MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW

Takeaway: Our risk monitor continues to flash benign readings on most fronts, though the overt positives are fewer than in recent weeks.

* 2-10 Spread – Last week the 2-10 spread tightened 3 bps to 159 bps. 

* Markit MCDX Index Monitor – Last week spreads tightened 8bps, ending the week at 113 bps versus 121 bps the prior week.  

* Sovereign CDS – Sovereign Swaps were mostly wider last week with Japan putting on a major move. Japanese CDS widened by 13 bps last week to 87 bps (a move of 17.8%). Meanwhile, the US also widened by 5 bps to 44 bps. This means the US now trades outside Germany (40 bps). Elsewhere in Europe, swaps were relatively unchanged. 

* XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TRADE resistance and 1.3% downside to TRADE support.

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 3 of 12 improved / 2 out of 12 worsened / 8 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

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1. American Financial CDS -  Swaps were mostly wider in US financials last week, but AGO, MBIA and Genworth all posted notable week-over-week tightening. Overall, swaps widened for 18 out of 27 domestic financial institutions.

Tightened the most WoW: GNW, AGO, TRV

Widened the most WoW: MTG, C, COF

Tightened the most WoW: GNW, AGO, MMC

Widened the most MoM: GS, C, WFC

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2. European Financial CDS - Swaps mostly widened in European Financials last week, though there was nothing especially noteworthy.

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3. Asian Financial CDS - Japanese banks widened by 6-12 bps, following the sovereign wider. Chinese banks did the same, widening by 4-11 bps. India's banks were mixed.

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4. Sovereign CDS – Sovereign Swaps were mostly wider last week with Japan putting on a major move. Japanese CDS widened by 13 bps last week to 87 bps (a move of 17.8%). Meanwhile, the US also widened by 5 bps to 44 bps. This means the US now trades outside Germany (40 bps). Elsewhere in Europe, swaps were relatively unchanged. 

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5. High Yield (YTM) Monitor – High Yield rates fell 2 bps last week, ending the week at 5.90% versus 5.92% the prior week.

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5.8 points last week, ending at 1768.96.

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7. TED Spread Monitor – The TED spread fell 0.8 bps last week, ending the week at 22.8 bps this week versus last week’s print of 23.6 bps.

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8. Journal of Commerce Commodity Price Index – The JOC index rose 3.1 points, ending the week at 10.5 versus 7.4 the prior week.

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9. Euribor-OIS Spread – The Euribor-OIS spread was flat week-over-week at 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. 

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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.  

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11. Markit MCDX Index Monitor – Last week spreads tightened 8bps, ending the week at 113 bps versus 121 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 government finances. 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.

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12. Chinese Steel – Steel prices in China fell 0.5% last week, or 20 yuan/ton, to 3730 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

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13. 2-10 Spread – Last week the 2-10 spread tightened 3 bps to 159 bps. We track the 2-10 spread as an indicator of bank margin pressure.   

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14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TRADE resistance and 1.3% downside to TRADE support.

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Joshua Steiner, CFA