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MONDAY MORNING RISK MONITOR: YIELD CURVE AND CHINESE STEEL

Key Takeaways

* European bank swaps were a mixed batch last week. German, Spanish, and French banks saw broad tightening last week while Italian and Greek banks widened. Sovereign swaps moved alongside bank swaps this week with most European countries tightening except for Ireland. US Bank swaps were generally uneventful last week. 

 

* Chinese steel prices dropped sharply last week. We use this indicator as a proxy for the health of China's construction industry. 

 

* The yield curve continues to flatten. How low can the 10-year go? More margin pressure to come in 3Q on the heels of sharp 2Q drops in NIM for JPM (-14 bps) and C (-9 bps).

 

*XLF Macro Quantitative Setup – More downside than upside. Our Macro team’s quantitative setup in the XLF shows 1.1% upside to TREND resistance of $14.87 and 2.7% downside to TRADE support at $14.31.

 

Financial Risk Monitor Summary  

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

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

• Long-term(WoW): Positive / 5 of 12 improved / 2 out of 12 worsened / 6 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: YIELD CURVE AND CHINESE STEEL - Summary

 

1. US Financials CDS Monitor – Swaps were flat to mixed for the large cap US financials. Meanwhile, swaps widened sharply for mortgage insurers (MTG, RDN, GNW) and guarantors (AGO, MBI).   

Tightened the most WoW: JPM, WFC, SLM

Widened the mos WoW: MTG, RDN, MBI

Tightened the most MoM: JPM, WFC, RDN

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

 

MONDAY MORNING RISK MONITOR: YIELD CURVE AND CHINESE STEEL - American CDs

 

2. European Financial CDS -  Spanish banks tightened a lot while French banks tightened a little. Italian banks were a bit wider while Greek banks widened a lot. Overall, 20 of the 39 European financial reference entities we track saw spreads widened last week.

 

MONDAY MORNING RISK MONITOR: YIELD CURVE AND CHINESE STEEL - European Financials CDs

 

3. Asian Financial CDS -  9 of the 12 Asian financials we track saw swaps widen last week. China's banks widened 5-9 bps.

 

MONDAY MORNING RISK MONITOR: YIELD CURVE AND CHINESE STEEL - Asian CDS

 

4. Sovereign CDS – All of Europe tightened, except for Ireland. 

 

MONDAY MORNING RISK MONITOR: YIELD CURVE AND CHINESE STEEL - Sov Table

 

MONDAY MORNING RISK MONITOR: YIELD CURVE AND CHINESE STEEL - Sov CDS 1

 

MONDAY MORNING RISK MONITOR: YIELD CURVE AND CHINESE STEEL - Sov CDS 2

 

5. High Yield (YTM) Monitor – High Yield rates rose 4.6 bps last week, ending the week at 7.39 versus 7.34 the prior week.

 

MONDAY MORNING RISK MONITOR: YIELD CURVE AND CHINESE STEEL - HY2

 

6. Leveraged Loan Index Monitor The Leveraged Loan Index rose 11.3 points last week, ending at 1678.

 

MONDAY MORNING RISK MONITOR: YIELD CURVE AND CHINESE STEEL - LLI

 

7. TED Spread Monitor  The TED spread fell 1.5 points last week, ending the week at 36.9 this week versus last week’s print of 38.4.

 

MONDAY MORNING RISK MONITOR: YIELD CURVE AND CHINESE STEEL - TED spread

 

8. Journal of Commerce Commodity Price IndexThe JOC index fell 1.8 points, ending the week at -12.37 versus -10.6 the prior week.

 

MONDAY MORNING RISK MONITOR: YIELD CURVE AND CHINESE STEEL - JOC

 

9. Euribor-OIS spread – The Euribor-OIS spread tightened by 3 bps to 38 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: YIELD CURVE AND CHINESE STEEL - Euribor OIS

 

10. ECB Liquidity Recourse to the Deposit FacilityThis index fell sharply from precipitous heights on the first day that the new 0.00% deposit rate went into effect.  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: YIELD CURVE AND CHINESE STEEL - ECB

 

11. Markit MCDX Index Monitor –  Municipal spreads tightened 1 basis point last week, ending at 158 bps. Given the spate of bankruptcies in the last few weeks, we're suprised the MCDX is as benign as it is. 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: YIELD CURVE AND CHINESE STEEL - MCDX2

 

12. Chinese Steel - Steel prices in China fell 2.19% last week, or 88 yuan/ton, to 3,928 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: YIELD CURVE AND CHINESE STEEL - Chinese Steel

 

13. 2-10 Spread –  Last week the 2-10 spread tightened to 124 bps, 3 bps tighter than a week ago. While admittedly imperfect, we think this is a useful reference for bank margin pressure.

