Key Takeaways
* Last week American and European bank swaps tightened across the board fueled by ECB comments about assistance for Spain and an initially strong perception of the US labor situation. However, Friday's softening by the close coupled with this morning's performance around the world is suggesting the labor-based rally may be short-lived.
* Sovereign CDS - Sovereign swaps mostly moved in tandem with bank swaps around the world, tightening across the board. The one notable divergence was the United States, which saw its sovereign swaps rise by 26.4% (9 bps) to 42 bps from 33 bps in the prior week.
* The rate on high-yield corporate debt fell 14.5 bps last week, ending the week at 6.67% versus 6.81%
* The 2-10 spread widened by 8 bps last week, bringing the spread to 148 bps. As we've noted in the past we like to look at the 2-10 spread as a leading indicator for bank margin pressure. While we welcome the widening that we saw last week, we continue to expect tightening going forward.
* Our Macro team’s quantitative setup in the XLF shows 0.4% upside to TRADE resistance and 2.0% downside to TRADE support.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 8 of 12 improved / 0 out of 12 worsened / 5 of 12 unchanged
• Intermediate-term(WoW): Positive / 8 of 12 improved / 1 out of 12 worsened / 4 of 12 unchanged
• Long-term(WoW): Positive / 7 of 12 improved / 2 out of 12 worsened / 4 of 12 unchanged
1. American Financial CDS - Swaps tightened significantly vs. last week with 25 out of 27 domestic financial institutions showing WoW improvement, for an average gain of 21 bps. Among the large caps, BAC and C showed the sharpest improvement at 22 and 21 bps, respectively.
Tightened the most WoW: MTG, BAC, C
Widened the most/ tightened the least WoW: MBI, MMC, AGO
Tightened the most WoW: MTG, HIG, AIG
Widened the most/ tightened the least MoM: MBI, JPM, AGO
2. European Financial CDS - European bank swaps were tighter across the board with Italian, Spanish and French banks showing the sharpest week-over-week improvement. Overall, swaps were tighter for 35 out of 37 reference entities with an average tightening of 29 bps.
3. Asian Financial CDS - In Asia, Chinese and Indian bank swaps were tighter while Japanese banks were generally wider. Overall, 8 out of the 12 reference entities that we track tightened.
4. Sovereign CDS – European sovereign swaps were sharply tighter across the board last week. Italian sovereign swaps tightened by -12.5% (-45 bps to 312 bps) and U.S. sovereign swaps widened by 26.4% (9 bps to 42 bps).
5. High Yield (YTM) Monitor – High Yield rates fell 14.5 bps last week, ending the week at 6.67% versus 6.81% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.2 points last week, ending at 1732.
7. TED Spread Monitor – The TED spread fell 1.2 bps last week, ending the week at 25.2 bps this week.
8. Journal of Commerce Commodity Price Index – The JOC index rose 1.3 points, ending the week at 6.43 versus 5.2 the prior week.
9. Euribor-OIS spread – The Euribor-OIS spread tightened by less than 1 bp to 13 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 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 – Last week spreads tightened , ending the week at 135 bps versus 136 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.
12. Chinese Steel - Due to "Golden Week" ( also known as Mid-Autumn Festival), a 7-day Chinese national holiday, there are no quotes for Chinese steel this week.
13. 2-10 Spread – Last week the 2-10 spread widened to 148 bps, 8 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.4% upside to TRADE resistance and 2.0% downside to TRADE support.
Margin Debt - August: +0.73 standard deviations
NYSE Margin debt rose to $287 billion in August from $278 billion in July. 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 August.
Joshua Steiner, CFA
Robert Belsky
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