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European Banking Monitor: ESM Delay = Enhanced Uncertainty

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:


* 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. 

 

Today there was an important announcement from Germany’s Constitutional Court that a ruling on the ESM and Fiscal Pact is set for September 12th. The runway of this lack of clarity on the scope of the ESM, especially the mandate for bank recapitalization lending, is hugely unsettling as market participants continue to want answers to a Eurozone "fix" yesterday. We’re forecasting that risk premium reflecting sovereigns and their banks could swing massively based on headline risk until more clarity is reached.

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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

 

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European Financials CDS Monitor 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.

 

European Banking Monitor: ESM Delay = Enhanced Uncertainty - dd. banks

 

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. 

 

European Banking Monitor: ESM Delay = Enhanced Uncertainty - dd. euribor

 

ECB Liquidity Recourse to the Deposit Facility – This 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.  

 

European Banking Monitor: ESM Delay = Enhanced Uncertainty - dd. facillity

 

Security Market Program – For the eighteenth straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 7/13, to take the total program to €211.5 Billion. Could this position of hold change? We think the ECB has to take a larger role to buy Europe’s sovereign peripheral paper. We’ll be looking to this Thursday’s ECB meeting for any information on a change of positioning.

 

European Banking Monitor: ESM Delay = Enhanced Uncertainty - dd. SMP


ANOTHER SO-SO WEEK IN MACAU

Average daily revenue per table fell sequentially to HK$711 million, bringing the MTD table revenues to $10.889 billion.  ADTR was only slightly better than last year’s HK$703 million.  We are slightly reducing our forecast range to HK$23.0-24.5 billion, representing YoY growth of -2% to +4%. 

 

ANOTHER SO-SO WEEK IN MACAU - ff

 

MPEL and LVS continue to outperform recent trends while MGM is struggling.  We think MGM’s share could continue to be under pressure.

 

ANOTHER SO-SO WEEK IN MACAU - fff


ESM's Runway of Uncertainty = Ugly!

Germany's Constitutional Court said a ruling on the ESM and Fiscal Pact is now set for September 12th.

 

German Finance Minister braced the markets last week that a ruling might not come until the Fall. Now that the date is official, and it's clear just how long this runway of uncertainty is, we can't stress enough how negative this timetable is for European (and global) markets.  The lack of clarity on the scope of the ESM, especially the mandate for bank recapitalization lending is hugely unsettling as market participants continue to want answers to a Eurozone "fix" yesterday. 

 

Much like the weeks leading up to Greek elections, we expect the heavy level of indecision around the ESM and path towards a fiscal compact to heighten headline risk. Spanish and Italian 10YR yields are already embedding a larger risk premium, up today to 6.82% and 6.15%, respectively. 

 

The chart below of the EUR/USD is dancing on our intermediate term TREND line of support. Our models suggest a current trading range of $1.20 to $1.23. Crumble Cake European leadership should only enhance the downside risk in this cross and the etf FXE. 

 

ESM's Runway of Uncertainty = Ugly! - aa. eur

 

Matthew Hedrick

Senior Analyst


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 80.65%
  • SHORT SIGNALS 78.63%

Mining: Troubles and Bubbles

Our recently launched Industrials coverage has been well received – and with good reason. In a time where King Dollar continues to trend higher, we’ve begun to witness a commodity bubble coming apart at the seams. You can see it in precious metals and oil and the final outcome is all but certain at this point in time.

 

 

Mining: Troubles and Bubbles - MINING bubble1

 

 

The next bubble of trouble about to burst is mining investments. Allow us to be succinct and to the point:

 

• Current levels of capital investment by miners is at bubble-like levels

• If depreciation and amortization represents an estimate of maintenance capital spending, current capital spending is heavily skewed toward increasing output

• Mature, cyclical industries (mining is among the most mature) do not support high levels of growth investment in the long-run

 

The chart above says it all. Investments in mining are a losing battle. And one of the biggest names in the game is about to feel the pressure: Caterpillar Inc. (CAT). This Dow Jones Industrial Average stalwart has enjoyed stellar performance relative to the S&P 500 since 1993. CAT has returned 393% while the S&P 500 has put up a puny 16.9% gain during the same time period. Caterpillar’s success is heavily dependent on this explosion of investment by miners.

 

Witness the chart below to see for yourself. This is not sustainable. Consider this the official warning shot from Industrials Managing Director Jay Van Sciver.

 

 

Mining: Troubles and Bubbles - MINING bubble2


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

 


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