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This week's notable callouts include financial company swaps tightening and the Baltic Dry Index falling.  It's also worth pointing out that the government's temporary budget expires this Friday, potentially setting the stage for a government shutdown thereafter if no budget agreement is reached. We consider this an underappreciated risk factor facing the markets in the short term (for more details see this morning's Early Look from our Macro team).


Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 2 of 11 improved / 4 out of 11 worsened / 5 of 11 unchanged
  • Intermediate-term (MoM): Negative/ 3 of 11 improved / 5 of 11 worsened / 3 of 11 unchanged
  • Long-term (150 DMA): Neutral / 4 of 11 improved / 4 of 11 worsened / 3 of 11 unchanged

WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS - summary

1. US Financials CDS Monitor – Swaps were mixed to positive across domestic financials, widening for 11 of the 28 reference entities and tightening for 17. 

Tightened the most vs last week: MET, XL, HIG

Widened the most vs last week: JPM, PMI, RDN

Tightened the most vs last month: UNM, MMC, WFC

Widened the most vs last month: RDN, ACE, MBI

WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS - us cds

2. European Financials CDS Monitor – Banks swaps in Europe were mostly tighter, tightening for 30 of the 39 reference entities and widening for 9.

WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS - euro cds

3. European Sovereign CDS – Sovereign CDS were mixed across Europe, rising in Greece, Portugal, and Ireland, but holding flat in Spain and falling in Italy. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS - sov cds

4. High Yield (YTM) Monitor – High Yield rates fell slightly to close a volatile week, ending at 7.85, 2 bps lower than the previous week.  

WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS - high yield

5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose last week to end the week at 1617.   

WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS - lev loan

6. TED Spread Monitor – The TED spread rose last week, ending the week near a new high at 23.6 versus 22.0 the prior week.

WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS - ted spread

7. Journal of Commerce Commodity Price Index – Last week, the JOC index fell to end the week at 32.9, 2.2 points lower than the prior week.

WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS - JOC

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields rose 17 bps.

WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS - greek bonds

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.  As of Thursday, the most recent data available, spreads rose to 138. 

WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS - markit

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.  Early in the year, Australian floods and oversupply pressured the Index, driving it down 30%. Since then it has bounced off the lows.  Last week it fell slightly, dropping 65 points to 1520. 

WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS - baltic dry

11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread tightened to 265 bps. 

WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS - 2 10

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  0% upside to TRADE resistance, 1.1% downside to TREND support.

WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS - xlf

Joshua Steiner, CFA

Allison Kaptur