MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD

Takeaway: Most of our risk measures remain benign, but rising commodities and higher taxes may be starting to exert some pressure.

Key Takeaways:

 

* Downside Trumps Upside in the Short Term: Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TRADE resistance and 2.8% downside to TRADE support.

 

* Yield Spreads Are Widening: Last week the 2-10 spread widened by 12 bps to 172 bps.

 

High Yield Backs Up: High yield rates rose 15 bps last week, ending the week at 5.96%.

 

* Muni Risk Continues to Fall: MCDX 16V-1 spreads fell 3 bps to 108 bps. 

 

* Chinese Steel Rises Further: Steel prices in China rose 0.7% last week, or 26 yuan/ton, to 3755 yuan/ton. 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 2 of 12 improved / 5 out of 12 worsened / 6 of 12 unchanged

 • Intermediate-term(WoW): Positive / 7 of 12 improved / 2 out of 12 worsened / 4 of 12 unchanged

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

 

1. American Financial CDS -  U.S. financial swaps were mixed with mortgage insurers and bond guarantors significantly wider WoW while the rest of the sector was flat to slightly tighter. 

 

Tightened the most WoW: ACE, AON, HIG

Widened the most WoW: MTG, AGO, GNW

Tightened the most WoW: GNW, AGO, MBI

Widened the most/ tightened the least MoM: COF, MTG, GS

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 1

 

2. European Financial CDS - European financials were wider across the board last week.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 2

 

3. Asian Financial CDS - Chinese and Indian banks were generally higher, while Japanese financials were mixed.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 17

 

4. Sovereign CDS – Sovereign swaps were wider globally last week with Italy, Spain and Portugal leading the way.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 18

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 3

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 15 bps last week, ending the week at 5.96% versus 5.81% the prior week.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell -4.2 points last week, ending at 1769.2.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 6

 

7. TED Spread Monitor – The TED spread was essentially unchanged last week, ending the week at 22.75 bps. 

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 7

 

8. Journal of Commerce Commodity Price Index – The JOC index rose 1.2 points, ending the week at 13.31 versus 12.1 the prior week.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 8

 

9. Euribor-OIS Spread– The Euribor-OIS spread widened by 1 bp 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: SHORT TERM RISK TRUMPS REWARD - 9

 

10. ECB Liquidity Recourse to the Deposit Facility – Deposits continue the secular decline. 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: SHORT TERM RISK TRUMPS REWARD - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened 3 bps, ending the week at 107.8 bps.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: SHORT TERM RISK TRUMPS REWARD - 11

 

12. Chinese Steel – Steel prices in China rose 0.7% last week, or 26 yuan/ton, to 3755 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 172 bps, 12 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TRADE resistance and 2.8% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 14

 

Joshua Steiner, CFA


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