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European Banking Monitor: The Tail That Wags the Dog

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:


* Last week we flagged the divergence between European bank swaps and European sovereign swaps as the former were moving higher while the latter tightened. Apparently the banks remain the tail wagging the dog in Europe, as this week European sovereign swaps are higher as uncertainty once again dominates headlines. This week there is less ambiguity. German, Italian and Spanish bank swaps were broadly wider last week while French bank swaps were mixed. This is consistent with what we saw in the sovereigns. 

  

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 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 UK, Spanish, Italian French and German banks saw swaps widen last week. Greek banks tightened.

 

Overall, 21 of the 39 European financial reference entities we track saw spreads widened last week. The median widening was 0.33% and the mean widening was 1.03%. 

 

European Banking Monitor: The Tail That Wags the Dog - dd. banks

 

Euribor-OIS spread – The Euribor-OIS spread widened by 1 bps to 42 bps.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. 

 

European Banking Monitor: The Tail That Wags the Dog - dd. euribor

 

ECB Liquidity Recourse to the Deposit Facility – This index remains near its all time peak. 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. This chart shows data through Thursday. 

 

European Banking Monitor: The Tail That Wags the Dog - dd. ecb facility

 

Security Market Program – For the seventeenth straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 7/6, to take the total program to €211.5 Billion.

 

European Banking Monitor: The Tail That Wags the Dog - dd. smp


Obama: Arbiter of the Market

Last summer, Obama’s approval rating on InTrade shot upward from June into about early July. After that, his approval rating fell, caught a slight bounce, and then continued downward. It has yet to recover to 2011 levels.

 

 

Obama: Arbiter of the Market - OBAMA SPX

 

 

Now that we’ve entered July once again, the same pattern has shown itself. And right now we’re in the middle of the bounce as is the S&P 500, which is highly correlated to Obama’s approval rating. The question remains: will the bounce continue upward into recovery or will it break and send Obama’s rating even lower?

 

It remains to be seen what will happen to the President, but we release our Hedgeye Election Indicator (HEI) every Tuesday. And according to the HEI, the President is just barely hanging on in this fight.


MACAU FIRST WEEK OF JULY

Early July GGR projection of -2% to +6% YoY change

 

 

While a significant pick up from the prior week (maybe due to the typhoon), this past week’s average daily table revenues (ADTR) actually fell 1% from last year.  Our full month projection for July stands at HK$23-25 billion, representing YoY growth of -2% to +6%.  Remember that July had above normal hold last year and GGR was up 48% so the comp is very difficult.  VIP likely will be negative for the second straight month.  Early anecdotal evidence indicates that the Mass floors remain busy, however.

 

MACAU FIRST WEEK OF JULY - macau1

 

Market shares at this stage of the month are not very important since hold usually has an outsized impact on shorter durations.  The only takeaways are that MPEL had a great week, LVS is trending where we think they should be, and Galaxy likely got whacked on the tables.

 

MACAU FIRST WEEK OF JULY - macau2 

 


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THE M3: TAIWAN, JUNKET CREDIT

The Macau Metro Monitor, July 9, 2012

 

 

TAIWAN ISLAND VOTES YES FOR FIRST CASINO RESORT Reuters, China Post, FT

According to Taiwanese media, 57% citizens of Matsu opted for a casino during a referendum, which could result in a casino in Taiwan in 3-5 years.  Matsu is home to 8,000 people and is a 30-minute ferry ride from Fujian province.  After the vote was held, the Executive Yuan asked two of its ministers-without-portfolio — Luo Ying-shueh and Yang Chiu-hsing — to lead the task force of drafting the Casino Establishment Act and selecting the regulatory agency that gives oversight of casino operations.  According to media reports, the Executive Yuan sees the Ministry of the Interior (MOI) as the ideal regulator.  MOI chief Lee Hung-yuan said he does not oppose his ministry being the regulatory agency.  Yet he said currently, neither the Lienchiang County Government nor the National Police Agency under the MOI are familiar with casino operations. “Right now, there's no manpower at the MOI to handle this.” Further regulations on gambling still need to be approved by the central government.

 

Lee also said there are four insufficiencies-transportation, water, energy, land-that still needs to be addressed.  Weidner Resorts Taiwan, a company run by former LVS executive Bill Weidner, has unveiled plans to build a casino resort that includes luxury hotels, professional sports venues and convention halls.

 

MACAU'S GAMBLING JUNKETS RISK LOSING THEIR GAME Reuters

"On average, repayment period is around 15 days. Now some gamblers are asking for 2-3 days longer. Only if it is a very special situation will we consider it," said Kenny Leong, CEO of AERL.  One casino executive said junkets had already cut back on credit extension.  "Junkets have stopped extending as much credit but could a situation like AMAX happen again? For sure," said the executive, who declined to be named due to the sensitive nature of the issue.


