MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION

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Margin Debt in November

We publish NYSE Margin Debt every month when it’s released. 

 NYSE Margin debt hit its post-2007 peak in April of this year at $320.7 billion. The chart below shows the S&P 500 overlaid against NYSE margin debt going back to 1997. In this chart both the S&P 500 and margin debt have been inflation adjusted (back to 1990 dollar levels), and we’re showing margin debt levels in standard deviations relative to the mean covering the period 1. While this may sound complicated, the message is really quite simple. First, when margin debt gets to 1.5 standard deviations or greater, as it did this past April, that has historically been a signal of extreme risk in the equity market - the last two times it did this the equity market lost half its value in the ensuing period. We flagged this for the first time back in May of this year. The second point is that margin debt trends tend to exhibit high degrees of autocorrelation. In other words, the last few months’ change in margin debt is the best predictor of the change we’ll see in the next few months. This is important because it means that margin debt, which retraced back to +0.43 standard deviations in September, still has a long way to go. We would need to see it approach -0.5 to -1.0 standard deviations before the trend reversed. There’s plenty of room for short/intermediate term reversals within this broader secular move, as we saw in October and November’s print of +0.78 and +0.55 standard deviations.  But overall, this setup represents a material headwind for the market.  

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

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - Margin Debt

* The TED spread made a new YTD high at 56.8 bps, indicating risk in the banking system continues to rise. We consider the TED spread to be a more sober reflection of systemic risk in the banking system.  This is a strong cautionary note amid widespread equity gains.  

*Credit default swaps for Eurozone countries were a mixed bag on Monday. German sovereign swaps widened by 6.3% while Spanish swaps tightened by 5.6% compared to the prior week. 

* Our composite MCDX monitor shows municipal default risk making steadily higher highs and higher lows. While it has not yet returned to the post-Whitney/Build America Bonds levels, it is on track do so in the not too distant future.

 * Our macro quantitative model indicates that in the immediate term (TRADE), there is currently around 2 times more downside than upside in the XLF (2.2% downside vs. 1.0% upside).

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 2 of 11 improved / 4 out of 11 worsened / 6 of 11 unchanged
  • Intermediate-term (MoM): Negative / 2 of 11 improved / 5 of 11 worsened / 5 of 11 unchanged
  • Long-term (150 DMA): Negative / 1 of 11 improved / 10 of 11 worsened / 1 of 11 unchanged

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - Summary

1. US Financials CDS Monitor – Swaps widened for 19 of 27 major domestic financial company reference entities last week.   

Widened the most vs last week: C, MET, HIG

Tightened the most vs last week: ALL, MBI, AGO

Widened the most/ Tightened the least vs last month: BAC, SLM, RDN

Tightened the most vs last month: ACE, ALL, CB

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - CDS  us

 

2. European Financials CDS Monitor – Bank swaps were wider in Europe last week for 28 of the 40 reference entities. The average widening was 2.7% and the median widening was 0.3%

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - CDS  euro

 

3. European Sovereign CDS – European sovereign swaps showed mixed results last week. German sovereign swaps widened by 6.3% (+6 bps to 107) and Spanish tightened by 5.6% (+24 bps to 410).

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - Sovereign CDS 1

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - Sovereign CDS 2

 

4. High Yield (YTM) Monitor – High Yield rates rose 5 bps last week, ending the week at 9.01 versus 8.96 the prior week.

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - High Yield

5. Leveraged Loan Index Monitor – The Leveraged Loan Index fell -5 points last week, ending at 1573.

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - LLI

 

6. TED Spread Monitor – The TED spread rose 2.6 points last week, ending the week at 56.8 this week versus last week’s print of 54.2.

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - TED spread

7. Journal of Commerce Commodity Price Index – The JOC indexfell -4.34 points, ending the week at -24.5 versus -20.16 the prior week.

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - JOC

8. Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk.  The Euribor-OIS spread tightened by 2 bps to 94 bps versus last week’s print of 96 bps.

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - Euribor

9. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  The ECB pays lower rates than the market, so an increase in this metric demonstrates increased perceived counterparty risk and liquidity hoarding.  Last week the facility hit its periodic low, but this level was higher than the previous cycle, indicating growing risk. 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - ECB liquidity deposit2 

10. 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 widened, ending the week at 190.4 bps versus 184 bps the prior week.

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - MCDX

11. 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 fell -34 points, ending the week at 1888 versus 1922 the prior week.

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - Baltic Dry

12. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread tightened to 162.29 bps, -21.11 bps tighter than a week ago.

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - 2 10

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.0% upside to TRADE resistance and 2.2% downside to TRADE support.

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - xlf

Joshua Steiner, CFA

Allison Kaptur

Robert Belsky

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