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MONDAY MORNING RISK MONITOR: SPANISH & ITALIAN BANKS GO ONE WAY WHILE SOVEREIGNS GO THE OTHER

Key Takeaways

* One week ago we published our risk monitor with the title "Risk Cooling Off, For Now". While that didn't seem to be the case on Monday of last week, it certainly played out over the remainder of the week. This morning, we're struck most by the divergence between sovereign and bank default swaps in Spain and Italy. The strength in the sovereign swaps is reflecting the perceived progress made at the EU summit to directly recapitalize the banks. However, you'd expect to see that reflected in reduced default expectations at the banks themselves. This wasn't the case, however, as Spanish and Italian bank CDS was broadly wider last week.  

 

* High yield rates fell sharply WoW while leveraged loan prices moved higher, underscoring the short-term momentum of the risk-on trade following last week's summit.  

 

* Looking at the week ahead, the XLF shows more downside than upside, with 0.5% upside to $14.71 and 2.2% downside to $14.32.  

 

Financial Risk Monitor Summary  

• Short-term(WoW): Positive / 4 of 12 improved / 0 out of 12 worsened / 9 of 12 unchanged  

• Intermediate-term(WoW): Neutral / 2 of 12 improved / 2 out of 12 worsened / 9 of 12 unchanged  

• Long-term(WoW): Positive / 4 of 12 improved / 2 out of 12 worsened / 7 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: SPANISH & ITALIAN BANKS GO ONE WAY WHILE SOVEREIGNS GO THE OTHER - Summary

 

1. US Financials CDS Monitor – In spite of the broad-based rally last week, credit default swaps among the US Financials were broadly worse. They widened at 16 of 27 major domestic financial company reference entities last week.   

Widened the most WoW: MTG, LNC, GNW

Tightened the most WoW: SLM, RDN, AGO

Widened the most MoM: LNC, UNM, XL

Tightened the most MoM: SLM, RDN, WFC

 

MONDAY MORNING RISK MONITOR: SPANISH & ITALIAN BANKS GO ONE WAY WHILE SOVEREIGNS GO THE OTHER - American CDS

 

European Financial CDS - The most interesting takeaway in this week's risk monitor is that the Spanish and Italian banks swaps were broadly worse week over week, while the sovereign default swaps were much tighter. Considering that the strength in the sovereign swaps was reflecting the plan to directly recap the banks through the ESM, we find it surprising that the individual company default probabilities seem not to have noticed. Overall, 22 of the 39 European financial reference entities we track saw spreads tighten last week. The median tightening was 0.5% and the mean tightening was 1.2%. 

 

MONDAY MORNING RISK MONITOR: SPANISH & ITALIAN BANKS GO ONE WAY WHILE SOVEREIGNS GO THE OTHER - European CDS

 

3. Asian Financial CDS-  Chinese bank default swaps were wider across the board last week, while Indian and Japanese banks posted mixed results. 

 

 MONDAY MORNING RISK MONITOR: SPANISH & ITALIAN BANKS GO ONE WAY WHILE SOVEREIGNS GO THE OTHER - Asia CDS

  

4. Sovereign CDS – European sovereign default swaps were tighter across the board last week. The largest moves were at Ireland (-104 bps), Spain (-72 bps) and Italy (-56 bps). There were also small moves lower at Portugal (-15 bps), France (-11 bps) and even Germany (-3 bps).  

 

MONDAY MORNING RISK MONITOR: SPANISH & ITALIAN BANKS GO ONE WAY WHILE SOVEREIGNS GO THE OTHER - Sov CDS

 

MONDAY MORNING RISK MONITOR: SPANISH & ITALIAN BANKS GO ONE WAY WHILE SOVEREIGNS GO THE OTHER - Sov CDS 1

 

MONDAY MORNING RISK MONITOR: SPANISH & ITALIAN BANKS GO ONE WAY WHILE SOVEREIGNS GO THE OTHER - Sov CDS 2

 

5. High Yield (YTM) Monitor – High Yield rates fell 11.5 bps last week, ending the week at 7.54 versus 7.65 the prior week.

 

MONDAY MORNING RISK MONITOR: SPANISH & ITALIAN BANKS GO ONE WAY WHILE SOVEREIGNS GO THE OTHER - HY

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 6 points last week, ending at 1660.

 

MONDAY MORNING RISK MONITOR: SPANISH & ITALIAN BANKS GO ONE WAY WHILE SOVEREIGNS GO THE OTHER - LLI

 

7. TED Spread Monitor – The TED spread fell 0.6 bp last week, ending the week at 37.7 bps versus last week’s print of 38.3 bps.

