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European Banking Monitor

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

 

Key Takeaways:

  

* American and European bank swaps mostly tightened in the latest week. Notably, French and German banks saw their swaps fall WoW along with the US Global banks. 

   

If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.

 

Matthew Hedrick

Senior Analyst

 

(o)

 

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European Financials CDS Monitor – Bank swaps were tighter in Europe last week for 28 of the 39 reference entities we track. French and German banks tightened across the board. The median tightening was 1.6%. 

 

European Banking Monitor - 11. banks

 

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 2 bps to 41 bps.

 

European Banking Monitor - 11. Euribor

 

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. The latest overnight reading is €741.86B.

 

European Banking Monitor - 1. ecb overnight

 

Security Market Program – For an eleventh straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 5/25, to take the total program to €212 Billion.

 

European Banking Monitor - 11. smp


Economic Identities

This note was originally published at 8am on May 15, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“There is, so I believe, in the essence of everything, something that we cannot call learning. There is, my friend, only a knowledge - that is everywhere.”

-Herman Hesse

 

Last week I was on vacation and had some time to turn off the crackberry (or iCrackberry in my case) and do some reading.  Most of my reading was centered on my day job as Director of Research at Hedgeye, but I also had a chance to read some fiction, including Hermann Hesse’s classic, “Siddhartha.”

 

For those of you that haven’t read Hesse’s novel, it is the classic example of a man’s search for meaning and identity.  In the story, the protagonist, Siddhartha, lives in the time of the Buddha and is in search of enlightenment.  On this path, he forsakes his family as a teen and leaves a comfortable lifestyle to the sparse life of an ascetic that is characterized by abstaining from worldly pleasures.

 

Siddhartha then has an awakening of sorts and leaves the ascetics to become a trader (in this day and age he would clearly have been trading CDS), and also takes on a lover.  Siddhartha then again turns his back on the materialistic world to once again return to the ascetics.  Eventually Siddhartha realizes that that his “understanding” is enhanced by the collection of his experiences.

 

From my purview, this short novel is the classic existential angst and search for identity story.  In people, this often occurs years immediately following college, but also manifests itself in the “midlife crisis.”  Nation states also struggle in the search for identity.  In the United States this struggle has recently been on the social side of the equation as both Republicans and Democrats have taken up the gay marriage debate with fervor, but in Europe the search for identity continues along the economic path.

 

This morning's GDP numbers were released for the majority of the Eurozone.  In the Chart of the Day, we’ve highlighted the y-o-y GDP growth rates for the EU-27.  While the architects of the euro may have envisioned a scenario where economic progress is shared across the region, the reality has proven to be much different.  Clearly, Germany has been, and continues to be, the key beneficiary of the common currency. This will only continue with the euro trading below the 1.30 line versus the U.S. dollar.

 

In aggregate, the EU27 grew 0.0% from Q4 2011 and 0.1% from Q1 2012.  This was largely driven by Germany, which grew at 0.5% sequentially and 1.2% y-o-y.   Germany has benefitted from strength in its industrial sector, in particular solid results from the automakers.  As a result, exports have been a meaningful tailwind for Germany.

 

On the disappointing end of the GDP report were France, Italy and Spain.  France’s growth effectively evaporated on a sequential basis to 0.0%, and Italy was -0.9% sequentially while Spain was down -0.3% sequentially.  Clearly, Europe is seeing the impact of austerity in short-term GDP growth numbers.  The open ended question remains how tolerable austerity remains, especially as Germany’s economy continues to dramatically outperform its neighbors.

 

To answer that question, we probably have to look no further than Francois Hollande’s first action as leader of France.  Specifically, immediately after being sworn in today Hollande is flying to Germany to discuss a growth pact with Angela Merkel.   While Merkel has been adamant that no new sovereign debt will be issued to support growth, she too is feeling the pressure to implement policies that are, at least in perception, more pro-growth by her political opposition in Germany.  The economic identity crisis in Europe continues.

 

The European sovereign debt markets are clearly signaling their confusion around the lack of economic identity.  While they had seemingly been reacting better to certain austerity policies, many periphery yields are now trading back near all-time highs.  The key market we watch, of course, is the Spanish 10-year yield which is now solidly above the rhetorically critical 6% line at 6.25% this morning. 

 

With France’s political identity resolved, at least temporarily, Greece is now in focus on the political front.  My colleague Matt Hedrick highlighted this on Friday when he noted:

 

“This week saw each of the three main Greek parties (New Democracy, Syriza, and Pasok) try to form a coalition with each another, only to come up short each time. There’s new hope from some that Pasok leader Evangelos Venizelos can put together a unity government given a shift in stance on the part of Democratic Left leader Fotis Kouvelis, who has broken ranks with Syriza, which it had backed earlier in the week. (Syriza is thoroughly against the mandates of austerity, and may be the most divisive partner in a coalition build).”

