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* The TED spread made a new YTD high at 58.1 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. According to the TED spread, none of European leaders' actions over the last weeks and months has made a difference to banking system stability.
* The ECB Liquidity Recourse to the Deposit Facility hit a new all-time high just days after its last cycle low. This suggests that levels will climb even higher before the next cycle peak. The level currently stands at 411 billion euros.
*Credit default swaps for Eurozone countries tightened on Monday. Italian swaps tightened by 7%.
Financial Risk Monitor Summary (Across 3 Durations):
- Short-term (WoW): Neutral / 4 of 11 improved / 4 out of 11 worsened / 4 of 11 unchanged
- Intermediate-term (MoM): Negative / 5 of 11 improved / 6 of 11 worsened / 1 of 11 unchanged
- Long-term (150 DMA): Negative / 2 of 11 improved / 9 of 11 worsened / 1 of 11 unchanged
1. US Financials CDS Monitor – Swaps tightened slightly for all 27 major domestic financial company reference entities last week.
Tightened the most vs last week: RDN, XL, MMC
Tightened the least vs last week: GS, SLM, HIG
Tightened the most vs last month: SLM, RDN, UNM
Tightened the least vs last month: ACE, ALL, XL
2. European Financials CDS Monitor – Bank swaps were tighter in Europe last week for 37 of the 40 reference entities. The median tightening was 6.33%. The three exceptions were the Greek banks.
3. European Sovereign CDS – European sovereign swaps tightened last week. German sovereign swaps tightened by 3% (-3 bps to 103) and Italian tightened by 7% (-38 bps to 500).
4. High Yield (YTM) Monitor – High Yield rates fell 9 bps last week, ending the week at 8.92 versus 9.01 the prior week.
5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5 points last week, ending at 1578.
6. TED Spread Monitor – The TED spread rose 1.3 points last week, ending the week at 58.1 this week versus last week’s print of 56.8.
7. Journal of Commerce Commodity Price Index – The JOC index rose less than 1 point, ending the week at -23.6 versus -24.5 the prior week.
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 widened by 4 bps to 98 bps versus last week’s print of 94 bps.
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. The Liquidity Recourse hit a new all-time high on Friday, signaling growing systemic risk to the European banking system.
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 tightened, ending the week at 182 bps versus 190 bps the prior week.
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 -150 points, ending the week at 1738 versus 1888 the prior week.
12. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure. Last week the 2-10 spread widened to 174 bps, 12 bps wider than a week ago.
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.
Joshua Steiner, CFA
Allison Kaptur
Robert Belsky
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