Key Takeaway:
Without much news out last week, markets broadly followed oil prices higher, as OPEC announced it will hold an informal meeting in September. CDS tightened globally, the high yield YTM fell by -16 bps to 6.33%, and the price of Chinese steel rose 1.5%.
Our heatmap below is positive across all durations.
Current Ideas:
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 5 of 13 improved / 2 out of 13 worsened / 6 of 13 unchanged
• Intermediate-term(WoW): Positive / 5 of 13 improved / 2 out of 13 worsened / 6 of 13 unchanged
• Long-term(WoW): Positive / 4 of 13 improved / 1 out of 13 worsened / 8 of 13 unchanged
1. U.S. Financial CDS – Swaps tightened for 11 out of 13 domestic financial institutions as investors defaulted to optimism without much news last week but with oil prices pushing higher.
Tightened the most WoW: BAC, C, AXP
Widened the most WoW: HIG, COF, UNM
Widened the least/ tightened the most WoW: LNC, COF, UNM
Widened the most MoM: AIG, JPM, GS
2. European Financial CDS – Financials swaps mostly tightened in Europe last week. Portugal, however, was an outlier. CDS for its Banco Espirito Santo widened by 98 bps to 1188.
3. Asian Financial CDS – Financials swaps mostly tightened in Asia last week. Only Nomura Holdings CDS widened minimally, by 1 bps to 80.
4. Sovereign CDS – Sovereign swaps mostly tightened over last week. However, Italian sovereign CDS widened by 6 bps to 132.
5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Russian sovereign swaps, however, stood out with a move 13 bps wider to 231.
6. High Yield (YTM) Monitor – High Yield rates fell 16 bps last week, ending the week at 6.33% versus 6.49% the prior week.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.0 points last week, ending at 1938.
8. TED Spread Monitor – The TED spread rose 1 bps last week, ending the week at 54 bps this week versus last week’s print of 53 bps.
9. CRB Commodity Price Index – The CRB index rose 1.6%, ending the week at 183 versus 180 the prior week. As compared with the prior month, commodity prices have decreased -3.3%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 5 bps.
11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 2 basis points last week, ending the week at 2.02% versus last week’s print of 2.00%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
12. Chinese Steel – Steel prices in China rose 1.5% last week, or 39 yuan/ton, to 2617 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.
13. Chinese Non-Performing Loans – Chinese non-performing loans amount to 1,437 billion Yuan as of June 30, 2016, which is up +31.6% year over year. Given the growing focus on China's debt growth and the potential fallout, we've decided to begin tracking loan quality. Note: this data is only updated quarterly.
14. Chinese Credit Outstanding – Chinese credit outstanding amounts to 151.4 trillion RMB as of July 31, 2016 (data released 8/12/2016), which is up +15.0 trillion RMB or +11.0% year over year. Month-over-month, credit is up +374 billion RMB or +0.2%. Note: this data is only updated monthly.
15. 2-10 Spread – Last week the 2-10 spread tightened to 81 bps, -6 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
16. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread widened by 1 bps to 40 bps.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
Patrick Staudt, CFA
