* U.S. Bank CDS: American bank swaps were tighter week-over-week with the average issuer seeing roughly 10 bps of improvement. Moneycenter banks and large brokers were tighter by 7 bps on average while consumer finance companies and Insurance companies tightened by 5 bps and 2 bps, respectively. Conspicuous movers (i.e. those that widened) included SLM widening by 2 bps, MBI widening by 116 bps, and MMC widening by 1 bps.
* European Bank CDS: In Europe, swaps were tighter in nearly all banks we track. 36 out of 37 bank swaps tightened. German and French banks saw considerable tightening along with banks from Spain and the U.K. Interestingly, Mario Monti, prime minister of Italy, resigned overnight. All in all, Monti's resignation came as a surprise and may increase uncertainty in Italy and in the Eurozone.
* Sovereign CDS: Sovereign swaps widened week-over-week. Ireland was the worst performer, widening by 18 bps. Spain and Italy were also laggards, widening by 14 and 10 bps, respectively. Portugal was the positive outlier, tightening by 4.9% week-over-week.
* Euribor-OIS: The Euribor-OIS spread, a measure that gauges European counter party risk, rose 2 bps last week.
* Quantitative Setup: Our Macro team’s quantitative setup in the XLF shows no upside to TRADE resistance and 1.5% downside to TRADE support.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 4 of 12 improved / 1 out of 12 worsened / 8 of 12 unchanged
• Intermediate-term(WoW): Positive / 6 of 12 improved / 2 out of 12 worsened / 5 of 12 unchanged
• Long-term(WoW): Positive / 7 of 12 improved / 2 out of 12 worsened / 4 of 12 unchanged
1. U.S. Financial CDS – Following Europe's lead, U.S. financials were broadly tighter week-over-week. The sole exception was MBIA, which widened by 116 bps. Swaps tightened for 24 out of 27 domestic financial institutions.
Tightened the most WoW: AIG, LNC, GNW
Widened the most WoW: MBI, MMC, SLM
Tightened the most WoW: C, GS, BAC
Widened the most MoM: ACE, RDN, MBI
2. European Financial CDS – European bank swaps posted an impressive rally last week with 36 out of the 37 reference entities we track tighter. Banks in France, Germany, Italy, the United Kingdom and Spain all were notably tighter.
3. Asian Financial CDS - Asian financials tightened broadly last week with 11 out of 12 reference entities we track better week over week. Japanese and Indian bank swaps were all tighter week-over-week. The largest improvements were at Japanese brokers and Indian banks.
4. Sovereign CDS – With the exception of Portugal, European Sovereign Swaps widened last week. Portuguese sovereign swaps tightened by -24 bps to 474 bps. Ireland was the worst performer with swaps widening 18 bps to 197 bps.
5. High Yield (YTM) Monitor – High Yield rates fell 24.1 bps last week, ending the week at 6.32% versus 6.56% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 8.6 points last week, ending at 1739.
7. TED Spread Monitor – The TED spread fell less than a basis point last week, ending the week at 22.6 this week versus last week’s print of 23.15.
8. Journal of Commerce Commodity Price Index – The JOC index rose 2.7 points, ending the week at 1.6 versus -1.1 the prior week.
9. Euribor-OIS spread – The Euribor-OIS spread widened by 2 bps to 14.2 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 2 bps, ending the week at 131 bps versus 133 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 –Steel prices in China fell 0.5% last week, or 18 yuan/ton, to 3548 yuan/ton. Since their recent highs on Oct 10, Chinese construction steel prices have fallen ~7%. The broader downward trend, which started August of last year, remains intact and is a sign of ongoing weakness in the Chinese 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 widened by 1 bp to 138 bps. 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 no upside to TRADE resistance and 1.5% downside to TRADE support.
Margin Debt – October: +1.19 Standard Deviations
NYSE Margin debt rose to $318 billion in October from $315 billion in September. 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 October.
Joshua Steiner, CFA