Key Highlights
* Spanish bank bailout expectations prompted across-the-board tightening for EU peripheral countries, EU banks and US global and credit-sensitive banks.
* On the other side of the trade, Germany's swaps widened (the only country in the EU to show this) as did swaps of US insurers, as expectations for low rates persisting longer than previously expected rose.
* Spanish bank bailout euphoria also rippled across junk bonds, leveraged loans and munis, with both indices showing improvement week-over-week.
* Our Macro team’s quantitative setup in the XLF shows 1.9% upside to TRADE resistance of $14.41 and 6.1% downside to TRADE support of $13.28.
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 3 of 12 improved / 4 out of 12 worsened / 6 of 12 unchanged
• Intermediate-term(WoW): Negative / 1 of 12 improved / 10 out of 12 worsened / 2 of 12 unchanged
• Long-term(WoW): Negative / 3 of 12 improved / 5 out of 12 worsened / 5 of 12 unchanged
1. US Financials CDS – Insurance swaps widened out last week, with 12 of 16 reference entities wider. On the other side were global banks and consumer lenders, which all tightened, reflecting anticipation of the Spanish bank bailout and expectations that a US "coupling" recession was less likely.
Overall, swaps tightened for 15 of 27 major domestic financial company reference entities last week.
Tightened the most WoW: WFC, MS, AXP
Widened the most WoW: PRU, UNM, XL
Tightened the most/ widened the least MoM: BAC, MS, RDN
Widened the most MoM: JPM, XL, MMC
2. European Financial CDS - French banks, still the canary in the coal mine, showed the biggest WoW improvement in swaps. Across Europe last week, 37 of the 39 reference entities we track showed spreads tighten. The median tightening was 4.7% (16 bps).
3. Asian Financial CDS - Japanese, Indian and Chinese banks swaps were all tighter last week. Bank of China tightened by 55 bps to 173 bps. The median tightening was -12.2%.
4. Sovereign CDS – Expectations for a Spanish bank bailout led to tightening across the EU periphery. Portugal was down 110 bps to 1,071 bps, while Spain and Italy were tighter by 44 bps and 35 bps, respectively (to 526 bps and 569 bps). Interestingly, Germany's swaps widened by 5 bps - the only major market to widen. As the risk in the periphery gets transferred to Germany's shoulders, Germany's creditworthiness is starting to reflect the deterioration.
5. High Yield (YTM) Monitor – High Yield rates fell 16 bps last week, ending the week at 7.93% versus 8.09% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.66 points last week, ending at 1641.
7. TED Spread Monitor – The TED spread fell 1.0 bps last week, ending the week at 38.9 bps this week versus the prior week print of 39.9 bps.
8. Journal of Commerce Commodity Price Index – The JOC index fell 1.5 points, ending the week at -15.2 versus -13.7 the prior week.
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 held flat at 40 bps.
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.
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 14-V1. Last week spreads tightened 16 bps, ending the week at 169 bps versus 185 bps the prior week.
12. Chinese Steel - We use Chinese steel rebar prices to gauge Chinese construction activity. We look at the average Chinese rebar spot price. Steel prices in China fell 0.15% last week, or 6 yuan/ton, to 4,068 yuan/ton. Notably, Chinese steel rebar prices have been generally moving lower since August of last year.
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 136 bps, 16 bps wider than a week ago.
14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.9% upside to TRADE resistance and 6.1% downside to TRADE support.
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.
Joshua Steiner, CFA
Robert Belsky
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