 

MONDAY MORNING RISK MONITOR: SPANISH & ITALIAN BANKS GO ONE WAY WHILE SOVEREIGNS GO THE OTHER - TED

 

8. Journal of Commerce Commodity Price Index – The JOC index rose 1.5 points, ending the week at -15.87 versus -17.4 the prior week.

 

MONDAY MORNING RISK MONITOR: SPANISH & ITALIAN BANKS GO ONE WAY WHILE SOVEREIGNS GO THE OTHER - 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. Last week, the Euribor-OIS spread tightened by 1 bp to 42 bps.

 

MONDAY MORNING RISK MONITOR: SPANISH & ITALIAN BANKS GO ONE WAY WHILE SOVEREIGNS GO THE OTHER - 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.  As the chart shows, European bank reliance on the ECB remains exceptionally high.

 

MONDAY MORNING RISK MONITOR: SPANISH & ITALIAN BANKS GO ONE WAY WHILE SOVEREIGNS GO THE OTHER - 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 series. Last week spreads widened 2 bps, ending the week at 155 bps versus 153 bps the prior week.

 

MONDAY MORNING RISK MONITOR: SPANISH & ITALIAN BANKS GO ONE WAY WHILE SOVEREIGNS GO THE OTHER - MCDX 2

 

12. Chinese Steel - We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy. We look at the average Chinese rebar spot price. Steel prices in China fell 0.61% last week, or 25 yuan/ton, to 4,050 yuan/ton. Notably, Chinese steel rebar prices have been generally moving lower since August of last year.

 

MONDAY MORNING RISK MONITOR: SPANISH & ITALIAN BANKS GO ONE WAY WHILE SOVEREIGNS GO THE OTHER - CHIS 2

 

13. 2-10 Spread – We track the 2-10 spread as an indicator of industry net interest margin pressure. Last week the 2-10 spread tightened another 2 bps, ending the week at 134 bps.

 

MONDAY MORNING RISK MONITOR: SPANISH & ITALIAN BANKS GO ONE WAY WHILE SOVEREIGNS GO THE OTHER - 2 10

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TRADE resistance and 2.2% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: SPANISH & ITALIAN BANKS GO ONE WAY WHILE SOVEREIGNS GO THE OTHER - XLF 2

 

Margin Debt - May: +0.63 standard deviations 

NYSE Margin debt fell in May to $279 billion from $298 billion in April. We like to to look at margin debt levels as a broad contrarian sentiment indicator. For reference, our approach is to look at it margin debt levels in standard deviation terms over the period 1. Our analysis shows that when margin debt gets to +1.5 standard deviations or greater, as it did in April of 2011, it has historically been a signal of extreme risk in the equity market. The preceding two instances were followed by the equity market losing roughly half its value. Overall 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 May. 

 

MONDAY MORNING RISK MONITOR: SPANISH & ITALIAN BANKS GO ONE WAY WHILE SOVEREIGNS GO THE OTHER - 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. 


 


MACAU DISAPPOINTS AGAIN

Macau came in at the low end of our expected YoY growth range of 12-17%.  GGR was HK$22.7 billion.  We have heard the disappointment is volume-related and not necessarily due to hold. 

 

 

July growth could be even lower as the month faces a more difficult VIP hold comparison than June (3.07% in July 2011 vs. 2.77% in June 2011).  We are currently anticipating 10-16% YoY growth for July. 

 

MACAU DISAPPOINTS AGAIN - macau1

 

In terms of market share, LVS (finally) and Galaxy are trending above recent trends although it could be argued that LVS should still be doing better.  We would be happy with share north of 19% until the rest of the amenities and hotel rooms open in September.  Share north of 20% should be the bogey at that point.  MGM share looks disappointing following a rebound in May.  The June share looks more realistic going forward for MGM.

 

MACAU DISAPPOINTS AGAIN - macau2



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THE M3: JUNE GGR; CHINA & S'PORE HOUSING PRICES; GST VOUCHER

The Macau Metro Monitor, July 2, 2012

 

 

MONTHLY GROSS REVENUE FROM GAMES OF FORTUNE DSEC

June total GGR rose 12.2% YoY to MOP23.33 billion (US$ 2.92 billion, HK$ 22.65 billion).

 

CHINA HOUSING PRICES RISE AFTER 9 MONTHS OF DECLINE WSJ

According to China Real Estate Index System, the average housing price in 100 major Chinese cities recorded its first sequential rise after nine straight months of decline.  A survey of property developers and real-estate firms showed the average price of housing in June was 8,688 yuan ($1,369) a square meter, rising 0.05% from 8,684 yuan in May, and overturning May's 0.31% decline.

