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European Banking Monitor: Globally Bank Swaps Tighten

Takeaway: Globally bank swaps tightened last week.

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

Key Takeaways:

 

** Bank CDS in Europe was mostly tighter week-over-week. German and British banks tightened, while Spanish and Italian bank swaps were generally wider. Greek bank swaps were flat, even after Greece received a disbursement of €34.4B tranche of bailout funding last week. The Euribor-OIS fell 2 bps.

 

** On OMTs Reporting: The ECB has stated that Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis and the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis. There is no indication that the OMTs has been initiated to date.

 

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If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.

 

Matthew Hedrick

Senior Analyst

 

(o)

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European Financials CDS Monitor – Swaps tightened for 24 out of 37 European reference entities last week. German and British banks tightened broadly, French banks were mixed - half tightening, half widening - and Spanish banks along with Italian banks generally saw swaps widen.

 

European Banking Monitor: Globally Bank Swaps Tighten - 55. banks

 

Euribor-OIS spread – The Euribor-OIS spread tightened by 2 bps 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. 

 

European Banking Monitor: Globally Bank Swaps Tighten - 55. euribor

 

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.  

 

European Banking Monitor: Globally Bank Swaps Tighten - 55. facility


MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD

Takeaway: Globally bank swaps tightened last week, while sovereign swaps widened. Euribor-OIS fell while the TED spread rose 5 bps.

Euribor-OIS vs TED Spread: This week the Euribor-OIS and the TED spread flashed conflicting signals. The TED spread rose 5 bps while the Euribor-OIS fell 2 bps. 

 

European Bank CDS: Bank CDS in Europe was mostly tighter week-over-week. German and British banks tightened, while Spanish and Italian bank swaps were generally wider. Greek bank swaps were flat, even after Greece received a disbursement of €34.4B tranche of bailout funding last week.

 

American Bank CDS: Swaps were broadly tighter for domestic banks last week, with the average issuer seeing roughly 17 bps of improvement. The Moneycenter banks tightened the most on average (9 bps week-over-week). MBIA was the lone hold out, widening 75 bps to 1158. 

 

High Yield: The average rate on high yield corporate debt fell 9 bps week-over-week to 6.22%

 

MCDX: Our preferred measure of municipal default risk rose 5 bps week-over-week.

 

2-10 Spread: The 2-10 spread widened 8 bps week-over-week. That said, the longer-term trend of down, down, down is showing no signs of abating. 

 

Financial Risk Monitor Summary  

• Short-term(WoW): Positive / 5 of 12 improved / 3 out of 12 worsened / 5 of 12 unchanged  

• Intermediate-term(WoW): Positive / 6 of 12 improved / 3 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

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - Summary

 

1. American Financial CDS –  Swaps tightened for 26 out of 27 domestic financial institutions. The Moneycenter banks and Large brokers tightened by 9 bps on average, while consumer finance companies and insurance companies tightened an average of 12 bps and 6 bps, respectively.

Tightened the most WoW: GNW, AIG, C

Widened the most/ tightened the least WoW: MBI, MTG, SLM

Tightened the most WoW: GNW, C, GS

Widened the most MoM: ACE, MMC, ALL

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - American

 

2. European Financial CDS – Swaps tightened for 24 out of 37 European reference entities last week. German and British banks tightened broadly, French banks were mixed - half tightening, half widening - and Spanish banks along with Italian banks generally saw swaps widen.

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - Europe

 

3. Asian Financial CDS – Swaps tightened across the board for all of the reference entities we track.  Japanese banks saw the most tightening, while Chinese banks saw the least.

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - Asia

 

4. Sovereign CDS –  European sovereign swaps tightened in the core, but widened in the periphery. Portuguese swaps tightened the most, falling 25 bps to 449 bps while Irish and Italian sovereign swaps widened the most, rising 23 bps and 19 bps, respectively week-over-week.

