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European Banking Monitor: Cyprus Doesn’t Shake Systemic Confidence

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

* 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. 

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If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.

 

Matthew Hedrick

Senior Analyst

 

European Financials CDS Monitor – 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.

 

European Banking Monitor: Cyprus Doesn’t Shake Systemic Confidence - xx. banks

 

Sovereign CDS – Despite the turmoil, global sovereign swaps were only modestly wider last week. Portugal was the worst performer, widening by 18 bps WoW.

 

European Banking Monitor: Cyprus Doesn’t Shake Systemic Confidence - xx. sover 

 

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. 

 

European Banking Monitor: Cyprus Doesn’t Shake Systemic Confidence - xx. euribor

 

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.  

 

European Banking Monitor: Cyprus Doesn’t Shake Systemic Confidence - xx. facility


Copper and the Dollar

Takeaway: Get the US dollar right, you'll get a lot of other things right - like copper, for example.

What's good for the US dollar is bad for commodities these days. We see that correlation across many different commodities, but copper prices are showing a particularly strong correlation as you can see in the chart below. The chart shows high grade copper prices versus the the US dollar index for the past 30 days.

 

Copper and the Dollar - Copper vs USD

 


MACAU GROWTH SLOWS - BUT NOT MUCH

Macau put up another strong week and while ADTR failed to keep up with the torrid pace of the first two and half weeks, revenues were still very good.  ADTR grew 33% YoY this past week to HK$886 million.  Our full month projection is higher once again, to HK$29.5-30.5 million which would represent YoY growth of 22-26%.  We are hearing that high VIP hold is only partly responsible for the March strength as volumes in both Mass and VIP have been very healthy.

 

Market shares thus far in March are consistent with recent trends for the most part.  The slight exceptions are SJM higher and MGM lower.  We continue to like MPEL and LVS as the best Macau long ideas.

 

MACAU GROWTH SLOWS - BUT NOT MUCH - mmm

 

MACAU GROWTH SLOWS - BUT NOT MUCH - fff


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Dollar General: On the Margin

Takeaway: The key margin driver for Dollar General might not have much more room to run.

Dollar General (DG) reported earnings earlier this morning, which showed sales growth but also improving margins. But, the key margin driver for DG is slowing as you'll see from the chart below.

 

Consumables, items like food or other perishables that have consumers returning frequently to the stores, now account for 74% of total sales, up from 69% and about has high as they can really go. This high percentage of consumables creates more frequent visits to the stores, improves comparable sales and ultimately makes margins higher.

 

As such, the rate of margin improvement will slow, and that will hamper the pace of appreciation in DG's stock price, too.

 

Dollar General: On the Margin - Dollar General 032513


MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE

Takeaway: Morgan Stanley looks like an obvious short-term reflation catalyst as well as GS. Citi ranks third.

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

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 15

 

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

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 1

 

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.

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 2

 

3. Asian Financial CDS - Swaps across China and Japan were tighter last week, while India saw swaps widen.

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 17

 

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. 

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 18

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 3

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 4

 

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.

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.2 points last week, ending at 1783.92.

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 6

 

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.

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 7

 

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.

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 8

 

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. 

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 9

 

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.  

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 10

 

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. 

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 11

 

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.

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 12

 

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.

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 13

 

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.

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 14

 

Joshua Steiner, CFA


U.S. Dollar Strength

Client Talking Points

Good for the Dollar, Bad for Commodities

The US Dollar Index is now up for six of the last seven weeks, and , in turn, the CRB Commodities Index is down for six of the last seven weeks. The dollar and commodities, then are inversely correlated. Oil, copper and rice have have very high inverse correlations, for example.

Emerging Markets Impact

Watch the emerging markets, too, to gauge the strengthening US dollar’s impact. In those emerging markets that do not have a peg to the dollar, we are seeing localized inflation. In those countries whose equity markets are commodity-linked, like Brazil for example, we are seeing declines. Brazil is down 9.4% for the year.

Asset Allocation

CASH 32% US EQUITIES 24%
INTL EQUITIES 20% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
DRI

Darden stands to be a beneficiary from a housing recovery and an improved employment picture, which boosts casual dining trends. Darden reported earnings today that beat Wall Street expectations, though net income declined 18%.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

Three for the Road

TWEET OF THE DAY

“Love that #OldWall mentality – everyone else had it wrong. So it’s ok (pay us).” – @KeithMcCullough

 

QUOTE OF THE DAY

“Be yourself; everyone else is already taken.” – Oscar Wilde

STAT OF THE DAY

15, the seed of Florida Gulf Coast, which became the first 15th seed in NCAA men’s basketball tournament history to make the round of 16.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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