 

Clearly, the search for political identity in Greece is going to be protracted.

 

Changing gears for a minute, I wanted to highlight a recent note from Howard Penney and Rory Green on our restaurants team titled, “The (Coffee) Prince”.  As they wrote:

 

“For Howard Schultz, it is all about winning.  Even when he doesn’t want to communicate it, he does.  The word “Machiavellian” has come to represent, for many people, any human behavior that is cynical and self-interested.  While Schultz seems to have a strong social conscience – and this is meant as a compliment – we can’t help but believe that the single-serve strategy being employed by Starbucks seems to rhyme with The Prince, Machiavelli’s most famous book.  An appearance by Mr. Schultz on CNBC yesterday illustrates this perfectly.”

 

Their general point, and email sales@hedgeye.com if you want to trial their research and read the entire note, is that the identity, or search for identity, of corporate leaders can very much impact financial results.

 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

 

 

 

 

 

 

Economic Identities - Chart of the Day

 

Economic Identities - Virtual Portfolio


TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER

Key Takeaways

* American and European bank swaps mostly tightened in the latest week. Notably, French and German banks saw their swaps fall WoW along with the US Global banks. 

 

* We are including a new Asia Financials CDS table this week, which includes major banks and brokers from China, Japan and India. The credit profile of Asia's financials was mixed over the last week, with 6 of the 12 reference entities we track tighter.

 

* Sovereign CDS mostly widened WoW. While much of the focus these days is on Spain and its banks, it's worth noting that Italy continues to press higher right alongside Spain. Ireland is also moving higher. 

 

Financial Summary

  Financial Risk Monitor Summary

• Short-term(WoW): Negative / 0 of 13 improved / 2 out of 13 worsened / 11 of 13 unchanged  

• Intermediate-term(WoW): Negative / 1 of 13 improved / 8 out of 13 worsened / 4 of 13 unchanged  

• Long-term(WoW): Positive / 4 of 13 improved / 3 out of 13 worsened / 6 of 13 unchanged

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - Summary

 

1. US Financials CDS Monitor – Swaps tightened for 20 of 27 major domestic financial company reference entities last week.   

Tightened the most WoW: JPM, MTG, RDN

Widened the most WoW:  AXP, UNM, ACE

Widened the least MoM:  C, UNM, TRV

Widened the most MoM:   WFC, AXP, RDN

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - American Financials

 

2. European Financial CDS - Bank swaps were tighter in Europe last week for 28 of the 39 reference entities we track. French and German banks tightened across the board. The median tightening was 1.6%

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - European Financials

 

3. Asian Financial CDS -  Bank swaps were tighter in Asia last week for 6 of the 12 reference entities we track. The median tightening was 1.7%. 

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - Asian Financials 2

 

4. European Sovereign CDS – European Sovereign Swaps mostly widened over last week. French sovereign swaps tightened by 7.2% (-16 bps to 205 ) and Italian sovereign swaps widened by 0.7% (+4 bps to 520).

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - Sov Table

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - Sov 1

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - Sov 2

 

5. High Yield (YTM) Monitor – High Yield rates fell 1 basis point WoW, ending at 7.64 versus 7.65 the prior week.

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - HY

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 5.71 points last week, ending at 1646.

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - LLI

 

7. TED Spread Monitor – The TED spread fell less than a basis point last week, ending at 38.3 this week versus last week’s print of 38.8.

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - TED

 

8. Journal of Commerce Commodity Price Index – The JOC index fell 0.4 points, ending the week at -11.4 versus -11.1 the prior week.

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - JOC

 

9. 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 2 bps to 41 bps.

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - Euribor OIS

 

10. 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.  

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - ECB

 

11. 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 168 bps versus 167 bps the prior week.

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - MCDX

 

12. 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 -107 points, ending the week at 1034 versus 1141 the prior week.

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - Baltic Dry

 

13. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread widened to 145 bps, 3 bps wider than a week ago.

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - 2 10

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.8% upside to TRADE resistance and 2.6% downside to TRADE support.

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - XLF

 

Margin Debt - April: +0.93 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 April. 

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - Margin Debt

 

Joshua Steiner, CFA

 

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. 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – May 29, 2012


As we look at today’s set up for the S&P 500, the range is 39 points or -1.66% downside to 1296 and 1.30% upside to 1335. 