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - Sov Table

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - Sov 1

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - Sov 2

 

5. High Yield (YTM) Monitor – High Yield rates fell 9.4 bps last week, ending the week at 6.22% versus 6.32% the prior week.

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - HY

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5.7 points last week, ending at 1745.14.

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - LLI

 

7. TED Spread Monitor – The TED spread rose 5.5  bps last week, ending the week at 28 this week versus last week’s print of 22.6.

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - TED

 

8. Journal of Commerce Commodity Price Index – The JOC index rose 2.2 points, ending the week at 3.09 versus 0.9 the prior week.

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - JOC

 

9. Euribor-OIS spread – The Euribor-OIS spread tightened by 2 bps 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. 

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - 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: TED SPREAD VS REST OF WORLD - ECB

 

11. Markit MCDX Index Monitor – Spreads widened 4 bps, ending the week at 135 bps versus 131 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: TED SPREAD VS REST OF WORLD - MCDX

 

12. Chinese Steel –Steel prices in China rose 1.0% last week, or 34 yuan/ton, to 3582 yuan/ton. Since their recent highs on Oct 10, Chinese construction steel prices have fallen ~6.5%. 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.

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - CHIS

 

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 147 bps, 8 bps wider than a week ago.

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - 2 10

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.4% upside to TRADE resistance and 1.0% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - XLF2

 

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. 

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - NYSE margin debt

 

Joshua Steiner, CFA

 

Robert Belsky

 

 


THE M3: MAINLAND TOURISTS; S'PORE HOME SALES

The Macau Metro Monitor, December 17, 2012

 

 

NO CONTROL OF MAINLAND TOURISTS: MGTO BOSS Macau Business

According to the departing director of the Macau Government Tourist Office (MTGO), João Manuel Costa Antunes, Macau will not create a mechanism to limit the number of mainland visitors based on the city’s capacity. Antunes was quoted as saying the individual visa policy is only implemented by Beijing authorities.

 

He was commenting on recent moves made by Hong Kong’s Chief Executive C. Y. Leung to control the number of visitors from the mainland, by creating a mechanism to assess the city’s capacity to receive visitors.  Leung has convinced mainland authorities to shelve its plan to relax visa restrictions for non-permanent residents in Shenzhen, which has limited the access of over 4.1 million potential visitors.  Both sides have agreed to set up a mechanism to assess Hong Kong’s capacity to receive visitors.

 

NEW PRIVATE HOME SALES PLUNGE 44% IN NOVEMBER, AFFECTED BY SCHOOL HOLIDAYS Strait Times

1,087 new private homes were sold last month, or -44% MoM, as the school holiday period dampened sales momentum.

 

CASH HANDOUT IN 2ND OR 3RD QUARTER: TAM Macau Business 

Secretary Tam said 2013's cash handout will be allocated during 2Q or 3Q.  Permanent residents will get a cash handout of MOP8,000 (US$1,000) next year, while non-permanent residents will get MOP4,800.  Last year, the cash handout was given out from April 24 to July 6.


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Praying For Courage

“Courage is rightly esteemed the first of human qualities because it guarantees all others.”

-Winston Churchill

 

That’s a quote from Churchill in “Great Contemporaries” that is cited by Paul Reid in the preamble to The Last Lion. “He believed in virtue and right … he taught himself well and created a code he could live by.” (page 23)

 

While I don’t think there are any words I can write to comfort families in my neighboring town of Newtown, CT, I just wanted to take time this morning to say that they are in our thoughts and prayers.

 

Back to the Global Macro Grind

 

US stocks closed down for the 2nd consecutive day on Friday, taking their 2-day correction to -1%. Despite the fanfare of “stocks being up YTD”, US stocks have been weak since mid-September. For Q4 of 2012, the SP500 and Nasdaq are down -1.9% and 4.7%, respectively.

 

Where do we go from here?

