Takeaway: The short-term setup for Financials is negative, but the intermediate/longer term outlook remains bullish.

Key Takeaways:

* XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.2% upside to TRADE resistance and 1.7% downside to TRADE support.

U.S. Financial CDS -  U.S. bank swaps continued to widen last week, albeit at a low-to-mid single digit basis point rate. This brings the month-over-month change to +18 bps for MS, +13 bps for BAC and +11 bps for JPM and GS. Overall, swaps widened for 18 out of 27 domestic financial institutions.

* Chinese Steel – Steel prices in China fell 1.4% last week, or 50 yuan/ton, to 3595 yuan/ton. Both the short-term and intermediate term trends in Chinese steel prices are negative. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

Euribor-OIS Spread – The Euribor-OIS spread was essentially unchanged at 13 bps last week.

Sovereign CDS – European sovereign swaps were largely uneventful last week with the only notable move coming from Portugal, tightening by 17 bps. Japanese sovereign swaps tightened 4 bps to 67 bps.

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 1 of 12 improved / 4 out of 12 worsened / 8 of 12 unchanged

 • Intermediate-term(WoW): Negative / 3 of 12 improved / 7 out of 12 worsened / 3 of 12 unchanged

 • Long-term(WoW): Positive / 6 of 12 improved / 1 out of 12 worsened / 6 of 12 unchanged

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1. U.S. Financial CDS -  U.S. bank swaps continued to widen last week, albeit at a low-to-mid single digit basis point rate. This brings the month-over-month change to +18 bps for MS, +13 bps for BAC and +11 bps for JPM and GS. Overall, swaps widened for 18 out of 27 domestic financial institutions.

Tightened the most WoW: XL, CB, ACE

Widened the most WoW: MBI, GNW, MS

Tightened the most WoW: GNW, AXP, XL

Widened the most MoM: MBI, MMC, SLM

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2. European Financial CDS - European bank swaps were modestly wider last week. Societe Generale widened by 14 bps to 202 bps, while Banco Popolare widened 38 bps to 592 bps.

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3. Asian Financial CDS - Indian bank swaps widened by 5-6 bps last week while the only notable move in China or Japan was Nomura widening by 10 bps.

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4. Sovereign CDS – European sovereign swaps were largely uneventful last week with the only notable move coming from Portugal, tightening by 17 bps. Japanese sovereign swaps tightened 4 bps to 67 bps.

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5. High Yield (YTM) Monitor – High yield rates rose 1.9 bps last week, ending the week at 5.67% versus 5.65% the prior week.

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 points last week, ending at 1793.5.

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7. TED Spread Monitor – The TED spread rose 1.4 basis points last week, ending the week at 22.8 bps this week versus last week’s print of 21.4 bps. The TED spread has remained relatively range bound for the past month.

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8. Journal of Commerce Commodity Price Index – The JOC index fell -2.6 points, ending the week at 7.2 versus 9.8 the prior week.

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9. Euribor-OIS Spread – The Euribor-OIS spread was essentially unchanged at 13 bps last week. 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 were lower by 4.8bn 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.  

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11. Markit MCDX Index Monitor – Last week spreads widened 1 bp, ending the week at 65.7 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 are currently tracking the 16-V1 series. 

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12. Chinese Steel – Steel prices in China fell 1.4% last week, or 50 yuan/ton, to 3595 yuan/ton. Both the short-term and intermediate term trends in Chinese steel prices are negative. 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 tightened another 2 bps to 150 bps. 

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14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.2% upside to TRADE resistance and 1.7% downside to TRADE support.

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Joshua Steiner, CFA