MONDAY MORNING RISK MONITOR: SURPRISINGLY QUIET AHEAD OF SEQUESTRATION

Takeaway: Europe shows very modest deterioration, while the U.S. holds up well. Sequestration's imminent threat seems not to be worrying US investors.

Key Takeaways:

* 2-10 Spread – Last week the 2-10 spread widened to 176 bps, 4 bps wider than a week ago. 

* Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bps to 13 bps. 

* TED Spread Monitor – The TED spread fell 2.7 basis points last week, ending the week at 16.41 bps this week versus last week’s print of 19.11 bps.

* ECB Liquidity Recourse to the Deposit Facility – Deposits at the ECB liquidity facility rose 30 billion euros WoW. 

* Markit MCDX Index Monitor – Last week spreads widened 2 bps, ending the week at 92 bps versus 90 bps the prior week. 

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 / 8 of 12 improved / 3 out of 12 worsened / 2 of 12 unchanged

 • Long-term(WoW): Positive / 9 of 12 improved / 1 out of 12 worsened / 3 of 12 unchanged

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1. American Financial CDS -  US financials were, on average, tighter by 2 bps week-over-week. Morgan Stanley posted an 8 bps improvement (to 136 bps) while BAC worsened by 3 bps to 121 bps. Swaps tightened for 20 out of 27 domestic financial institutions.

Tightened the most WoW: ACE, MET, MS

Widened the most WoW: AON, MMC, BAC

Tightened the most WoW: RDN, HIG, MET

Widened the most MoM: MMC, AON, SLM

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2. European Financial CDS - The median European financial widened 6 bps WoW, while the worst EU financial was Credit Agricole at +11 bps (to 167 bps). Greek banks were the best performing group on the week.

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3. Asian Financial CDS - Asian banks were mostly tighter WoW with China's Export-Import Bank the worst performer at +6 bps.

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4. European Sovereign CDS – Sovereign swaps, with the exception of a modest widening in Italy, were largely unchanged last week. 

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5. High Yield (YTM) Monitor – High Yield rates were up nominally last week (+0.5 bps), ending the week at 6.08%.

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.2 points last week, ending at 1771.3.

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7. TED Spread Monitor – The TED spread fell 2.7 basis points last week, ending the week at 16.41 bps this week versus last week’s print of 19.11 bps.

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8. Journal of Commerce Commodity Price Index – The JOC index fell -3.7 points, ending the week at 7.47 versus 11.2 the prior week.

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9. Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bps to 13 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 – Deposits at the ECB liquidity facility rose 30 billion euros WoW. 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 widened 2 bps, ending the week at 92 bps versus 90 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 track the 16-V1. 

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12. Chinese Steel – Steel prices in China rose 2.0% last week, or 76 yuan/ton, to 3866 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 widened to 176 bps, 4 bps wider than a week ago. 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 1.3% upside to TRADE resistance and 1.7% downside to TRADE support.

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Joshua Steiner, CFA