 

If it wasn’t for Apple (AAPL) and #EarningsSlowing (Schlumberger, the #3 component of the Energy Sector ETF (XLE) guided down on Friday), everything would be pseudo-fine this morning. But you can’t back those things out – they are big things.

 

So is the Global Growth Cycle – and while we aren’t raging bulls suggesting that growth is back, we are seeing the causal factor that stabilizes global economic growth (Commodity Price Deflation) start to take hold where it matters most – price and expectations.

 

On the expectations front, check out last week’s CFTC Futures and Options net long positioning in commodities:

  1. Total Net Long commodity contracts fell another -11% wk-over-wk to 802,817
  2. Net long commodity contracts continue to crash from their all-time high (SEP 2012), down -40%!
  3. Sugar contracts had their biggest 1 wk drop in 5 years at -68% last week to 6,056 contracts
  4. Wheat contracts plummeted -67% wk-over-wk to 11,219 net long contracts
  5. Oil net long positions were down -21% wk-over-wk (biggest drop since May)
  6. Farm Goods dropped another -10% in the aggregate to 484,088 net longs

While expected commodity deflation is crystal clear in the futures/options market at this point, prices and expectations don’t always agree. Gold is the not-so-shining example of that statement:

  1. Gold bets actually keep going up as the price goes down (price = down for 3 straight wks; net longs up for 4 of the last 5 wks)
  2. Net long contracts in Gold went up another +3% last week to 129,865
  3. Gold is down another -0.33% this morning to $1690, and remains bearish TRADE and TREND in our model

With Gold’s TRADE and TREND resistance overhead at $1709 and $1719, respectively, this makes for an interesting debate (ask for Darius Dale’s Gold research note from Friday if you didn’t read it). Long-term TAIL support of $1670 is the only big line left of support for Gold. If that holds, consensus bets on the net long side could be ok, but only if they own the right strikes.

 

If Gold’s TAIL breaks, watch-out below.

 

That’s how we thought about AAPL (see Chart of The Day, TAIL = $561). That’s how we think about TAIL risk. We have a line that moves dynamically as price/volume/volatility does, and we use that as our headlights. Is the probability of incremental risk rising or falling? That’s another way to simplify how we think about that. It’s not perfect, but it’s a consistent risk management code I can live by.

 

If you go back to the 3-factor Global Growth Model I’ve been calling out for the last 3 weeks:

  1. Chinese stocks (Shanghai Composite)
  2. Bond Yields (US Treasuries)
  3. Copper

There’s emerging evidence that supports a shift from global #GrowthSlowing to #GrowthStabilizing. We’re not wedded to this – we’re just courageous enough to embrace the market’s uncertainty and change our minds as markets suggest we do.

 

Bond Yields had a big move last week with the 10yr Treasury Yield not only rising from 1.62% to 1.70% on the week, but closing above my TREND line of 1.69%. This morning, the 10yr yield is up another 2 basis points to 1.72%, confirming the move.

 

That’s also bearish for Gold. Rising bond yields always have been bearish for Gold because they compete with the long-standing expectation of #GrowthSlowing embedded in both Bond market and Gold bubbles.

 

On Friday, that’s why I cut our Fixed Income asset allocation to 0%, raised our Global Equities allocation, and stayed with what’s served us well since mid-September (0% asset allocation to Commodities).

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $105.71-108.93, $79.41-79.99, $1.29-1.31, 1.69-1.76%, and 1, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Praying For Courage - Chart of the Day

 

Praying For Courage - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – December 17, 2012


As we look at today's setup for the S&P 500, the range is 23 points or 0.39% downside to 1408 and 1.23% upside to 1431. 

                                                                                                                                                              

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.49 from 1.47
  • VIX closed at 17.0 1 day percent change of 2.66%
  • UST 10YR – more commodity deflation this morning is good for #GrowthStabilizing expectations (consumption), globally. 10yr yield is +2bps this morning to 1.72%, 3bps above my TREND line (was resistance) of 1.69%; #1 way to get people to buy equities for real is get the flows back (they’re in bonds).