 

Q2 PRIVATE-HOME PRICES REVERSE SHORT-LIVED FALL Channel News Asia

Preliminary data released by the Urban Redevelopment Authority (URA) showed private-residential prices rising 0.4% QoQ in 2Q.  Home prices had eased 0.1% QoQ in 1Q, the first decline since Q2 2009.

 

2.1 MILLION SINGAPOREANS TO RECEIVE GST VOUCHERS UNDER NEW SCHEME Strait Times

About 2.1 million Singaporeans will be receiving cash handouts, utility rebates and Medisave top-ups in the next two months, under a new GST voucher scheme for lower-income families that is to become a permanent feature of Singapore's social system.  A $3.6 billion fund will be set up to pay for this new GST Voucher scheme over the next five years until 2016, of which $680 million will be spent for this year alone.



Our Saviors

This note was originally published at 8am on June 18, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Our mediocre and bankrupt elite, concerned with its own survival, spends its energy and our resources desperately trying to save a system that cannot be saved.”

-Chris Hedges

 

This weekend I finished reading Death of The Liberal Class. It’s my kind of book. Not because I agreed with everything in it, but because it made me think outside of my comfort zone. Chris Hedges was fired by the New York Times for having a point of view.

 

Some people call Hedges a socialist; others call him a libertarian. I’ll call him one of the many men and women who need to be heard. You don’t have to agree with everything someone says to be empathetic to their perspective. That’s a democracy.

 

The perspective of almost every politician making central planning calls on the fly right now is that of their own political career risk. In the short-run (this morning), that means they might need a “coordinated action” for the market’s un-coordinate reaction. In the long-run (the next 3 years), doing more of what has not worked will make their political careers dead.

 

Back to the Global Macro Grind

 

Let’s start with what markets are not doing this morning – going up. This is coming off the 2nd Bailout Sunday in a row where the S&P Futures opened 15 handles higher than where they wound up come Monday morning.

 

Got expectations? Markets do. Sadly, Our Saviors don’t. From Obama’s Spanish bank bailout man Tim Geithner to Italy’s Mario Monti, these people don’t have a clue as to what they are building into this globally interconnected market’s set of expectations.

 

Big Government Intervention policies (causality) drive currencies. Currency moves drive asset price inflation/deflation (correlation). For now, that is the deep simplicity of what anyone who manages real-time risk has to deal with in real-time. Fun.

 

With the US Dollar DOWN for the 2nd consecutive week, Global Equity and Commodity prices went UP last week:

  1. US Dollar Index = -1.5% in the last 2 weeks to $81.63 (from $82.89, the weekly YTD closing high)
  2. CRB Commodities Index = +1.5% in the last 2 weeks to 272
  3. SP500 = +5.0% in the last 2 weeks to 1342 (from 1278, the weekly YTD closing low)

Now, while some might say the last few weeks of stocks and commodities rising were based on “fundamentals”, I’ll remind you that is a crock.

 

Never mind Europe, last week’s US economic data was as weak as any we have seen in 2012:

  1. US Retail Sales missing on Wednesday had stocks selloff hard on the news (Consumer stocks down -1.6% on the day)
  2. US Jobless Claims rising to 386,000 (20% higher than where the data was in March), got Qe3 whispering back “on”
  3. US Consumer Confidence (University of Michigan survey) dropped like a rock in June to 74.1 (vs 79.3 in May)

#GrowthSlowing

 

So, you buy stocks and commodities on that, right?

 

Right. Right.

 

The only reason why you’d do that (and more of it was short covering, by the way, because volume in this stock market has gone bone dry) is because you were either begging for (or fearing) more bailouts and easing.

 

Is that what Our Saviors have reduced our markets to? Begging and fearing? This is all turning out to be as pathetic and sad as each and every rally looks to lower long-term highs, on lower and lower volumes.

 

To be fair, some of the options brokers in currency and commodity markets are seeing some flow (the flow is what you get paid when customers pay you a commission to transact). Chucky Evans from the Chicago Fed loves getting a piece of that flow. Who said a politicized man at the Fed can’t be bought and paid for? Can you pay me $25,000 to speak at a road-show lunch?

 

To get a little more granular on the commodity “speculation” side of the flow, here’s how last week’s CFTC flow data looked:

  1. CRB Commodities net long contracts = +9.1% week-over-week (to 587,327 contracts)
  2. Silver net long contracts = +12% week-over-week
  3. Farm Goods net long contracts = +21% week-over-week

Yeah, bro. You get Chucky up there talking down the Dollar and we’re going to dance. Especially as global demand slows, bro. Because we are absolutely and positively paid to speculate on policy, not fundamentals, bro.

