MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY

Takeaway: QE3 confidence & "unlimited" ECB asset purchases made for quite the centrally-planned rally last week. China remains a focus of concern.

Key Takeaways 

* Last week saw the largest single week of improvement in credit default swaps ever for EU sovereign credits on the heels of the ECB's Draghi pledging "unlimited" asset purchases. Spanish, Italian, German and French bank as well as sovereign credit default swaps were sharply lower, reflecting optimism that the ECB will avert the crisis.

 

* High yield and leveraged loans found renewed bids last week, pushing both indices to new, post-crisis highs

 

* Commodities were similarly affected. The JOC index turned higher again this week. Expect higher prices at the pump and at the grocery store. 

 

* China seems to be the only country left out of the global rally -  Chinese steel fell another 3.4% WoW.

 

* Negative Short-term Setup: In spite of last week's impressive squeeze higher, our Macro team’s quantitative setup in the XLF shows a negative short-term setup with 0.4% upside to TRADE resistance of 15.74 and 2.9% downside to TRADE support of 15.23.

 

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 9 of 12 improved / 1 out of 12 worsened / 3 of 12 unchanged  

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

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

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - Summary

 

1. American Financial CDS – Credit default swaps tightened sharply last week across all U.S. Financial institutions. Some of the most improved were BAC & C with 17-18% declines week-over-week along with GS down 15% WoW. Currently, none of the big six banks/brokers are trading north of 300 bps. 

Tightened the most WoW: BAC, C, GS

Tightened the least WoW: MBI, AGO, TRV

Tightened the most WoW: BAC, C, GS

Tightened the least MoM: TRV, COF, ALL

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - American

 

2. European Financial CDS – Italian, German, French and British bank default swaps were down approximately 20% across the board last week, on ECB commentary.   

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - European

 

3. Asian Financial CDS – Chinese and Indian bank CDS tightened while Japanese banks were mixed. 

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - Asian

 

4. Sovereign CDS – European sovereign default swaps plunge. Spanish and Italian sovereign default swap premiums fell by 33% week-over-week on the ECB's "unlimited" pledge. Ireland saw its swaps decline 24%, while Portuguese swaps fell 20%. Even France and Germany benefited with 16% declines each. 

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - Sovereign Table

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - Sovereign CDS 1

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - Sovereign CDS 2

 

5. High Yield (YTM) Monitor – High Yield rates fell 20 bps last week, ending the week at 6.86% versus 7.06% the prior week.

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - HY

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 7.2 points last week, ending at 1,716.

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - Leveraged Loan Index

 

7. TED Spread Monitor – The TED spread fell 4 bps last week, ending the week at 30 bps versus 34 bps last week. 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - TED

 

8. Journal of Commerce Commodity Price Index  The JOC index rose 3.0 points, ending the week at +1.0 versus -2.0 the prior week. This is the first time the index has been positive since  August 8th 2011. 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - JOC

 

9. Euribor-OIS spread The Euribor-OIS spread tightened by 3 bps to 18 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: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - 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.  

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - ECB

 

11. Markit MCDX Index Monitor – Last week spreads tightened 2 bps, ending the week at 152 bps versus 154 bps the prior week. 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: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - MCDX

 

12. Chinese Steel - Steel prices in China fell 3.4% last week, or 118 yuan/ton, to 3388 yuan/ton. Over the last four months, Chinese construction steel prices have fallen ~20%. This index continues to reflect 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.

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - CHIS

 

13. 2-10 Spread –  Last week the 2-10 spread widened to 141 bps, 9 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure. 

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - 2 10

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.4% upside to TRADE resistance and 2.9% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - XLF

 

Margin Debt - July: +0.61 standard deviations 

NYSE Margin debt fell  to $278 billion in July from $285 billion in June. We like to to look at margin debt levels as a broad contrarian sentiment indicator. For reference, our approach is to look at margin debt levels in standard deviation terms over the period 1. Our analysis finds 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 significant risk in the equity market. The preceding two instances were followed by the equity market losing roughly half its value over the following 24-36 months. 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 July. 

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - NYSE 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.  

 


Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more