 

MONDAY MORNING RISK MONITOR: YIELD CURVE AND CHINESE STEEL - 2 10

 

14. XLF Macro Quantitative Setup – More downside than upside. Our Macro team’s quantitative setup in the XLF shows 1.1% upside to TREND resistance of $14.87 and 2.7% downside to TRADE support at $14.31.

 

MONDAY MORNING RISK MONITOR: YIELD CURVE AND CHINESE STEEL - 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: YIELD CURVE AND CHINESE STEEL - Margin Debt

 

Joshua Steiner, CFA

 

Robert Belsky

 

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JULY KNAPP TRACK

The Knapp Track numbers for June suggest a slight sequential improvement in casual dining trends from May.  Timing related to 4th of July celebrations inflated the number, however, as the estimate (based on weekly data) takes into account the last week in June which includes July 1.  When the account results are released for June, Knapp says, the difference between the estimate based on weekly data and the accounting month will be +0.4-0.6%.  Tellingly, traffic trends continue to decline.

 

Calendar Shift

Knapp noted that the estimates for June were based on weekly data, which included July 1st.  Last year, many cities and towns held firework displays to celebrate the 4th of July on Saturday (7/1/11), which lowered casual dining sales.  This year, celebrations were held primarily on the 4th, a Wednesday.  This shift boosted Knapp Track estimated casual dining comparable restaurant sales growth because the data is based on weekly results and the last week in June included July 1 this year, a week which showed a large increase in sales. 

 

 

Results

 

Estimated Knapp Track casual dining comparable restaurant sales grew 1.1 % in June versus an estimated -1.3% in May.  The sequential change, in terms of the two year average trend, was +150 bps.  However, if we assume the accounting number for May will be in line with the estimate, and the accounting number for June will be 40-60 bps below the estimate (as Knapp suggests it might be), the two year average trend will likely be closer to +125 bps.

 

Estimated Knapp Track casual dining guest counts declined -1.2% in June versus an estimated -3.9% in May.  The sequential change from May to June, in terms of the two-year average trend, was +165 bps.  Even with the benefit of a strong last week, which included July 1st, traffic trends continued to decline in June.  With the pricing environment as competitive as ever within the space, and within the food retail industry more broadly, restaurant companies are under intense pressure to operate efficiently.

 

JULY KNAPP TRACK - cpi home away from home

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


THE M3: Q2 TABLES; PARCEL 3; S'PORE NEW HOME SALES; TPI

The Macau Metro Monitor, July 16, 2012

 

 

TABLES/SLOTS DSEC

At the end of Q2 2012, Macau had 5,498 (+256 QoQ) gaming tables and 17,035 (+933 QoQ) slots.

 

SANDS CHINA GETS DEADLINE EXTENSION FOR PARCEL THREE Macau Business

Sands China said it has received an extension of the deadline for the completion of the development of parcel three, in Cotai.  The company said it received a letter from the Macau government dated July 13 informing it that a decision had been made by the Secretary for Transportation and Public Works, authorizing the extension of the construction period relating to parcel three until April 17, 2016 (original deadline: April 2013).  The government will later notify Sands China of the extension penalty.

 

Sands China also says parcel three “will target the mass-family market, and will feature family-oriented facilities.”  The company says design details for the property are currently being finalized.

 

NEW PRIVATE HOME SALES FALL 19.4% IN JUNE Channel News Asia 

According to Urban Redevelopment Authority, the number of new private homes sold in June continued to fall for the second consecutive month.  Developers sold 1,371 private homes (excluding executive condominiums) in June, down 19.4% from May when 1,702 units were sold.

 

TOURIST PRICE INDEX FOR THE 2ND QUARTER 2012 DSEC 

Tourist Price Index (TPI) 2Q 2012 increased by 6.57% YoY to 118.59.  Price index of Accommodation Services decreased by 6.38% YoY.  2Q TPI decreased 4.62% QoQ, of which the price index of Accommodation Services slid by 24.64% due to lower room rate after the Lunar New Year.

 

 

 




Early Look

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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – July 16, 2012


As we look at today’s set up for the S&P 500, the range is 27 points or -1.38% downside to 1338 and 0.61% upside to 1365. 