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Empire Manufacturing, Dec., est. -1.0 (prior -5.22)
  • 9am: Total Net TIC Flows, Oct. (prior $4.7b)
  • 9am: Net L-T TIC Flows, Oct., est. $25.0b (prior $3.3b)
  • 11am: Fed’s Stein speaks on dollar funding in Frankfurt
  • 11am: Fed to buy $4.25b-$5.25b notes in 2018-2020 sector
  • 11:30am: U.S. Treasury to sell $32b 3M, $28b 6M bills
  • 1pm: U.S. Treasury to sell $35b 2Y notes
  • 1pm: Fed’s Lacker speaks on economy in Charlotte, N.C.

GOVERNMENT:

    • House, Senate in session
    • Federal Retirement Thrift Investment Board meets, 10am
    • Defense Secretary Leon Panetta discusses U.S. policy, 1pm

WHAT TO WATCH

  • Apple downgraded at Citigroup; drops below $500 pre-mkt
  • Boehner offers Obama tax-rate-boost deal w/ entitlement cuts
  • Google said to end FTC probe with letter promising changes
  • AIG offers to sell as much as $6.5b of AIA shares
  • First Quantum again raises offer for Inmet Mining
  • UBS said to face $1.6b penalty as Libor settlement looms
  • Starwood Capital nears buy of Principal Hayley: Sunday Times
  • China signals tolerance of slower growth after annual mtg
  • Abe’s LDP wins victory over Noda in Japan election rout
  • Novartis therapy wins U.S. backing for Cushing’s Disease
  • Cisco said to hire Barclays to sell Linksys routers unit
  • Jackson’s “Hobbit” tops weekend box office at $84.8m
  • Holiday spending “modest” through Dec. 8: SpendingPulse
  • SAC e-mails show Cohen consulted on Dell trade
  • Akamai Says co-founder Leighton to become CEO effective Jan. 1
  • Spending probably rose, home sales climbed: U.S. eco preview

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)


GOLD – gold just doesn’t like rising rates - never has – and that makes sense as absolute return (up for 12 straight yrs) on gold looks less exciting when risk free rates move higher. Gold remains bearish TRADE and TREND in our model with a big zone of resistance up at $1/oz.

  • Hedge Funds Reduce Bullish Bets by Most in a Month: Commodities
  • Rubber Surges to Seven-Month High as Yen Weakens on Abe Victory
  • JPMorgan Wins SEC Approval for Physically-Backed Copper ETF
  • Gold Drops on U.S. Fiscal Cliff Talks as ETP Holdings at Record
  • Soybeans Jump to Five-Week High as U.S. Crushes Most Since 2010
  • Rebar Extends Gain on Demand Outlook as China Flags Urban Growth
  • Oil Bulls in Biggest Retreat in Seven Months: Energy Markets
  • China Cuts Natural Rubber Import Taxes to Boost Local Supplies
  • Malaysia Sets Zero Export Tax for Crude Palm Oil to Cut Reserves
  • India Cuts Benchmark Import Price of Gold to $550 Per 10 Grams
  • Malaysia Sets Crude Palm Oil Export Tax at Zero for January
  • Natural Gas Prices Need Cold Winter to Get Off Floor: Outlook
  • HKEx May Allow Chinese Cos. as LME Category 1 Members, HKET Says
  • Brent Crude Futures Drop Amid Disagreement in U.S. Budget Talks

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

EUROPEAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS


JAPAN – the Japanese begged for a bailout bureaucracy and got it with a big LDP win over the weekend and follow through buying in the Nikkei (up another +0.94% to 9828, up +13.5% since mid November!). Probability continues to rise that Japan becomes 1st modern economy to fall on the sword of Keynesian economic policy (burning currency). Economic data is awful.

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%
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