WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE

All our indicators looked better following Friday's rally. Big picture risks we remain focused on include the ongoing slowdown in the JOC Industrial Commodity Index signaling ongoing slowdown in the global economy and the relentless drive higher in EU sovereign swaps.  In the short-term, however, the EU/Greece bandaid has put concerns on hold. 


Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Positive / 8 of 11 improved / 0 out of 11 worsened / 3 of 11 unchanged
  • Intermediate-term (MoM): Negative / 1 of 11 improved / 4 of 11 worsened / 6 of 11 unchanged
  • Long-term (150 DMA): Negative / 2 of 11 improved / 6 of 11 worsened / 3 of 11 unchanged

 

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - summary

 

1. US Financials CDS Monitor – Swaps tightened for all domestic financials last week, with the moneycenters and brokers leading the charge.

Tightened the least vs last week: UNM, AGO, GNW

Tightened the most vs last week: C, WFC, GS

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

Tightened the most vs last month: JPM, GS, PRU

 

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - us cds

 

2. European Financials CDS Monitor – Banks swaps in Europe were mixed last week.  11 of the 38 swaps were wider and 28 tightened.   

 

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - euro cds

 

3. European Sovereign CDS – European sovereign swaps corrected amid good news from Greece.

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates edged dropped sharply on Friday of last week, ending at 7.38 versus 7.57 the prior week.

 

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index climbed slightly last week, ending the week 7 points higher than the previous week at 1605.   

 

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - lev loan

 

6. TED Spread Monitor – The TED spread fell slightly, ending the week at 23.0 versus 24.1 the prior week.

 

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - ted spread

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index rose less than one point to 8.6. 

 

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields came in 44 bps, ending the week at 1634.

 

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - 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 dropped 13 bps to 109. 

 

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - 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.  Last week the series remained close to flat versus the prior week.

 

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - 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 to 271 bps.   

 

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  1.0% upside to TRADE resistance, 3.4% downside to TRADE support.

 

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - XLF

 

Margin Debt Back Off of Recent Highs

We publish 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.  In May, margin debt decreased $5.3B to $315B.  On a standard deviation basis, margin debt fell to 1.36 standard deviations above the long-run average.

 

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

 

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - margin debt

 

Joshua Steiner, CFA

 

Allison Kaptur


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