Financial Risk Monitor Summary (Across 3 Durations):
- Short-term (WoW): Positive / 6 of 10 improved / 1 of 10 worsened / 3 of 10 unchanged
- Intermediate-term (MoM): Negative / 0 of 10 improved / 7 of 10 worsened / 3 of 10 unchanged
- Long-term (150 DMA): Negative / 0 of 10 improved / 6 of 10 worsened / 3 of 10 unchanged / 1 of 10 n/a
1. US Financials CDS Monitor – Swaps tightened across domestic financials last week, widening for just 3 of the 28 reference entities and tightening for the other 25.
Tightened the most vs last week: PRU, MBI, AGO
Widened the most vs last week: XL, AON, MMC
Tightened the most vs last month/widened the least: SLM, PMI, JPM
Widened the most vs last month: CB, TRV, MBI
2. European Financials CDS Monitor – In Europe, banks swaps tightened significantly following the Irish bailout. Swaps tightened for 37 of the 39 reference entities.
3. Sovereign CDS – Sovereign CDS fell 39 bps on average last week, as swaps responded favorably to the bailout.
4. High Yield (YTM) Monitor – High Yield rates fell slightly last week, closing at 8.23 on Friday.
5. Leveraged Loan Index Monitor – After sinking since early November, the Leveraged Loan Index reversed course and rose 1.3 points versus last week.
6. TED Spread Monitor – The TED spread increased sharply into the end of the week, rising 3 points by Friday to close at 17.2.
7. Journal of Commerce Commodity Price Index – Last week, the index rose 7.5 points, closing at 21.9 on Friday.
8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds. Last week yields fell, ending the week 21 bps below last week’s close.
9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on four 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. Our index is the average of their four indices. Spreads closed the week at 173 bps, 8 bps lower than last week.
10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production. Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion. Last week the index was close to flat, falling 0.2 points at 217.
11. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows: 0.33% upside to TRADE resistance, 2.2% downside to TRADE support. This implies 6 to 1 downside to upside ratio near-term. We generally look to see 2 to 1 upside/downside ratios to be long and 2 to 1 downside ratios to be short.
Joshua Steiner, CFA