they are moving in almost opposite directions. Indeed, the rise in the price of oil on Friday comes after China announced dramatic increases in fuel prices and the U.S. said gasoline consumption is down 1 per cent in 2008, suggesting that something else is driving the price higher.

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"Why are crude prices so resilient given this potential oil demand destruction from China and the ongoing change in American drivers' energy consumption habits? It seems that the answer comes from the financial players' desire to hedge against the U.S. dollar, not to mention having an insurance policy against the U.S. banking system woes," Mr. Gignac said in a note to clients.

Binky Chadha, a strategist at Deutsche Bank, noted that the entire S&P 500 has recently turned decidedly negatively correlated with oil.

"This contrast in behaviour of correlations suggests oil prices have been exerting an increasing negative influence on equity markets recently," Mr. Chadha said. The way he sees it, U.S. stocks are a "hostage to oil."

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