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
2. European Financial CDS - European financials were wider across the board last week.
3. Asian Financial CDS - Chinese and Indian banks were generally higher, while Japanese financials were mixed.
4. Sovereign CDS – Sovereign swaps were wider globally last week with Italy, Spain and Portugal leading the way.
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.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell -4.2 points last week, ending at 1769.2.
7. TED Spread Monitor – The TED spread was essentially unchanged last week, ending the week at 22.75 bps.
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.
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.
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.
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.
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.
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.
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.
Joshua Steiner, CFA