Key Takeaways:
* XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.4% upside to TRADE resistance and 3.3% downside to TRADE support.
* 2-10 Spread – Last week the 2-10 spread widened 9 bps to 156 bps.
* High Yield – High Yield rates fell 4.5 bps last week, ending the week at 5.22% versus 5.27% the prior week.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 3 of 12 improved / 2 out of 12 worsened / 8 of 12 unchanged
• Intermediate-term(WoW): Positive / 7 of 12 improved / 2 out of 12 worsened / 4 of 12 unchanged
• Long-term(WoW): Positive / 5 of 12 improved / 0 out of 12 worsened / 8 of 12 unchanged
1. U.S. Financial CDS - Swaps were sharply tighter for US financials last week. BofA and MS saw swaps tighten 16 and 10 bps, respectively. MTG & RDN dropped another 51 and 38 bps, while MBIA dropped 670 bps on a favorable resolution of their BofA litigation. MBIA swaps are now trading just inside the "Lehman line" at 299 bps. Overall, all 27 major U.S. financials we track saw swaps tighten week-over-week.
Tightened the most WoW: MBI, TRV, XL
Tightened the least WoW: UNM, MET, COF
Tightened the most WoW: MBI, RDN, AXP
Tightened the least MoM: WFC, UNM, JPM
2. European Financial CDS - French, Spanish and Italian banks saw swaps mostly widen last week. Overall, swaps were wider, by a median of 6 bps.
3. Asian Financial CDS - Relatively uneventful week for Asian financial swaps.
4. Sovereign CDS – Italy, Portugal and Japan all dropped 6-8 bps WoW. Elsewhere, swaps were flat to down 2 bps. The world remains a calm place for now.
5. High Yield (YTM) Monitor – High Yield rates fell 4.5 bps last week, ending the week at 5.22% versus 5.27% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5.3 points last week, ending at 1804.9.
7. TED Spread Monitor – The TED spread rose 0.7 basis points last week, ending the week at 23.4 bps this week versus last week’s print of 22.7 bps.
8. Journal of Commerce Commodity Price Index – The JOC index fell -0.9 points, ending the week at 5.51 versus 6.4 the prior week.
9. Euribor-OIS Spread – The Euribor-OIS spread was unchanged week-over-week at 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.
10. ECB Liquidity Recourse to the Deposit Facility – Deposits declined week over week by 37.6 billion Euros. 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 widened from 43 to 61 bps on the 16-v1 series. 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.
12. Chinese Steel – Steel prices in China rose 0.4% last week, or 13 yuan/ton, to 3584 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 widened to 156 bps, 9 bps wider 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 1.4% upside to TRADE resistance and 3.3% downside to TRADE support.
Joshua Steiner, CFA