                                            

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 05/25 NYSE 114
    • Down from the prior day’s trading of 512
  • VOLUME: on 05/25 NYSE 595.63
    • Decrease versus prior day’s trading of -25.22%
  • VIX:  as of 05/25 was at 21.76
    • Increase versus most recent day’s trading of 1.02%
    • Year-to-date decrease of -7.01%
  • SPX PUT/CALL RATIO: as of 05/25 closed at 2.03
    • Up from the day prior at 1.24 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning 39
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.72
    • Decrease from prior day’s trading at 1.74
  • YIELD CURVE: as of this morning 1.43
    • Down from prior day’s trading at 1.45 

MACRO DATA POINTS (Bloomberg Estimates):

  • 9am: S&P/CS 20-city (M/m), Mar., est. 0.2%, prior 0.15%
  • 9am: S&P/CS Home Price Index, Mar., est. 134.4, prior 134.2
  • 10am: Consumer confidence, May, est. 69.5, prior 69.2
  • 10:30am: Dallas Fed manuf. activity, May, est. 1.5, prior -3.4
  • 11:30am: U.S. to sell $30b 3-mo., $27b 6-mo. bills 

GOVERNMENT:

    • 10am: Defense Secretary Panetta speaks at Naval Academy Commencement ceremony
    • 3:25pm: President Obama to award Presidential Medals of Freedom to Bob Dylan, Toni Morrison, John Glenn, others
    • Supreme Court issues opinions
    • Texas Republican primaries; Romney may get enough votes to push him past the 1,144 needed to clinch nomination

 WHAT TO WATCH:

  • Marubeni to buy grain merchandiser Gavilon for $3.6b
  • Dewey & LeBoeuf files Chapter 11 bankruptcy
  • Vale sells Colombian coal assets to Goldman for $407m
  • South Korean manufacturer confidence falls from 9-month high
  • CP Railway strike may end in three days, Canada’s Raitt says
  • Spain may use debt instead of cash to support Bankia Group
  • Greek fund distributes EU18b to country’s 4 biggest banks
  • Italy borrowing costs rise at 6-mo. bill auction
  • Richard Li may be bidder for ING Asia insurance unit: WSJ
  • TNK-BP’s Fridman quits as CEO, deepening dispute
  • Moody’s says China growth collapse may hurt sovereign rating
  • Weekly agendas for energy, real estate, media/entertainment, consumer, industrials, health, finance, tech, rates, Canada oil & gas, Canada mining
  • U.S. Jobs, Chinese Output, Panetta: Week Ahead May 28-June 2 

EARNINGS:

    • Sanderson Farms (SAFM) 6:30am, $0.90
    • Bank of Nova Scotia (BNS CN) 7:30am, C$1.15
    • Copart (CPRT) After-mkt, $0.43 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG) 

  • Platinum Glut Diminishing as Bear Market Approaches: Commodities
  • Copper Slips to $7,684 a Ton, Erasing Advance; Aluminum Drops
  • China Agrees to Fund $3 Billion of Farming Projects in Ukraine
  • Oil Advances for a Third Day on Outlook for U.S. Economic Growth
  • Gold Declines as Investors Favor Dollar Amid European Crisis
  • Wheat Drops as Rain From Russia to Australia Boosts Crop Outlook
  • Gold Recycling in India to Jump as Near-Record Price Cuts Demand
  • Sugar Seen Falling on Speculation Prices Have Climbed Too High
  • Wheat Price Seen Having Potential to Jump on Exporter Stockpiles
  • Marubeni Agrees to Buy Gavilon for Access to U.S. Grain Trade
  • Rashnikov Paring MMK Debt Aided by Mystery Suit: Russia Credit
  • Coal Use Set for 1984 Low Batters Global Prices: Energy Markets
  • Seaway Oil Torrent Boosts Gas Cargoes as Scorpio Rises: Freight
  • Copper Gains on China Stimulus Speculation
  • Chinese Sugar Smuggling Seen Declining by Two-Thirds in Q2
  • Gold Losing Allure for Biggest Buyers Spurs Bonds: India Credit
  • Palm Oil Advances to Two-Week High on Ramadan Demand Outlook 

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES


US DOLLAR – after 4 consecutive up weeks, our Strong Dollar theme is getting some headline respect (Most Read on Bloomberg this morn = “Dollar Scarce”). In conjunction with the consensus headline, the USD weakens and commodities strengthen this morning; Gold looks like it could re-test $1601 if the USD down move has any follow through.

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


SPAIN – Spanish Retail Sales get smoked (-11.3% y/y in April) and their stock market crash continues (down another -1.5% this morn, down -29% since March). Rajoy wants a Bankia bailout – he’ll probably get that, but lose the trust/flows of his stock/bond market in the meantime. That’s the other side of the trade. 10yr Spanish yields hitting new highs at 6.52% (higher than Nov 2011).

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS


CHINA – not an outright bailout plan from the Chinese overnight; they’ll go with stimulus plans first – that had the Shanghai Comp +1.3% (HK +1.4%) but we’d need to see follow through from these levels for the risk management setup to change from the bearish setup Asian Equity markets have been in since March.

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team


THE M3: UNEMPLOYMENT RATE

The Macau Metro Monitor, May 29, 2012

 

 

EMPLOYMENT SURVEY FOR FEBRUARY -  APRIL 2012 DSEC

Macau's unemployment rate for February-April 2012 was 2.0%.  Labor force population was 345,000 and the participation rate stood at 72.4%.




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