 

Not sure on the bro thing, but I am certain that I have no idea what do in these markets any more than the next guy/gal who has the next Fed or Treasury or ECB whisper. Maybe that’s what Our Saviors consider the New Democracy.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1587-1637, $95.72-98.47, $81.58-82.26, $1.24-1.26, 6260-6794, and 1319-1347, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Our Saviors - Chart of the Day

 

Our Saviors - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – July 2, 2012


As we look at today’s set up for the S&P 500, the range is 29 points or -1.92% downside to 1336 and 0.21% upside to 1365. 

                                            

SECTOR AND GLOBAL PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - two

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 6/29 NYSE 2281
    • Up from the prior day’s trading of 397
  • VOLUME: on 6/29 NYSE 1094.36
    • Increase versus prior day’s trading of 20.71%
  • VIX:  as of 6/29 was at 17.08
    • Decrease versus most recent day’s trading of -13.34%
    • Year-to-date decrease of -27.01%
  • SPX PUT/CALL RATIO: as of 6/29 closed at 1.35
    • Down from the day prior at 1.85 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning 38
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 1.64
    • Unhanged from prior day’s trading
  • YIELD CURVE: as of this morning 1.33
    • Down from prior day’s trading at 1.34 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8am: Markit US PMI Final, June
  • 9:30am: Intl Grains Council monthly crop report
  • 10am: ISM Manufacturing, June, est. 52 (prior 53.5)
  • 10am: ISM Prices Paid, June, est. 45.7 (prior 47.5)
  • 10am: Construction Spending, May, est. 0.2% (prior 0.3%)
  • 11:30am: U.S. to sell $30b 3-mo. bills, $27b 6-mo. bills
  • 1:15pm: Fed’s Williams to speak in San Francisco

GOVERNMENT:

    • House, Senate not in session
    • White House has no public events scheduled

WHAT TO WATCH: 

  • Bristol-Myers Squibb to buy Amylin for $31-shr cash
  • Linde to buy respiratory-care company Lincare for $3.8b
  • Dell said to be near buying Quest to add data-ctr software
  • Euro-Area Unemployment Climbs to Record 11.1% on Spanish Cuts
  • Barclays Chairman Agius said poised to quit after Libor fine
  • Fund-Manager Pay Rules Included in EU Response to Madoff Fraud
  • Pena Nieto Claims Win in Mexico Election as PRI Returns to Power
  • American Electric forecasts a week to fix storm blackouts
  • Airbus to Invest $600 Million in Alabama Facility, Reuters Says
  • Japan Tankan Confidence Improves Even as Yen Limits Exports
  • BNP Said to Mull Plan for $50 Billion Spain-Italy Funding Gap
  • Weekly agendas for Media/Entertainment, Industrials, Finance, Energy, IPOs, Transports, Real Estate, Consumer, Health, Tech, Rates, Canada Mining, Canada Oil & Gas
  • U.S. Jobs, Tankan, Mexico President: Wk Ahead June 30-July 7

EARNINGS:

  • Acuity Brands (AYI) 8:30am, $0.79

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Speculator Bullish Oil Wagers Rose Before Rally: Energy Markets
  • Platinum Slump Seen Spurring China’s Jewelers: Chart of the Day
  • Corn Extends Rally as Hot, Dry Weather Threatens Midwest Yields
  • Hedge Funds Win on Bull Bets Before Biggest Rally: Commodities
  • Oil Declines After Biggest Gain Since 2009 on Europe Concerns
  • Copper Falls on Signs of Worldwide Manufacturing Deterioration
  • Iran-Oil Sanctions Risk Biggest OPEC Export Loss Since Libya
  • Gold Set to Decline as Biggest Gain in Four Weeks Spurs Sales
  • U.S. Natural Gas Futures Slide From Highest Price Since January
  • Isramco Says ‘Significant’ Natural Gas Signs at Shimshon Site
  • German 2013 Power Declines as European Coal, Carbon Permits Drop
  • Japan’s LNG Imports May Rise 6.5% to 88.6 Mln Tons, IEEJ Says
  • Russian Oil Output Falls on Month, Holds Near Post-Soviet High
  • EU’s Iranian Ban Will Push Up Demand for Sour Crude, JBC Says
  • Dubai Backwardation Rises Amid Iran Sanctions Start: Asia Crude
  • Hedge Funds Win on Bull Bets Before Rally
  • Goldman Raises Price Forecasts for Corn, Soybeans, Wheat

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

ASIAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team


Early Look

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