This week's notable callouts include a new YTD high in the TED spread, tightening of US and European financial CDS, and tightening of most sovereign swaps. Greek sovereign CDS hit a new high mid-week before falling sharply, ending slightly higher than the prior week.
Financial Risk Monitor Summary (Across 3 Durations):
- Short-term (WoW): Positive / 5 of 11 improved / 2 out of 11 worsened / 4 of 11 unchanged
- Intermediate-term (MoM): Negative / 3 of 11 improved / 5 of 11 worsened / 3 of 11 unchanged
- Long-term (150 DMA): Negative / 2 of 11 improved / 7 of 11 worsened / 2 of 11 unchanged
1. US Financials CDS Monitor – Swaps tightened across 27 of 28 major domestic financials in our table last week. In contrast, only 16 companies have tighter swaps compared to a month ago.
Tightened the most vs last week: GS, PMI, ACE
Tightened the least/ widened the most vs last week: RDN, AGO, GNW
Tightened the most vs last month: PMI, ACE, MMC
Widened the most vs last month: LNC, PRU, AGO
2. European Financials CDS Monitor – Banks swaps mostly tightened in Europe last week. 25 of the 39 swaps were tighter while 14 widened. There was a notable divergence in Greek banks, with Alpha Bank A.E, EFG Eurobank Ergasias, and National Bank of Greece widening 61%, 52%, and 32% respectively. French banks led the tightening, with BNP Paribas and Credit Agricole tightening 13% WoW.
3. European Sovereign CDS – European sovereign swaps mostly tightened across the Eurozone. After hitting a new all-time high of almost 5,000 bps mid-week, Greek swaps are trading at 3,536 bps today, just 27 bps wider than last Monday’s level. CDS of Portugal, Ireland, Spain, Italy, France, and Germany were modestly tighter compared to last week.
4. High Yield (YTM) Monitor – High Yield rates rose 2 bps last week, ending at 7.84 versus 7.82 the prior week.
5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3 points last week, ending at 1541.
6. TED Spread Monitor – The TED spread made another new YTD high, ending the week at 35.1 versus 33.3 the prior week.
7. Journal of Commerce Commodity Price Index – Last week, the JOC index fell slightly, ending the week at -4.4.
8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds. Last week yields hit new all-time highs, before falling to end the week at 2119 bps.
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 week, spreads fell 19 bps and closed at 144 bps.
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 hit its YTD high before falling to end the week 24 points lower at 1814.
11. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure. Last week the 10-year yield rose to 2.05, pushing the 2-10 spread to 188 bps, 15 bps wider than a week ago.
12. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows the following: 1.6% upside to TRADE resistance, 1.5% downside to TRADE support.
Margin Debt Flat in July
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 July, margin debt held close to flat at $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 July.
Joshua Steiner, CFA