Key Takeaways:
* Spanish and Italian swaps continue to rule the day with Italian swaps, in particular, climbing higher. Italy's sovereign CDS climbed 31 bps vs. last week to 473 bps and are now almost in-line with Spanish sovereign CDS (510 bps, down 12 bps week over week). Meanwhile, French and German CDS widened by 15 and 12 bps, respectively on concerns around the ongoing deterioration in economic conditions across the Continent, and expectations that the bailout will further encumber both countries. French elections are adding further uncertainty to the economic outlook.
* US financial companies saw their swaps mostly tighten, with the notable exception of Genworth (GNW), which postponed the IPO plans for its Australian mortgage insurance unit to early 2013 from 2Q12. Swaps on GNW rose 140 bps week over week. Among the large cap US Financials, only Morgan Stanley (MS) is currently trading above 300 bps (366 bps, down 13 bps week-over-week).
* EU financial companies were mixed last week, but French banks saw their swaps widen noticeably. BNP Paribas (+25 bps to 263 bps), Credit Agricole (+31 bps to 320 bps), Societe Generale (+24 bps to 339 bps) all widened meaningfully. Recall that it was concern around the counterparty exposure to French banks in 2H11 that principally weighed on US banks, so it's interesting to note the current, short-term divergence.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 3 of 12 improved / 1 out of 12 worsened / 8 of 12 unchanged
• Intermediate-term(WoW): Negative / 3 of 12 improved / 4 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 tightened for 19 of 26 major domestic financial company reference entities last week. While trend was overall positive, there were notable negative divergences like Genworth (GNW).
Tightened the most WoW: C, COF, ACE.
Widened the most WoW: MTG, RDN, GNW.
Tightened the most MoM: AXP, COF, MBI.
Widened the most MoM: BAC, MS, GNW.
2. European Financials CDS Monitor – Bank swaps were wider in Europe last week for 23 of the 39 reference entities. The average widening was 0.3% and the median widening was 4.2%. French banks, in particular, saw their default probabilities rise notably week over week.
3. European Sovereign CDS – European Sovereign Swaps mostly widened over last week. Portuguese sovereign swaps tightened by 6.4% (-71 bps to 1036 ) and German sovereign swaps widened by 15.6% (12 bps to 88).
4. High Yield (YTM) Monitor – High Yield rates were roughly flat last week, ending at 7.37.
5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5.3 points last week, ending at 1656.
6. TED Spread Monitor – The TED spread rose 1.5 points last week, ending the week at 39.70 this week versus last week’s print of 38.23.
7. Journal of Commerce Commodity Price Index – The JOC index fell 1.5 points, ending the week at -10.13 versus -8.7 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 1 bps to 40 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 nominally, ending the week at 120 bps versus 119 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 95 points, ending the week at 1067 versus 972 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 170 bps, 2 bps tighter than a week ago.
13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.3% upside to TRADE resistance and 1.5% 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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