Key Takeaways
* Systemic Risk vs. Local Risk. The most interesting callout in this week's risk monitor is the divergence between Euribor-OIS and EU bank swaps. Euribor-OIS was tighter week-over-week, moving from 12.70 bps to 12.20 bps. Meanwhile, bank swaps across Europe were meaningfully wider. This speaks to Cyprus not being a systemic risk to the banking system in spite of the media's best efforts at making it one, or at least the markets didn't see it that way. The obvious long play here is Morgan Stanley, which was down 6% last week, the worst of the U.S. global banks. Close behind MS is GS, down 5.3%.
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 3 of 12 improved / 5 out of 12 worsened / 5 of 12 unchanged
• Intermediate-term(WoW): Negative / 5 of 12 improved / 5 out of 12 worsened / 3 of 12 unchanged
• Long-term(WoW): Positive / 11 of 12 improved / 1 out of 12 worsened / 1 of 12 unchanged
1. American Financial CDS - The global U.S. banks widened as expected in response to Cyprus. Bank of America and Morgan Stanley were hardest hit, widening by 18 and 15 bps, respectively.
Tightened the most WoW: ALL, UNM, XL
Widened the most WoW: BAC, JPM, C
Tightened the most WoW: MTG, MBI, RDN
Widened the most MoM: MMC, AON, BAC
2. European Financial CDS - Not surprisingly, EU bank swaps widened sharply last week. French banks were among the hardest hit with BNP wider by 26 bps, Credit Agricole wider by 35 bps and Soc Gen wider by 39 bps. German, Italian and Spanish banks followed suit.
3. Asian Financial CDS - Swaps across China and Japan were tighter last week, while India saw swaps widen.
4. Sovereign CDS – Despite the turmoil, global sovereign swaps were only modestly wider last week. Portugal was teh worst performer, widening by 18 bps WoW. The U.S. was flat.
5. High Yield (YTM) Monitor – High Yield rates rose 0.6 bps last week, ending the week at 5.80% versus 5.79% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.2 points last week, ending at 1783.92.
7. TED Spread Monitor – The TED spread rose 2.1 basis points last week, ending the week at 21.66 bps this week versus last week’s print of 19.61 bps.
8. Journal of Commerce Commodity Price Index – The JOC index rose 0.5 points, ending the week at 9.58 versus 9.1 the prior week.
9. Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bps to 12 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 – In spite of the turmoil in Cyprus, ECB overnight deposits were unchanged 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.
11. Markit MCDX Index Monitor – Last week spreads tightened 4 bps, ending the week at 84 bps versus 88 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.
12. Chinese Steel – Steel prices in China rose 0.9% last week, or 32 yuan/ton, to 3686 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 tightened to 166 bps, 10 bps tighter 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 1.7% upside to TRADE resistance and 1.3% downside to TRADE support.
Joshua Steiner, CFA
