MONDAY MORNING RISK MONITOR: FRANCE CDS RISE ON ELECTION RESULTS

Key Takeaways 

* French Bank Swaps tightened slightly WoW going into Sunday's French presidential election, which saw Francois Hollande, the socialist party candidate, win the presidency. French sovereign swaps widened by 3% this morning compared to last Friday, highlighting an increased risk of default stemming from Hollande's likely rejection of certain austerity policies. 

 

*Sovereign CDS were mostly wider WoW. Italian sovereign swaps were the only exception, tightening by 1.3%. Spanish Bank CDS tightened over the week while Spanish sovereign CDS widened.

 

* High yield rates fell sharply last week.

 

Financial Risk Monitor Summary  

• Short-term(WoW): Neutral / 3 of 12 improved / 3 out of 12 worsened / 6 of 12 unchanged  

• Intermediate-term(WoW): Neutral / 3 of 12 improved / 3 out of 12 worsened / 6 of 12 unchanged  

• Long-term(WoW): Positive / 5 of 12 improved / 2 out of 12 worsened / 5 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: FRANCE CDS RISE ON ELECTION RESULTS - Summary 4

 

1. US Financials CDS Monitor – Swaps widened for 18 of 27 major domestic financial company reference entities last week.   

Widened the most WoW: WFC, MTG, RDN

Tightened the most WoW: C, UNM, MBI

Widened the most MoM: MTG, RDN, GNW

Tightened the most MoM: COF, MBI, AIG

 

MONDAY MORNING RISK MONITOR: FRANCE CDS RISE ON ELECTION RESULTS - US CDS2

 

2. European Financial CDS - Bank swaps were tighter in Europe last week for 29 of the 39 reference entities. The average tightening was 3.9% while the median tightening was 3.3%. 

 

MONDAY MORNING RISK MONITOR: FRANCE CDS RISE ON ELECTION RESULTS - EURO CDS

 

3. European Sovereign CDS – European Sovereign Swaps mostly widened over last week. Italian sovereign swaps tightened by 1.3% (-6 bps to 441 ) and Portuguese sovereign swaps widened by 4.9% (47 bps to 1010).

 

MONDAY MORNING RISK MONITOR: FRANCE CDS RISE ON ELECTION RESULTS - Sov table

 

MONDAY MORNING RISK MONITOR: FRANCE CDS RISE ON ELECTION RESULTS - Sovereign CDS 1

 

MONDAY MORNING RISK MONITOR: FRANCE CDS RISE ON ELECTION RESULTS - Sovereign CDS 2

 

4. High Yield (YTM) Monitor – High Yield rates fell 15.6 bps last week, ending the week at 7.07 versus 7.23 the prior week.

 

MONDAY MORNING RISK MONITOR: FRANCE CDS RISE ON ELECTION RESULTS - HY

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 10 points last week, ending at 1671.

 

MONDAY MORNING RISK MONITOR: FRANCE CDS RISE ON ELECTION RESULTS - LLI

 

6. TED Spread Monitor – The TED spread rose 1.5 points last week, ending the week at 39 this week versus last week’s print of 37.7.

 

MONDAY MORNING RISK MONITOR: FRANCE CDS RISE ON ELECTION RESULTS - TED

 

7. Journal of Commerce Commodity Price Index – The JOC index rose 1.8 points, ending the week at -3.7 versus -5.5 the prior week.

 

MONDAY MORNING RISK MONITOR: FRANCE CDS RISE ON ELECTION RESULTS - 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 1 bps this morning over last Monday to 38 bps.  We have noted previously that the correlation between Euribor-OIS and other risk measures (such as bank CDS or even bank stock prices) was very tight in the fall, but has disintegrated since mid-March.  Thus, at the moment, we are not focused on Euribor-OIS as a key risk indicator. 

 

MONDAY MORNING RISK MONITOR: FRANCE CDS RISE ON ELECTION RESULTS - Euribor OIS

 

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.  

 

MONDAY MORNING RISK MONITOR: FRANCE CDS RISE ON ELECTION RESULTS - ECB Liquidity

 

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 16-V1. Last week spreads widened, ending the week at 150.8 bps versus 146.8 bps the prior week.

 

MONDAY MORNING RISK MONITOR: FRANCE CDS RISE ON ELECTION RESULTS - 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 rose 1 point, ending the week at 1157 versus 1156 the prior week.

 

MONDAY MORNING RISK MONITOR: FRANCE CDS RISE ON ELECTION RESULTS - Baltic

 

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 bps, 5 bps tighter than a week ago.

 

MONDAY MORNING RISK MONITOR: FRANCE CDS RISE ON ELECTION RESULTS - 2 10

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.1% upside to TRADE resistance and 1.2% downside to TREND support.

 

MONDAY MORNING RISK MONITOR: FRANCE CDS RISE ON ELECTION RESULTS - XLF

 

Margin Debt - March: +0.91 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 March. 

 

MONDAY MORNING RISK MONITOR: FRANCE CDS RISE ON ELECTION RESULTS - Margin Debt

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

Having trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser. 

 

 


Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more