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    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

Takeaway: Various risk measures signal ongoing calm in the markets. High yield, municipal swaps, inter-bank counterparty risk are all in agreement.

* High Yield – High Yield rates fell 8.7 bps last week, ending the week at 5.92% versus 6.01% the prior week.

* Euribor-OIS  – The spread tightened by 2 bps to 11 bps. Europe continues to mend and rally.

* Markit MCDX  – Last week spreads tightened 4 bps, ending the week at 121 bps versus 125 bps the prior week. Taking a step back, municipal credit default risk has been steadily falling since its peak of 230 bps in November 2011. 

* Chinese Steel – Steel prices in China rose 2.0% last week, or 74 yuan/ton, to 3750 yuan/ton. Chinese steel has been rising since the end of November 2012.

* 2-10 Spread – Last week the 2-10 spread widened 11 bps to 162 bps. 

* XLF Macro Quantitative Setup – Quantitatively, the Financials remain bullish TRADE and TREND (short & intermediate term). Our Macro team’s quantitative setup in the XLF shows 2.0% upside to TRADE resistance and 1.1% downside to TRADE support.

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 6 of 12 improved / 2 out of 12 worsened / 4 of 12 unchanged

 • Intermediate-term(WoW): Positive / 10 of 12 improved / 2 out of 12 worsened / 0 of 12 unchanged

 • Long-term(WoW): Positive / 8 of 12 improved / 1 out of 12 worsened / 3 of 12 unchanged

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - summary

1. American Financial CDS -  Swaps tightened for 23 out of 27 domestic financial institutions. All large caps were tighter except for GS, which widened 1 bp.

Tightened the most WoW: MBI, AGO, MS

Widened the most WoW: MTG, GS, TRV

Tightened the most WoW: MMC, ACE, GNW

Widened the most/ tightened the least MoM: MBI, SLM, WFC

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - us cds

2. European Financial CDS - EU Financial swaps were mixed this past week, with German and French swaps nominally higher while Spanish and Italian swaps continued to tighten. 

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - eu cds 2

3. Asian Financial CDS - Asian Financials were tighter across the board, as rising expectations for Japan's new monetary initiatives continue to fuel a rally.

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - asia cds

4. Sovereign CDS – Sovereign swaps were mixed, with Italy, Spain, Ireland and France tighter, while the US, Germany, Portgual and Japan were flat or wider by 1 bp. mostly tightened over last week. 

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - sov table

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - sov cds 4

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - sov cds 5

5. High Yield (YTM) Monitor – High Yield rates fell 8.7 bps last week, ending the week at 5.92% versus 6.01% the prior week.

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - hy

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 8.5 points last week, ending at 1763.15.

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - LLI

7. TED Spread  – The TED spread fell 0.1 basis points last week, ending the week at 23.6 bps this week versus last week’s print of 23.7 bps.

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - ted spread

8. Journal of Commerce Commodity Price Index – The JOC index rose 1 point, ending the week at 8.8 versus 7.7 the prior week.

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - jocs

9. Euribor-OIS spread – The Euribor-OIS spread tightened by 2 bps to 11 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: RISK MEASURES REMAIN BROADLY BULLISH - 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: RISK MEASURES REMAIN BROADLY BULLISH - ecb liquidity

11. Markit MCDX Index Monitor – Last week spreads tightened 4 bps, ending the week at 121 bps versus 125 bps the prior week. Taking a step back, municipal credit default risk has been steadily falling since its peak of 230 bps in November 2011. 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: RISK MEASURES REMAIN BROADLY BULLISH - mcdx

12. Chinese Steel – Steel prices in China rose 2.0% last week, or 74 yuan/ton, to 3750 yuan/ton. Chinese steel has been rising since the end of November 2012.

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - chinese steel

13. 2-10 Spread – Last week the 2-10 spread widened 11 bps to 162 bps. We track the 2-10 spread as an indicator of bank margin pressure.  

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - 2 10

14. XLF Macro Quantitative Setup – Quantitatively, the Financials remain bullish TRADE and TREND (short & intermediate term). Our Macro team’s quantitative setup in the XLF shows 2.0% upside to TRADE resistance and 1.1% downside to TRADE support.

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - levels

Joshua Steiner, CFA