This week's notable callouts include a new high in the TED spread and a sharp decline in the JOC commodity index.
Financial Risk Monitor Summary (Across 3 Durations):
- Short-term (WoW): Neutral / 3 of 11 improved / 3 out of 11 worsened / 5 of 11 unchanged
- Intermediate-term (MoM): Positive / 2 of 11 improved / 6 of 11 worsened / 3 of 11 unchanged
- Long-term (150 DMA): Neutral / 4 of 11 improved / 4 of 11 worsened / 3 of 11 unchanged
1. US Financials CDS Monitor – Swaps widened across domestic financials, widening for 25 of the 28 reference entities and tightening for 3.
Widened the most vs last week: GS, PMI, MBI
Tightened the most vs last week: MS, ACE, AON
Widened the most vs last month: JPM, PMI, MTG
Tightened the most vs last month: ACE, ALL, AGO
2. European Financials CDS Monitor – Banks swaps in Europe were mostly wider, widening for 31 of the 39 reference entities and tightening for 8.
3. European Sovereign CDS – After taking a breather the prior week, European sovereign swaps increased late last week, rising 5 bps on average. Greek CDS rose on speculation that Greece would leave the Eurozone. Our Europe analyst, Matt Hedrick, commented in a piece on Friday, “It seems far more likely that these meetings are being called to discuss the back and forth over recent days about the prospect of Greece restructuring its debt, a position Greeks deny the need for, while select European voices continue to press. Greece’s equity market (Athex) had a tough week, closing down 4.5% w/w as sovereign cds and government yields remain elevated, with the Greek 10yr yield at 15.5%. That said, we’re not seeing a freak-out in risk intraday that would confirm the validity of the likelihood that Greece leaves the union. If anything, a serious talk about Greece’s public debt and the prospect for restructuring was probably in order, and the weekend will help shield some of the downside risk to the meeting’s announcement.”
4. High Yield (YTM) Monitor – High Yield rates fell last week, ending at 7.12 versus 7.66 the prior week. A data error or methodology change appears to be the cause of the step function in the Bloomberg series. We are awaiting clarification on this shift.
5. Leveraged Loan Index Monitor – The Leveraged Loan Index remained flat last week at 1621.
6. TED Spread Monitor – The TED spread rose last week to a new YTD high, ending the week at 26.2 versus 23.8 the prior week.
7. Journal of Commerce Commodity Price Index – Last week, the JOC index dove with the rest of the commodity market, ending the week at 21.0, 7.3 points lower than the prior week. This fall brings the JOC to its year-to-date low.
8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds. Last week yields fell 15 bps versus the prior Friday.
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 six 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. We track the 14-V1. Last week spreads fell to 99 from 112.
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% before bouncing off the lows. Last week it rose 71 points to 1340.
11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins. Last week the 2-10 spread tightened 8 bps to 260 bps.
12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows: 2.3% upside to TRADE resistance, 0.6% downside to TRADE support.
Joshua Steiner, CFA