Key Takeaways
* Spanish sovereign swaps continue to climb. At 502 bps this morning, they are up 102 bps from a month earlier and are up 38 bps vs. the prior week. Italian swaps stand at 435 bps, up 17 bps week over week and up 80 bps vs. a month earlier. For reference, Spanish swaps just hit an all time high as of this morning, narrowly eclipsing their highs of November last year (497 bps). Italian swaps are still a good bit below their prior highs.
* Both American and European Bank CDS were wider WoW. Bank swaps are reflecting the deterioration in creditworthiness in Spain, an economy roughly 5x as large as that of Greece. Get ready for 2011 all over again as we watch Spanish swaps climb and climb and concerns surrounding that rise escalate.
* Euribor-OIS has ceased tightening. After steadily falling since the start of the year, the risk measure has essentially flattened out at the 40-41 bps level. This had been a key measure we were using to gauge the perceived risk in the counterparty system.
* High yield rates rose 4 bps last week underscoring increasing risk in the market.
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 1 of 12 improved / 3 out of 12 worsened / 8 of 12 unchanged
• Intermediate-term(WoW): Positive / 4 of 12 improved / 3 out of 12 worsened / 5 of 12 unchanged
• Long-term(WoW): Neutral / 3 of 12 improved / 3 out of 12 worsened / 6 of 12 unchanged
1. US Financials CDS Monitor – Swaps widened for 26 of 27 major domestic financial company reference entities last week.
Widened the most WoW: GNW, RDN, MTG
Tightened the most/widened the least WoW: MBI, AON, COF
Widened the most MoM: C, BAC, MS
Tightened the most/ widened the least MoM: MTG, MBI, AXP
2. European Financials CDS Monitor – Bank swaps were wider in Europe last week for 37 of the 40 reference entities. The average widening was 5.6% and the median widening was 4.8%.
3. European Sovereign CDS – European Sovereign Swaps mostly widened over last week. Spanish sovereign swaps widened by 8.1% (38 bps to 502).
4. High Yield (YTM) Monitor – High Yield rates rose 4 bps last week, ending the week at 7.37 versus 7.33 the prior week.
5. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 1.75 points last week, ending at 1650.
6. TED Spread Monitor – The TED spread fell 1.6 basis points last week, ending the week at 38.2 bps this week versus last week’s print of 39.8.
7. Journal of Commerce Commodity Price Index – The JOC index was roughly flat WoW, ending the week at -8.7.
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 was flat ending the week at 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 119 bps versus 118 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 44 points, ending the week at 972 versus 928 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 tightened to 172 bps, 12 bps tighter than a week ago.
13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.0% upside to TRADE resistance and 1.9% 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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