                                            

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 07/13 NYSE 2044
    • Up versus the prior day’s trading of -792
  • VOLUME: on 07/13 NYSE 683
    • Decrease versus prior day’s trading of -10.58%
  • VIX:  as of 07/13 was at 16.74
    • Decrease versus most recent day’s trading of -8.67%%
    • Year-to-date decrease of -28.46%
  • SPX PUT/CALL RATIO: as of 07/13 closed at 1.62
    • Up from the day prior at 1.31 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning 36
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.48%
    • Decrease from prior day’s trading at 1.49%
  • YIELD CURVE: as of this morning 1.25
    • Unchanged from prior day’s trading 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Empire Manufacturing, July, est. 4 (prior 2.29)
  • 8:30am: Advance Retail Sales, June, est. 0.20% (prior -0.2%)
  • 9:30am: IMF releases updates to global economic forecasts
  • 10am: Business Inventories, May, est. 0.2% (prior 0,4%)
  • 11am: Fed to purchase $1.5b-2b notes maturing Aug. 15, 2022- Feb. 15, 2031
  • 11:30am: U.S. to sell $30b 3-mo bills, $27b 6-mo bills
  • 7:30pm: Fed’s George speaks on monetary policy and farmland values in Kansas City 

GOVERNMENT

    • President Obama holds campaign event in Ohio
    • Senate in session, House not in session
    • Dominion Resources CEO Thomas Farrell speaks at House Energy panel field hearing on proposed EPA greenhouse gas new source performance standard for utilities, 9am

WHAT TO WATCH:  

  • Citigroup to post 2Q results; watch investment bank, trade rev.
  • Sales at U.S. retailers probably rose 0.2% in June
  • U.K. FSA Chairman, Barclays ex-COO to testify at House of Commons committee on Libor-rigging scandal
  • IMF to revise global growth forecasts; Lagarde has said forecasts will be lowered from April’s 3.5% projection
  • Glaxo raises Human Genome bid to $14-shr: Reuters
  • Visa, MasterCard in settlement w/ total value $7.25b on merchants’ antitrust swipe-fee suit; convenience-store assn. rejects settlement, Natl Retail Fed. says not party to suit
  • Calpers to release preliminary performance results for past yr
  • WTO set to issue ruling on U.S. complaint against China’s restrictions on U.S. electronic-pymt svc suppliers, 10:30am
  • Trial of SEC vs. Brian Stoker, former Citigroup dir., begins
  • Weekly agendas: Finance, Tech, Media/Entertainment, Industrials, Energy, Transports, Health, Real Estate, Consumers, IPOs, Rates, Canada Mining, Canada Oil & Gas
  • Bernanke testifies, China housing, Google: Week Ahead 

EARNINGS:

    • Citigroup (C) 8am, $0.89 - Preview
    • Gannett (GCI) 8:15am, $0.53 - Preview
    • JB Hunt Transport (JBHT) 4pm, $0.66
    • Cintas (CTAS) 4:07pm, $0.60
    • Brown & Brown (BRO) 4:50pm, $0.31
    • Packaging Corp. of America (PKG) 5pm, $0.46

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG) 

  • Hedge Funds Bet Right Before Longest Winning Streak: Commodities
  • Speculators Cut Bullish Oil Wagers Before Rally: Energy Markets
  • Wilbur Ross Says U.S. Coal Is Facing Years of Headwinds: Energy
  • Corn at 10-Month High, Soybeans Costliest Since 2008 on Drought
  • Oil Declines From One-Week High on China Slowdown, Hormuz Bypass
  • Sugar Falls as Producer Supplies Seen Advancing; Cocoa Declines
  • Worst-in-Generation Drought Dims U.S. Farm Economy Bright Spot
  • Gold Set to Fall in London as Europe’s Debt Crisis Aids Dollar
  • Soybean Meal Surges to Record as Drought Withers U.S. Harvest
  • Copper Drops for First Day in Four on China Consumption Concern
  • Gold Demand in India to Drop as Buyers Prefer to Hoard Cash
  • Gulf Oil Less Crucial in Storms as Shale Grows: Chart of the Day
  • BP Said to Buy Fuel Oil Cargo From Hindustan Petroleum for July
  • Ghana’s Cocoa Mid-Crop May Be as Much as 80,000 Tons This Year
  • Deficient Monsoon Challenges India’s Record Food Grain Harvests
  • Soybeans May Set Record, Break Resistance: Technical Analysis

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES


EURO – failed to hold Friday’s no-volume gains and is also failing to hold the 2010 closing lows; the Euro could go a lot lower; and the USD a lot higher (see our Q3 Macro Theme slides for the update on why); refreshed risk range for EUR/USD = 1.20-1.23

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS


CHINA – Friday’s no-volume USA rally on the lowest consumer confidence print in 7 months was based partly on a rumor China was going to cut again this weekend – but they didn’t, and Chinese stocks got cut to fresh YTD lows, down another -1.7% after Wen said that it needs to be “clearly understood” that #GrowthSlowing is accelerating on the downside.

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


ISRAEL – jumping off my risk factoring page this morning for reasons I am not sure of (down -0.6% testing new lows at -3.2% YTD) with plenty of rumoring by the British on possible “attacks” (Iran); something to think about re Oil (+3.1% last wk) keeping a bid during the USD’s recent upswing; middle east tension has been out of the mainline news for a while now.

