MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET?

Takeaway: Neither Italy nor sequestration seem to be having much impact on U.S. Financials. Systemic interbank risk measures remains low for now.

Key Takeaways:

* European Financial CDS - Italian banks are wider on the political uncertainty with increases ranging from +19 to +34 bps. On a MoM basis, Italian banks are up 31 to 52 bps. Spanish banks are not far behind. Interestingly, while sovereign swaps in Germany and France were little changed, German and French bank swaps were notably wider WoW. Swaps widened by a median of 8 bps WoW among EU Financials, while equities were down by 3%. The MoM change in EU Financials is up to +13 bps. 

* Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bps to 14 bps. While individual swaps are rising, the sentiment around systemic risk remains low, as evidenced by the very modest uptick in the Euribor-OIS spread.

* ECB Liquidity Recourse to the Deposit Facility – Likewise, ECB Liquity Deposits fell by 13 billion euros last week. 

* U.S. Financial CDS -  Mortgage insurers MGIC and Radian continued to tighten, improving 319 and 135 bps, respectively WoW, signaling that sentiment around the ongoing housing recovery is intact. The global U.S. banks were modestly wider WoW on rising concerns around Italy. 

* 2-10 Spread – Last week the 2-10 spread tightened to 164 bps, 12 bps tighter than a week ago. 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 3 of 12 improved / 6 out of 12 worsened / 4 of 12 unchanged

 • Intermediate-term(WoW): Positive / 6 of 12 improved / 3 out of 12 worsened / 4 of 12 unchanged

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

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 15 rm

1. U.S. Financial CDS -  Mortgage insurers MGIC and Radian continued to tighten, improving 319 and 135 bps, respectively WoW, signaling that sentiment around the ongoing housing recovery is intact. The global U.S. banks were modestly wider WoW on rising concerns around Italy. 


Tightened the most WoW: MTG, RDN, AGO

Widened the most WoW: MBI, MS, JPM

Tightened the most WoW: RDN, MTG, MET

Widened the most MoM: AON, MMC, BAC

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 1 rm

2. European Financial CDS - Swaps widened by a median of 8 bps WoW among EU Financials, while equities were down by 3%. The MoM change in EU Financials is up to +13 bps. Italian banks were wider on the political uncertainty with increases ranging from +19 to +34 bps. On a MoM basis, Italian banks are up 31 to 52 bps. Spanish banks are not far behind. Interestingly, while sovereign swaps in Germany and France were little changed, bank swaps among German and French banks were notably wider WoW.

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 2 rm

3. Asian Financial CDS - India widened while China tightened. Japan was mixed. 

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 17 rm

4. Sovereign CDS – Italian sovereign swaps widened sharply last week on Italian political uncertainty. Italy's swaps widened 36 bps WoW to 286 bps. Spain and Portugal were narrowly wider by 11 bps on sympathy. The rest of the world, however, moved little, with the U.S., Germany, France, Ireland and Japan all flat or narrowly tighter.

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 18 rm

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5. High Yield (YTM) Monitor – High Yield rates fell 10.5 bps last week, ending the week at 5.98% versus 6.08% the prior week.

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 5 rm

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 0.6 points last week, ending at 1771.9.

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 6 rm

7. TED Spread Monitor – The TED spread rose 1.6 basis points last week, ending the week at 18 bps versus last week’s print of 16.4 bps.

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 7 rm

8. Journal of Commerce Commodity Price Index – The JOC index fell 0.8 points, ending the week at 9.08 versus 9.9 the prior week.

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 8 rm

9. Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bps to 14 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: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 9 rm

10. ECB Liquidity Recourse to the Deposit Facility – Deposits fell by 13 billion euros last week. 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: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 10 rm

11. Markit MCDX Index Monitor – Last week spreads widened by 1 bp, ending the week at 93 bps versus 92 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. 

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 11 rm

12. Chinese Steel – Steel prices in China fell 2.0% last week, or 76 yuan/ton, to 3790 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: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 12 rm

13. 2-10 Spread – Last week the 2-10 spread tightened to 164 bps, 12 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 13 rm

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.9% upside to TRADE resistance and 1.5% downside to TRADE support.

MONDAY MORNING RISK MONITOR: ARE ITALY'S WOES HITTING U.S. FINANCIALS YET? - 14 rm

Joshua Steiner, CFA