Who Knows?

This note was originally published at 8am on June 25, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Who knows, maybe they are much better off the way they are.”

-Mitchell Zuckoff

 

That’s a quote that I underlined this weekend in an unbelievably true WWII story of disaster, discovery, and survival – Lost In Shangri-La, by a professor of Journalism at Boston University, Mitchell Zuckoff.

 

Since last Thursday I’ve been lost in my own cash position. It’s weird, people keep asking me when and where I am going to put some cash to work. Who Knows? I’m in no hurry. All I can tell you is that I am getting longer of books, in US Dollars.

 

If you can tell me, precisely, how this all ends (other than not well), I’ll have to risk manage the timing of your view. These markets are as volatile and reactionary as the central planners who are attempting to “smooth” them.

 

Back to The Global Macro Grind

 

I have no idea what risk management moves I am going to make each and every day. I wake-up in the morning, put one shoe on at a time, then grind through the process. Embracing the uncertainty of what Mr. Market is going to signal is what I do.

 

Last week’s uncertainty was solely concentrated on 1 central planning event – Ben Bernanke’s presser. After he didn’t deliver the drugs, the Dollar went straight back up – and everything big beta priced in US Dollars went straight back down.

 

Here’s how that looked week-over-week:

  1. US Dollar Index = +0.77% (up for the 1st week in 3)
  2. SP500 = down -0.5% (down for the 1st week in 3)
  3. CRB Commodities Index = down -1.8%
  4. WTIC Oil = down -5.2% (crashing, down -27% since February)
  5. Gold = down -3.9% (testing down for 2012 YTD)
  6. Russian stocks (RTSI) = -5.1%

Russian stocks? Yep. Russian stocks have been crashing alongside the price of The Petro since March. That’s why we call Russia a Petro-Dollar tape. Get the Petro and the Dollar right, and you’ll get Russian stocks right.

 

Whatever happened to the bull case for “de-coupling”? Is Oil going down because of the Dollar or Demand? They’ve changed their bullish thesis so many times already in 2012 that it’s getting hard to keep track.

 

Who Knows?

 

What I do know is that people who didn’t pay attention to the Correlation Risk in this market are Lost In Q2. Where do we go from here? Do we beg, print, and bail some more? Maybe doing more of the same will work this time? Maybe ‘this time is different.’

 

Right. And Ben Bernanke is going to bailout China this morning too.

 

Chinese stocks have been leading decliners for the last few weeks as Chinese #GrowthSlowing appears to be accelerating on the downside. Last night the Shanghai Composite Index was down another -1.6%. It’s been down -9.2% since the beginning of May.

 

At the beginning of May, there was plenty of opportunity to get out of stocks and commodities. But that’s not how consensus rolls. Instead, those addicted to the Qe drugs keep going back to the same old well of hope.

 

Look at last week’s CFTC Commodities speculation data (ahead of the Fed decision):

  1. Net long contracts on the Commodities basket were up +7% wk-over-wk to 628,540 contracts
  2. Agriculture bets ripped a +13% wk-over-wk move
  3. Gold saw a net long ramp of +5% wk-over-wk to the highest net long (notional) position since May 1st

Go back to May 1st and tell me how buying Gold around $1660 played out. Or go back to the beginning of last week, when these net long contracts perked back up, and tell me how not selling into the expectation of a Bernanke Bailout bounce to $1628 paid.

 

It’s all the same trade, over and over, and over again. With the difference being that this time Ben S. Bernanke’s Fed is out of bullets. Could he poke his head back into our lives in the coming days, weeks, or months? Who Knows. All I can do is proactively prepare for what I can see in front of me and, at the same time, have Mr. Market signal to me whatever else I might be missing.

 

In the US, I’m not missing this week’s Macro Catalyst Calendar:

  1. Monday: US New Home Sales “expected” to be a lofty 346,000 (an acceleration from April’s high, Who Knows?)
  2. Tuesday: US Consumer Confidence (June) “expected” to rise to 63.5 vs 61.9 in May? (Who Knows?)
  3. Wednesday: US Durable Goods (May) “expected” to rise +0.5% vs May (doubt that, but Who Knows?)
  4. Thursday: Will US GDP for Q1 be revised lower than 1.9%? Will Jobless Claims eclipse last week’s high for 2012?
  5. Friday: US PMI for June “expected” to be in-line with May’s 52.7, Who Knows?

All the while, of course, we’ll have the Eurocrats saving the world by piling more debt-upon-debt (EU Summit June 27-28th). Even though the German Parliament needs to ratify anything ESM after the EU Summit (June 29th); and even though the Italians are publically patronizing the Germans ahead of that vote; Who Knows?

