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This week's notable callouts include high yield and leveraged loans weakening, and domestic financial swaps tightening.

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 1 of 11 improved / 4 out of 11 worsened / 6 of 11 unchanged
  • Intermediate-term (MoM): Negative / 1 of 11 improved / 7 of 11 worsened / 3 of 11 unchanged
  • Long-term (150 DMA): Neutral / 3 of 11 improved / 5 of 11 worsened / 3 of 11 unchanged

WEEKLY FINANCIALS RISK MONITOR: THE CALM BEFORE THE (GREEK) STORM? - summary

1. US Financials CDS Monitor – Swaps were mixed across domestic financials last week, tightening for 15 of the 28  reference entities and widening for 13.

Widened the most vs last week: PMI, COF, ALL

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

Widened the most vs last month: PMI, MTG, WFC

Widened the least vs last month: GS, AON, MMC

WEEKLY FINANCIALS RISK MONITOR: THE CALM BEFORE THE (GREEK) STORM? - us cds

2. European Financials CDS Monitor – Banks swaps in Europe were wider last week.  35 of the 38 swaps were wider and only 3 tightened.   

WEEKLY FINANCIALS RISK MONITOR: THE CALM BEFORE THE (GREEK) STORM? - euro cds

3. European Sovereign CDS – European sovereign swaps spiked going into last weekend, as uncertainty about the Greek bailout unsettled the market. 

WEEKLY FINANCIALS RISK MONITOR: THE CALM BEFORE THE (GREEK) STORM? - sov cds

4. High Yield (YTM) Monitor – High Yield rates continued to climb higher last week, ending at 7.62 versus 7.45 the prior week.  

WEEKLY FINANCIALS RISK MONITOR: THE CALM BEFORE THE (GREEK) STORM? - high yield

5. Leveraged Loan Index Monitor – The Leveraged Loan Index to its lowest level since mid-March, closing at 1602 versus 1606 the prior week. Remember that Leveraged Loans are quoted in prices, not yield.  

WEEKLY FINANCIALS RISK MONITOR: THE CALM BEFORE THE (GREEK) STORM? - LEV LOAN

6. TED Spread Monitor – The TED spread rose slightly last week, ending the week at 22.1 versus 20.7 the prior week.

WEEKLY FINANCIALS RISK MONITOR: THE CALM BEFORE THE (GREEK) STORM? - ted spread

7. Journal of Commerce Commodity Price Index – Last week, the JOC index fell 5 points, dropping to 12.6. We treat this series as a referendum on economic growth.

WEEKLY FINANCIALS RISK MONITOR: THE CALM BEFORE THE (GREEK) STORM? - JOC

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields rose before giving back much of the increase on Friday.

WEEKLY FINANCIALS RISK MONITOR: THE CALM BEFORE THE (GREEK) STORM? - 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 WoW at 115. 

WEEKLY FINANCIALS RISK MONITOR: THE CALM BEFORE THE (GREEK) STORM? - 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% before bouncing off the lows.  Last week the series was essentially flat.

WEEKLY FINANCIALS RISK MONITOR: THE CALM BEFORE THE (GREEK) STORM? - baltic

11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread was close to flat. 

WEEKLY FINANCIALS RISK MONITOR: THE CALM BEFORE THE (GREEK) STORM? - 2 10 spread

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  0.9% upside to TRADE resistance, 1.8% downside to TRADE support.

WEEKLY FINANCIALS RISK MONITOR: THE CALM BEFORE THE (GREEK) STORM? - XLF

Margin Debt Approaching Prior Pre-Crash Highs

We are now publishing NYSE Margin Debt every month when it’s released.  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-run 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: THE CALM BEFORE THE (GREEK) STORM? - margin debt

Joshua Steiner, CFA

Allison Kaptur