Key Takeaways
* U.S. and EU bank swaps were wider last week as a spate of blue-chip U.S. companies disappointed on 3Q earnings and/or guidance. Meanwhile, Romney's momentum slowed and Fiscal Cliff concerns are again taking center stage. In Europe, French, Italian and Spanish bank swaps showed the most deterioration.
* Perennial laggards Spain, Italy and Portugal saw their swaps widen notably last week. However, the U.S., Japan, Germany and France all saw government default swaps tighten.
* Rates on high yield corporate debt rose 14bps week-over-week, the first increase in a long time. The leveraged loan market also reflected that reversal.
* The MCDX, our preferred gauge of municipal default risk in the United States, rose 3bps to 135 bps vs. the prior week.
* Our Macro team’s quantitative setup in the XLF shows 1.5% upside to TRADE resistance and 0.9% downside to TRADE support.
Financial Risk Monitor Summary
• Short-term: Negative / 3 of 12 improved / 6 out of 12 worsened / 4 of 12 unchanged
• Intermediate-term: Positive / 9 of 12 improved / 2 out of 12 worsened / 2 of 12 unchanged
• Long-term: Positive / 7 of 12 improved / 2 out of 12 worsened / 4 of 12 unchanged
1. American Financial CDS – Money center banks and large brokers saw their swaps widen by ~6 bps on average. Wells Fargo was the only exception in the group, where swaps tightened 1 bp. The median US Financial swap widened bps, and, overall, 20 out of 27 domestic financial institutions widened.
Widened the most WoW: AXP, MTG, AIG
Tightened the most WoW: TRV, WFC, LNC
Tightened the most WoW: HIG, C, BAC
Tightened the least MoM: MTG, XL, MBI
2. European Financial CDS – Europe took its cues from America. European bank swaps were wider for 34 out of 37 reference entities WoW. Out of the three swaps that tightened this week, two were German (Deutsche Bank AG & IKB Deutsche Industriebank AG) and one was Belgian (Dexia S.A.). Spanish banks were sharply wider, where the average reference entity widened by 9.2%. This is the result of Moody's downgrading 5 Spanish regions on Monday of last week. Italian and French bank default swaps were also notably wider week-over-week.
3. Asian Financial CDS – Asian bank swaps were mixed. Nomura Holdings of Japan saw its swaps tighten by 49 bps to 281 while Matsui Securities tightened 24 bps to 226 bps. Those were the largest movers of the week, both Japanese. In China, the China Development Bank tightened 14 bps to 105 bps. Overall, Asian banks were tighter by an average of 7 bps last week.
4. Sovereign CDS – European sovereign swaps were mixed last week. Italy, Spain and Portugal widened by 30 bps, 33 bps, and 79 bps, respectively, while Germany and France saw their swaps tighten 9 bps and 7 bps. The U.S. tightened by 2 bps and Japan was tighter by 1 bp.
5. High Yield (YTM) Monitor – High Yield rates rose 14 bps last week, ending the week at 6.66% versus 6.52% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 4.5 points last week, ending at 1730.99.
7. TED Spread Monitor – The TED spread fell 2.4 basis points last week, ending the week at 19.9 bps this week versus last week’s print of 22.3 bps.
8. Journal of Commerce Commodity Price Index – The JOC index fell -4.2 points, ending the week at -4.81 versus -0.7 the prior week. The commodity bubble continues to pop.
9. Euribor-OIS spread – The Euribor-OIS spread tightened by less than a basis point to 10.4 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 – ECB Liquidity Facility balances ticked lower again this past week. 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 widened 3 bps, ending at 135 bps versus 132 bps in 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 – Steel prices in China rose 0.5% last week, or 18 yuan/ton, to 3763 yuan/ton. This index has had a solid bounce from its recent lows on 9/7/12, up 12.7% since then. That said, it remains 25% below its August 2011 levels, reflecting ongoing weakness in China's construction market. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.
13. 2-10 Spread – Last week the 2-10 spread tightened to 145 bps, this was 2 bps tighter 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 1.5% upside to TRADE resistance and 0.9% downside to TRADE support.
Margin Debt - September: +1.12 standard deviations
NYSE Margin debt rose to $315 billion in September from $287 billion in August. 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 September.
Joshua Steiner, CFA
Robert Belsky