 

THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team

 


Hailing Patriotism

This note was originally published at 8am on July 02, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I only regret that I have but one life to lose for my country.”

-Nathan Hale

 

The quote above from Nathan Hale is by many thought to be one of the more patriotic statements made in American history.  These words were spoken by Hale shortly before being hung by the British for spying.  The 21-year old Yale graduate had been captured by the British after volunteering to go behind enemy lines to report on British troop movement during the Battle of Long Island.  Clearly, a willingness to sacrifice your life for your country is the ultimate sacrifice.

 

Yesterday was Canada Day in Canada and Wednesday will be Independence Day in the United States.  While most of us won’t be swearing to give our lives for our respective countries this week, for many of us our patriotism will nonetheless be on display.  In many ways, patriotism is a great thing.  On the other hand, extreme patriotism is in many instances the root of the more significant military conflicts in modern history.  Ultimately at the root of patriotism is a deep seated perspective that your nation’s interests should come ahead of another nation’s interests.

 

The global equity markets have rallied aggressively over the last couple of days based on perceived positive developments from the European Union summit last week.  This is the 20th summit since the European sovereign debt crisis began in 2010 and the ensuing storyline has become somewhat predictable. The leaders of the European Union meet, stories are linked about the possible bailout plans that are in the works, numerous MOUs are signed or agreed to at the end of the summit, and then the markets rally in anticipation of the end of the crisis.  Eventually, though, market participants again realize there is no solution and that crisis is far from over.  But who knows, perhaps this summit truly was different. Personally, I remain a skeptic.

 

The ultimate solution in Europe must come from a broad willingness for nations to give up sovereignty on fiscal and budgetary matters.  As discussed above, national pride and patriotism run deep, particularly in Europe, therefore relinquishing even some sovereignty for collective fiscal and budgetary decisions will not be an easy matter. So, even if the headlines coming out of the most recent summit are positive, we need to keep in mind that any actual implementation of a broad based solution will not be simple, or quick.

 

On the economic data front, the Purchasing Managers Index for manufacturing in Europe came out this morning at 45.1.  This is the 11th monthly decline and the rate of decline was comparable to that of May, which was the fastest monthly decline in almost three years.  Overall, the average reading of 45.4 was the slowest reading since Q2 2009.  Most disturbing is likely the fact that Germany is clearly no longer immune from growth headwinds as German PMI came in at 45.0 for the fourth consecutive month of declines. All in all, pretty somber news as it relates to growth, or lack thereof.

 

The larger emerging issue from Europe’s structural growth problem is that of unemployment.  In May, the Eurozone unemployment rate came in at a new record of 11.1% with more than 17 million people unemployed in the 17-nation Eurozone.  Consistent with its victory in the European Cup over the weekend, Spain continues to also lead on the unemployment front with unemployment at 24.6%, though is followed closely by Greece at 21.9% and Portugal at 15.2%.  There is no question given the current state of the European Union, as most recently indicated by the PMI numbers outlined above, that we have not yet seen highs in unemployment.

 

Later this week both the European Central Bank and the Bank of England will meet and then give their most recent rate decisions.  Similar to the Federal Reserve, both of these central banks are largely out of bullets.  It is expected that both banks will cut rates by 25 basis points and approve a 50 billion pound bump in the asset purchase program, respectively.  Based on the move we’ve seen in European equities and bonds in the last few days, it seems likely that even coming in line with expectations may actually be a disappointment.

 

We continue to be very conservatively positioned in both the Hedgeye Asset Allocation Model with 91% cash and in the Hedgeye Virtual Portfolio that now has 5 longs and nine shorts.  So, yes, we are now running net short in the Virtual Portfolio as Keith added the following shorts in Friday’s melt up: Discover Financial Services (DFS), Italian equities (via the etf EWI), the Russell 2000 (via the etf IWM), and Brent Oil (via the etf BNO).

 

As you head into July 4th and celebrate American independence with your friends and family, and despite some of the somber economic news coming out of Europe, it is important to remain optimistic and upbeat.  As such, I’d like to leave you with quotes from two American Presidents, a Republican and a Democratic.  They are as follows:

 

“There is nothing wrong with America that cannot be cured with what is right about America.”

-President Bill Clinton

 

“America has never been an empire.  We may be the only great power in history that had the chance, and refused – preferring greatness to power and justice to glory.”

-President George W. Bush

 

Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Germany’s DAX, and the SP500 are now $1583-1623, $92.82-97.66, $81.21-82.16, $1.25-1.27, 6269-6563, and 1336-1365, respectively.

 

Enjoy your holiday time this week.

 

Best,

 

Daryl G. Jones

Director of Research

 

Hailing Patriotism - Chart of the Day

 

Hailing Patriotism - Virtual Portfolio



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