MONDAY MORNING RISK MONITOR: GLOBAL FUNDAMENTALS CATCHING UP TO EQUITIES

Takeaway: Chinese steel as well as industrial commodities moved modestly higher, while the TED spread moved lower. Short-term downside trumps upside.

Key Takeaways

 

American Financial CDS -  Across the board, US Financial swaps tightened. BofA and Citi were tighter by 16 and 15 bps, respectively, while MS tightened 21 bps. Mortgage insurers MTG and RDN tightened 153 bps and 68 bps, respectively.

 

* European Financial CDS - With the exception of Greece and one Spanish Bank (Caja de Ahorros del Mediterraneo), European bank swaps were tighter across the board on US fiscal cliff resolution. Italian and Spanish banks were the most improved, while German and French banks were close behind.

 

TED Spread – The TED spread fell 6.3 basis points last week, ending the week at 24 bps versus last week’s print of 30 bps.

 

Journal of Commerce Commodity Price Index – The JOC index rose 1 point, ending the week at 7.3 versus 6.3 the prior week, reflecting stabilizing/strengthening global growth/demand.

 

Chinese Steel – Steel prices in China rose 0.9% last week, or 34 yuan/ton, to 3676 yuan/ton. 

 

* XLF Macro Quantitative Setup –  Our Macro team’s quantitative setup in the XLF shows 0.9% upside to TRADE resistance and 3.2% downside to TRADE support.

 

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 / 4 out of 12 worsened / 3 of 12 unchanged  

• Long-term(WoW): Positive / 9 of 12 improved / 2 out of 12 worsened / 2 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: GLOBAL FUNDAMENTALS CATCHING UP TO EQUITIES - summary

 

1. American Financial CDS -  Across the board, US Financial swaps tightened. BofA and Citi were tighter by 16 and 15 bps, respectively, while MS tightened 21 bps. Mortgage insurers MTG and RDN tightened 153 bps and 68 bps, respectively.  

 

Tightened the most: MMC, BAC, MTG

Tightened the least: UNM, TRV, AON

 

MONDAY MORNING RISK MONITOR: GLOBAL FUNDAMENTALS CATCHING UP TO EQUITIES - us bank cds

 

2. European Financial CDS - With the exception of Greece and one Spanish Bank (Caja de Ahorros del Mediterraneo), European bank swaps were tighter across the board on US fiscal cliff resolution. Italian and Spanish banks were the most improved, while German and French banks were close behind.

 

MONDAY MORNING RISK MONITOR: GLOBAL FUNDAMENTALS CATCHING UP TO EQUITIES - eu bank cds

 

3. Asian Financial CDS - Asian bank swaps were mostly flat WoW. One notable mover, however, was India's ICICI bank, which widened by 42 bps to 282 bps. In Japan, Nomura tightened by 10 bps to 192 bps.

 

MONDAY MORNING RISK MONITOR: GLOBAL FUNDAMENTALS CATCHING UP TO EQUITIES - asian bank cds

 

4. Sovereign CDS – Sovereign Swaps were notably tightened last week around the globe on the resolution of the fiscal cliff. Ironically, the US was wider by 1 bp. Portugal, Italy and Spain posted the largest WoW improvements.

 

MONDAY MORNING RISK MONITOR: GLOBAL FUNDAMENTALS CATCHING UP TO EQUITIES - sov cds table

 

MONDAY MORNING RISK MONITOR: GLOBAL FUNDAMENTALS CATCHING UP TO EQUITIES - sov cds 4

 

MONDAY MORNING RISK MONITOR: GLOBAL FUNDAMENTALS CATCHING UP TO EQUITIES - sov cds 5

 

5. High Yield (YTM) Monitor – High Yield rates fell 76.3 bps last week, ending the week at 6.01% versus 6.77% the prior week.

 

MONDAY MORNING RISK MONITOR: GLOBAL FUNDAMENTALS CATCHING UP TO EQUITIES - hy

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5.9 points last week, ending at 1754.69.

 

MONDAY MORNING RISK MONITOR: GLOBAL FUNDAMENTALS CATCHING UP TO EQUITIES - LLI

 

7. TED Spread – The TED spread fell 6.3 basis points last week, ending the week at 24 bps versus last week’s print of 30 bps.

 

MONDAY MORNING RISK MONITOR: GLOBAL FUNDAMENTALS CATCHING UP TO EQUITIES - Ted spread

 

8. Journal of Commerce Commodity Price Index – The JOC index rose 1 point, ending the week at 7.3 versus 6.3 the prior week, reflecting stabilizing/strengthening global growth/demand.

 

MONDAY MORNING RISK MONITOR: GLOBAL FUNDAMENTALS CATCHING UP TO EQUITIES - summary

 

9. Euribor-OIS spread – The Euribor-OIS spread widened by roughly half a basis point to 12.5 bps in the latest week. 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: GLOBAL FUNDAMENTALS CATCHING UP TO EQUITIES - 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: GLOBAL FUNDAMENTALS CATCHING UP TO EQUITIES - ecb liq

 

11. Markit MCDX Index Monitor – Last week spreads tightened 15 bps, ending the week at 125 bps versus 140 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 are currently tracking the 16-V1 series. 

 

MONDAY MORNING RISK MONITOR: GLOBAL FUNDAMENTALS CATCHING UP TO EQUITIES - mcdx

 

12. Chinese Steel – Steel prices in China rose 0.9% last week, or 34 yuan/ton, to 3676 yuan/ton. From their highs in mid-2011, Chinese construction steel prices are down ~23%, but has been climbing steadily over the past month. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: GLOBAL FUNDAMENTALS CATCHING UP TO EQUITIES - china steel 2

 

13. 2-10 Spread –  Last week the 2-10 spread tightened was essentially unchanged at 151 bps vs. the prior week. We track the 2-10 spread as an indicator of bank margin pressure. 

 

MONDAY MORNING RISK MONITOR: GLOBAL FUNDAMENTALS CATCHING UP TO EQUITIES - 2 10

 

14. XLF Macro Quantitative Setup –  Our Macro team’s quantitative setup in the XLF shows 0.9% upside to TRADE resistance and 3.2% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: GLOBAL FUNDAMENTALS CATCHING UP TO EQUITIES - xlf quant

 

Joshua Steiner, CFA

 


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