MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR

Highlights:

Watch French Sovereign CDS levels as a proxy for the EU Debt Crisis, as a downgrade of France could jeopardize the EFSF. French Sovereign swaps have risen to 158 bps as of this morning, up from 60 bps as recently as April. In the past week alone, they are wider by 37 bps.

 

The notable callouts from this week's Risk Monitor include swaps and spreads blowing out across the complex. High Yield and Leveraged Loans saw significant declines, while both US and EU financial company CDS widened. Also of interest was the sharp decline in commodity prices reflecting a diminishing global growth outlook. The US downgrade is front and center today.

 

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 0 of 11 improved / 10 out of 11 worsened / 1 of 11 unchanged
  • Intermediate-term (MoM): Negative / 2 of 11 improved / 9 of 11 worsened / 0 of 11 unchanged
  • Long-term (150 DMA): Negative / 2 of 11 improved / 6 of 11 worsened / 3 of 11 unchanged

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - SUMMARY

 

1. US Financials CDS Monitor – Swaps widened across all domestic financials last week (28 of 28 issuers widening).  On a month-over-month basis all 28 issuers were also wider. Mortgage insurer swaps continued to blow out, as PMI Group entered the red zone.

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

Widened the least vs last week: CB, XL, MMC

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

Tightened the most/widened the least vs last month: MBI, AON, MMC

 

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - US CDS

 

2. European Financials CDS Monitor – Banks swaps in Europe were mostly wider last week.  34 of the 38 swaps were wider and 4 tightened.   

Widened the most vs last week: Banco Popular Espanol (Spain), Svenska Handelsbanken, Barclays

Widened the least vs last week: Alpha Bank, EFG Eurobank, National Bank of Greece

Widened the most vs last month: Banco Popolare (Italy), Banco Pastor (Spain), Bayerische Hypo (Germany)

Tightened the most/widened the least vs last month: Alpha Bank (Greece), EFG Eurobank (Greece), Hannover Rueckverischerung (Germany)

 

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - EU CDS

 

3. European Sovereign CDS – European sovereign swaps moved higher again last week off of their post-bailout lows.  We believe the CDS market is currently pricing in decreased hedge effectiveness. 

 

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - SOV CDS

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - SOV CDS 2

 

4. High Yield (YTM) Monitor – High Yield rates were up significantly last week, ending at 7.67 versus 7.40 the prior week.

 

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - HY

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 32 points last week, ending at 1574. 

 

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - LLI

 

6. TED Spread Monitor – The TED spread widened considerably, ending the week at 25.8 versus 16.4 the prior week.

 

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - TED

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index fell significantly, ending the week at 2.6 vs. 8.9 the prior week. 

 

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - JOCS

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields rose 41 bps, ending the week at 1524 bps.

 

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - GREECE

 

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.  After bottoming in April, the index has been moving higher.  Last Friday, spreads closed at 140 bps.

 

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - 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 index was essentially flat, coming in at 1268 vs 1264 the prior week.

 

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - BALTIC

 

11. 2-10 Spread – We track the 2-10 spread as a proxy for banking sector net interest margins.  Last week the 2-10 spread declined 18 bps to 226 bps from 244 bps the prior week.   

 

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  8.1% upside to TRADE resistance, 0.3% downside to TRADE support. That said, if TRADE support of $13.39 should fail to hold on the open, then there is no support below that.

 

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - XLF LEVELS

 

Margin Debt Continues to Fall

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 $9.5B to $306B.  On a standard deviation basis, margin debt fell to 1.21 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 June.

 

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - margin debt

 

Joshua Steiner, CFA

 

Allison Kaptur