 

All I know is that I don’t know until I know. And that’s why, for now, I’m largely in Cash.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, German DAX, and SP500 are now $1563-1591, $89.06-94.79, $81.95-82.62, $1.24-1.26, 6075-6235, and 1318-1335, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Who Knows? - ChartoftheDay

 

Who Knows? - vp 6 25


MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG

Key Takeaways

* Last week we flagged the divergence between European bank swaps and European sovereign swaps as the former were moving higher while the latter tightened. Apparently the banks remain the tail wagging the dog in Europe, as this week European sovereign swaps are higher as uncertainty once again dominates headlines. This week there is less ambiguity. German, Italian and Spanish bank swaps were broadly wider last week while French bank swaps were mixed. This is consistent with what we saw in the sovereigns. 

 

* Interestingly, US Banks broadly improved last week (both swaps and stocks). This surprises us for two reasons. First, the emerging Libor scandal will be an enormous overhang for the US banks involved in setting Libor rates. However, as it did with mortgage putbacks, this could take some time for the markets to fully synthesize the size and scope of what's going on here. Second, with European banks and sovereigns moving lower, the positive divergence in US banks seems unsustainable.

 

* One possible justification for the positive move in US banks was the the ECB and the People’s Bank of China decision to cut their benchmark rates last week while the Bank of England increased the size of its asset-purchase program. We would again be skeptical. Rate cuts, when rates are already as low as they are, offer little incremental stimulus. Moreover, encouraging more borrowing through cheaper money is not the solution to Europe's problem of overindebtedness.

 

* UK banks were big losers last week as the Libor scandal heats up. Barclays was the outsized loser as its swaps rose 27 bps to 232 bps.

 

* XLF: Slightly more upside. Our Macro team’s quantitative setup in the XLF shows 3.3% upside to TREND resistance of $14.95 and 2.2% downside to TRADE support at $14.15.

 

Financial Risk Monitor Summary  

• Short-term(WoW): Positive / 3 of 12 improved / 2 out of 12 worsened / 8 of 12 unchanged  

• Intermediate-term(WoW): Positive / 5 of 12 improved / 3 out of 12 worsened / 5 of 12 unchanged  

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

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - JOC 2

 

1. US Financials CDS Monitor – Swaps tightened across all 27 major domestic financial company reference entities last week.   

Tightened the most WoW: MTG, RDN, MBI

Widened the most/ tightened the least WoW: Met, UNM, HIG

Tightened the most MoM: WFC, RDN, MBI

Widened the most/ tightened the least MoM: LNC, UNM, GNW

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - American CDS

 

2. European Financial CDS -  UK, Spanish, Italian French and German banks saw swaps widen last week. Greek banks tightened.

 

Overall, 21 of the 39 European financial reference entities we track saw spreads widened last week. The median widening was 0.33% and the mean widening was 1.03%. 

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - European Financials

 

3. Asian Financial CDS -  11 of the 12 Asian banks we track saw swaps tighten last week. 

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - Asian Financials

 

4. European Sovereign CDS Spain and Portugal widened sharply while Italy widened nominally. Ireland was significantly tighter week over week on the heels of their re-entry into the sovereign debt market.  

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - Sov Table

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - Sov1

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - Sov 2

 

5. High Yield (YTM) Monitor – High Yield rates fell 19 bps last week, ending the week at 7.34 versus 7.54 the prior week.

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - HY

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 6 points last week, ending at 1667.

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - LLI

 

7. TED Spread Monitor – The TED spread rose 0.7 bps last week, ending the week at 38.41 this week versus last week’s print of 37.69.

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - TED spread

 

8. Journal of Commerce Commodity Price IndexThe JOC index rose 4.8 points, ending Thursday at -11.1 versus -15.9 the prior Friday.

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - JOC index 2

 

9. Euribor-OIS spread – The Euribor-OIS spread widened by 1 bps to 42 bps.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. 

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - Euribor OIS

 

10. ECB Liquidity Recourse to the Deposit Facility This index remains near its all time peak. 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. This chart shows data through Thursday. 

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - ECB 2

 

11. Markit MCDX Index Monitor – Municipal spreads widened 4 bps last week, ending at 159 bps. 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. 

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - MCDX

 

12. Chinese Steel - Steel prices in China fell 1.1% last week, or 45 yuan/ton, to 4,011 yuan/ton. Notably, Chinese steel rebar prices have been generally moving lower since August of last year. 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. 

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - CHIS

 

13. 2-10 SpreadLast week the 2-10 spread tightened by 7 bps to 127 bps. While admittedly imperfect, we think this is a useful reference for bank margin pressure.

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - 2 10

 

14. XLF Macro Quantitative Setup Slightly more upside. Our Macro team’s quantitative setup in the XLF shows 3.3% upside to TREND resistance of $14.95 and 2.2% downside to TRADE support at $14.15.

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - XLF

 

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: THE TAIL THAT WAGS THE DOG - Margin Debt

 

Joshua Steiner, CFA

 

Robert Belsky

 

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