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This week's notable callouts include swaps tightening across the board, particularly the European banks and European sovereigns (except Greece).  The only negative on the short-term duration was a significant decline in the Baltic Dry Index, which fell 144 points WoW.


Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Positive / 6 of 11 improved / 1 out of 11 worsened / 4 of 11 unchanged
  • Intermediate-term (MoM): Positive / 5 of 11 improved / 1 of 11 worsened / 5 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: SWAPS SIGNAL FALLING RISK - summary

1. US Financials CDS Monitor – Swaps were mostly tighter across domestic financials, tightening for 22 of the 28 reference entities and widening for 6. 

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

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

Tightened the most vs last month: MET, XL, C

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

WEEKLY RISK MONITOR FOR FINANCIALS: SWAPS SIGNAL FALLING RISK - us cds

2. European Financials CDS Monitor – Banks swaps in Europe were tighter, tightening for 35 of the 39 reference entities and widening for 3, with one unchanged.

WEEKLY RISK MONITOR FOR FINANCIALS: SWAPS SIGNAL FALLING RISK - euro cds

3. European Sovereign CDS – Sovereign CDS fell sharply across Europe, particularly in Ireland and Portugal.  Greek CDS rose slightly on the news that Greece may require another extension of the terms of repayment or another cut in the bailout rate. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: SWAPS SIGNAL FALLING RISK - sov cds

4. High Yield (YTM) Monitor – High Yield rates fell slightly last week, ending at 7.82, 3 bps lower than the previous week.  

WEEKLY RISK MONITOR FOR FINANCIALS: SWAPS SIGNAL FALLING RISK - high yield

5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose last week to end the week at 1620.   

WEEKLY RISK MONITOR FOR FINANCIALS: SWAPS SIGNAL FALLING RISK - lev loan

6. TED Spread Monitor – The TED spread rose last week, hitting a new high mid-week and ending the week at 24.0 versus 23.6 the prior week.

WEEKLY RISK MONITOR FOR FINANCIALS: SWAPS SIGNAL FALLING RISK - ted spread

7. Journal of Commerce Commodity Price Index – Last week, the JOC index rose to end the week at 37.4, 4.5 points higher than the prior week.

WEEKLY RISK MONITOR FOR FINANCIALS: SWAPS SIGNAL FALLING RISK - JOC

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields rose 11 bps.

WEEKLY RISK MONITOR FOR FINANCIALS: SWAPS SIGNAL FALLING RISK - 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.  Last week spreads fell to 122. 

WEEKLY RISK MONITOR FOR FINANCIALS: SWAPS SIGNAL FALLING RISK - mcdx

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 once again, dropping 144 points to 1376. 

WEEKLY RISK MONITOR FOR FINANCIALS: SWAPS SIGNAL FALLING RISK - Baltic dry

11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread widened out to 277 bps. 

WEEKLY RISK MONITOR FOR FINANCIALS: SWAPS SIGNAL FALLING RISK - 2 10

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  1.6% upside to TRADE resistance, 0.4% downside to TRADE support.

WEEKLY RISK MONITOR FOR FINANCIALS: SWAPS SIGNAL FALLING RISK - xlf

Joshua Steiner, CFA

Allison Kaptur