European Bank Swaps Shake

Positions in Europe: Short EUR-USD (FXE); Covered short EUFN (European Financials) today


Below is our European Financials CDS Monitor that is tracked weekly by our Financials Managing Director Josh Steiner and his team.  As we’ve noted in recent work, the rising spotlight on the sovereign health of Italy and Spain have sent bank stocks in both countries shaking. Announcements over the weekend from Spain and Italy to further tighten spending to reduce budget deficits and the ECB’s decision to re-activate its bond purchasing program (SMP) did little to quell investor fears today: European equities fell -2 to -6%, and most towards the latter end of the range. [For more see today’s note titled “European Risk Monitor: In the Red”].

 

While the “news” did send 10YR Italian and Spanish sovereign bond yields tumbling around 70bps day-over-day to 5.35% and 5.23% respectively, it’s clear that the ECB too is worried about bond yields creeping up in both countries. Our break-out yield target level remains 6%, which both have flirted around, even after the announcement of Greece’s second bailout on July 21st. 

 

As it relates to the banks, we see the 300bps (affectionately named the Lehman Brothers line) as a critical break-out momentum line. And here the score card is very telling. Currently 13 out of the 39 large European banks are trading over the 300bps line. If we focus on the banks of the peripheral countries, the majority of them are above 300bps, and a significant number have cleared the line by a country mile. We think many of these banks that defy the line are in serious risk of default. 

 

A breakdown of the monitor shows that bank 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)

 

Today we covered our short position in European Financials (EUFN) in the Hedgeye Virtual Portfolio for a 15.7% gain (see levels chart below).

 

European Bank Swaps Shake - 1. josh

 

European Bank Swaps Shake - 2. josh

 

Matthew Hedrick

Senior Analyst


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