WEEKLY FINANCIALS RISK MONITOR: MARGIN DEBT CONTINUES TO CLIMB

Margin Debt Edges Closer to Prior Pre-Crash Highs

We are now publishing NYSE Margin Debt every month when it’s released.  Last week we got April data (as of month-end). This chart shows the S&P 500, inflation adjusted back to 1997, along with the inflation-adjusted level of margin debt (expressed as standard deviations from the long-term mean).  As the chart demonstrates, higher levels of margin debt are associated with increased risk in the equity market.  Our analysis shows that more than 1.5 standard deviations above the average level is the point where things start to get dangerous.  Currently, we are very close to that level – April margin debt hit 1.49 standard deviations above the average.

One limitation of this series is that it is reported on a lag.  The chart shows data through April.

WEEKLY FINANCIALS RISK MONITOR: MARGIN DEBT CONTINUES TO CLIMB - margin debt

This week's notable callouts include domestic and European financials CDS increasing.


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 FINANCIALS RISK MONITOR: MARGIN DEBT CONTINUES TO CLIMB - summary

1. US Financials CDS Monitor – Swaps widened across domestic financials, widening for 26 of the 28 reference entities and tightening for 2. 

Widened the most vs last week: GS, MET, PRU

Tightened the most vs last week/widened the least: JPM, PMI, MBI

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

Tightened the most vs last month/widened the least: ACE, TRV, GNW

WEEKLY FINANCIALS RISK MONITOR: MARGIN DEBT CONTINUES TO CLIMB - us cds

2. European Financials CDS Monitor – Banks swaps in Europe widened last week.  34 of the 38 swaps were wider and only four tightened.   

WEEKLY FINANCIALS RISK MONITOR: MARGIN DEBT CONTINUES TO CLIMB - euro cds

3. European Sovereign CDS – European sovereign swaps rose last week, climbing 32 bps on average.  Greek CDS led the way higher, rising 7.4% before coming in somewhat early this week. 

WEEKLY FINANCIALS RISK MONITOR: MARGIN DEBT CONTINUES TO CLIMB - sov cds

4. High Yield (YTM) Monitor – High Yield rates rose slightly last week, ending at 7.14 versus 7.12 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.  

WEEKLY FINANCIALS RISK MONITOR: MARGIN DEBT CONTINUES TO CLIMB - high yield

5. Leveraged Loan Index Monitor – The Leveraged Loan Index slid slightly again last week, ending the week at 1614 versus 1618 the prior week.   

WEEKLY FINANCIALS RISK MONITOR: MARGIN DEBT CONTINUES TO CLIMB - lev loan

6. TED Spread Monitor – The TED spread continued to decline off its high last week, ending the week at 21.3 versus 21.7 the prior week.

WEEKLY FINANCIALS RISK MONITOR: MARGIN DEBT CONTINUES TO CLIMB - ted spread

7. Journal of Commerce Commodity Price Index – Last week, the JOC index continued to bounce along the bottom, falling 1 point versus the prior week. 

WEEKLY FINANCIALS RISK MONITOR: MARGIN DEBT CONTINUES TO CLIMB - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields fell 15 bps versus the prior Friday.

WEEKLY FINANCIALS RISK MONITOR: MARGIN DEBT CONTINUES TO CLIMB - 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 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 were flat at 101 vs 104 the prior week. 

WEEKLY FINANCIALS RISK MONITOR: MARGIN DEBT CONTINUES TO CLIMB - 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% before bouncing off the lows.  Last week the series gained 125 points.

WEEKLY FINANCIALS RISK MONITOR: MARGIN DEBT CONTINUES TO CLIMB - 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 4 bps to 259 bps. 

WEEKLY FINANCIALS RISK MONITOR: MARGIN DEBT CONTINUES TO CLIMB - 2 10

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  0.1% upside to TRADE resistance, 2.2% downside to TRADE support.

WEEKLY FINANCIALS RISK MONITOR: MARGIN DEBT CONTINUES TO CLIMB - XLF

Joshua Steiner, CFA

Allison Kaptur