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