Key Takeaways
* Italian and Spanish sovereign swaps widened along with European Bank swaps over the week, underscoring increasing risk in the Eurozone.
* American Bank default swaps were a mixed batch, with 16 reference entities seeing swaps tighten and 11 seeing widening. MS is back over 300 bps.
* The Euribor-OIS spread continued to move lower, falling 2 bps last week to 41bps. Over the same period, the TED spread was flat.
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 2 of 12 improved / 3 out of 12 worsened / 7 of 12 unchanged
• Intermediate-term(WoW): Positive / 4 of 12 improved / 2 out of 12 worsened / 6 of 12 unchanged
• Long-term(WoW): Neutral / 4 of 12 improved / 4 out of 12 worsened / 4 of 12 unchanged
1. US Financials CDS Monitor – Swaps tightened for 16 of 27 major domestic financial company reference entities last week.
Tightened the most WoW: AXP, WFC, MTG
Widened the most WoW: ALL, TRV, BAC
Tightened the most MoM: AXP, JPM, BAC
Widened the most MoM: MBI, MMC, ACE
2. European Financials CDS Monitor – Bank swaps were wider in Europe last week for 35 of the 40 reference entities. The average widening was 3.4% and the median widening was 7.8%.
3. European Sovereign CDS – European Sovereign Swaps mostly tightened over last week. Portuguese sovereign swaps tightened by 9.5% (-113 bps to 1076 ) and Italian sovereign swaps widened by 6.8% (25 bps to 397).
4. High Yield (YTM) Monitor – High Yield rates rose 0.9 bps last week, ending the week at 7.14 versus 7.13 the prior week.
5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.5 points last week, ending at 1652.
6. TED Spread Monitor – The TED spread remained flat over last week, ending the week at 40 bps.
7. Journal of Commerce Commodity Price Index – The JOC index fell -0.6 points, ending the week at -9.5 versus -8.9 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 tightened by 2 bps to 41 bps.
9. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB. Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system. An increase in this metric shows that banks are borrowing from the ECB. In other words, the deposit facility measures one element of the ECB response to the crisis.
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 112 bps versus 110 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 rose 26 points, ending the week at 934 versus 908 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 by 1 bp to 189 bps.
13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.4% upside to TRADE resistance and 1.3% downside to TRADE support.
Margin Debt - February: +0.85 standard deviations
We publish NYSE Margin Debt every month when it’s released. NYSE Margin debt hit its post-2007 peak in April of 2011 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 last April, it 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 2011. 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. We would need to see it approach -0.5 to -1.0 standard deviations before the trend runs its course. There’s plenty of room for short/intermediate term reversals within this broader secular move. Overall, however, this setup represents a long-term headwind for the market. One limitation of this series is that it is reported on a lag. The chart shows data through February.
Joshua Steiner, CFA
Allison Kaptur
Robert Belsky
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