Key Takeaways
* Money center banks (JPM, BAC, C, WFC) and the large domestic global brokerages all saw their credit default swaps widen on renewed EU and growth slowing fears.
* Spanish and Italian bank and sovereign swaps were wider week over. In contrast, German bank and sovereign swaps tightened
* Steel prices in China fell 3.7% last week, or 147 yuan/ton, to 3,799 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.
* The 2-10 spread widened 1 bps to 125 bps last week, but this morning it's hitting a new YTD low at 120 bps.
* Our Macro team’s quantitative setup in the XLF shows 0.4% upside to TRADE resistance ($14.43) and 1.1% downside to TRADE support ($14.21).
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 / 7 of 12 improved / 2 out of 12 worsened / 4 of 12 unchanged
• Long-term(WoW): Positive / 5 of 12 improved / 2 out of 12 worsened / 6 of 12 unchanged
1. US Financials CDS Monitor – The money center banks (JPM, BAC, C, WFC) and the large U.S. brokers (GS, MS) all saw credit default swaps widen, primarily on renewed Europe and growth slowing fears.
Tightened the most WoW: MET, ALL, HIG
Widened the most WoW: JPM, WFC, GS
Tightened the most MoM: RDN, ALL, AGO
Widened the most MoM: MTG, UNM, C
2. European Financial CDS - Spanish and Italian banks widened across the board while German banks mostly tightened. 3 out of 4 French banks widened. Overall, 24 of the 39 European financial reference entities we track saw spreads widen last week.
3. Asian Financial CDS - 11 of the 12 Asian financials we track saw swaps tighten last week.
4. Sovereign CDS – Italian, Spanish, and Irish sovereign swaps widened week over week. German, French, and Portuguese sovereign swap tightened over the same time period. German sovereign swaps tightened by 12.9% (-11 bps to 76 ) and Spanish sovereign swaps widened by 4.3% (25 bps to 592).
5. High Yield (YTM) Monitor – High Yield rates fell 8 bps last week, ending the week at 7.31 versus 7.39 the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.5 points last week, ending at 1683. Notably, this series continues to make new highs.
7. TED Spread Monitor – The TED spread fell -0.6 bps last week, ending the week at 36.3 bps this week versus last week’s print of 36.9 bps.
8. Journal of Commerce Commodity Price Index – The JOC index rose 4.5 points, ending the week at -7.88 versus -12.4 the prior week.
9. Euribor-OIS spread – The Euribor-OIS spread tightened by 2 bps to 35 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.
10. ECB Liquidity Recourse to the Deposit Facility – The sharp drop from two weeks earlier reflects the ECB's deposit rate change to 0.0%. Since that time, the index has been roughly flat. 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 – Municipal default swaps widened 4 bps last week, ending the week at 162 bps versus 158 bps the prior week. Frankly, we're surprised that this index is widening more given the spate of recent municipal bankruptcies. 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.
12. Chinese Steel - Steel prices in China fell 3.7% last week, or 147 yuan/ton, to 3,799 yuan/ton. This index is reflecting significant weakness in China's construction market. 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.
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 125 bps, 1 bps wider than a week ago, although this morning it's hitting new lows at 120 bps.
14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.4% upside to TRADE resistance and 1.1% downside to TRADE support.
Margin Debt - June: +0.72 standard deviations
NYSE Margin debt rose in June to $285 billion from $279 billion in May. 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 June.
Joshua Steiner, CFA
Robert Belsky
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