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European Banking Monitor: Sliding Into Summer

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 .

 

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European Financial CDS - The good news is, the systemic gauge of EU banking system risk, Euribor-OIS, remains benign. The bad news is, individual company swaps look awful. The table below speaks for itself, but we'd call attention to Sberbank of Russia (+44 bps WoW), RBS (+47 bps WoW), and the UK banks.

 

European Banking Monitor: Sliding Into Summer - rr. banks

 

Sovereign CDS – Sovereign swaps widened across the board last week. Italy, Spain and Portugal blew out by 24, 32 and 38 bps, respectively to 284, 284 and 409 bps. Meanwhile, Japan widened a further 5 bps to 86 bps, Germany widened 5 bps to 32 bps and the U.S. added 2 bps to 29 bps.

 

European Banking Monitor: Sliding Into Summer - rr. sov 1

 

European Banking Monitor: Sliding Into Summer - rr. sov 2

 

European Banking Monitor: Sliding Into Summer - rr. sov 3

 

Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bps to 12 bps. This is another token silver lining to the current maelstrom. European spreads are at least contained from a systemic standpoint. 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: Sliding Into Summer - rr. euribor

 

ECB Liquidity Recourse to the Deposit Facility – Deposits were down another 12 billion Euros last week, signaling relative calm in the European financial system (relative vs. rest of world). 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: Sliding Into Summer - rr. facility

 


Broken: SP500 Levels, Refreshed

Takeaway: For the 1st time since November 2012, the SP500 is bearish on both our TRADE and TREND durations.

POSITION: 5 LONGS, 6 SHORTS @Hedgeye

 

We’ve always thought this was about price, volume, and velocity. If #RatesRising were to break out at an accelerating rate, the rest of the market’s interconnected risk was going to start to shake. That’s happening now. And the SP500’s TREND line is broken.

 

The other big thing banging around in my head is did US Consumption #GrowthAccelerating peak sequentially in Q213? It’s been a heck of a run from the Q312 consumption lows. Anything can happen; especially if people lose enough money in bonds.

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Intermediate-term TREND resistance = 1591
  2. Immediate-term TRADE support = 1566
  3. Long-term TAIL support = 1503

 

In other words, for the 1st time since November 2012, the SP500 is bearish on both our TRADE and TREND durations, and there’s no obvious intermediate-term support to 1503. That 1566 line is a loose one.

 

As always, we’ll remain market signal and data dependent (the signal generally front-runs the data).

KM

 

Keith R. McCullough
Chief Executive Officer

 

Broken: SP500 Levels, Refreshed - SPX


MONDAY MORNING RISK MONITOR: RISK ACCELERATING TO THE DOWNSIDE

Takeaway: Credit risk continues to rise globally with Chinese banks the latest focal area. High Yield, meanwhile, continues to collapse.

Key Takeaways:

We've been flagging rising risk for 3 weeks now. Risk measures are showing signs of accelerating deterioration on many fronts, both by asset class and by geography. Swaps at the global sovereign and global banking level continue to go the wrong way. Interestingly, systemic banking system gauges like TED Spread and Euribor-OIS, remain benign. High Yield continues to get demolished. Keep an eye on HY - we won't see a let up in pressure until HY stabilizes.

 

* High Yield – Still our preferred primary risk gauge, High Yield rates rose another 40.6 bps last week, ending the week at 6.63% versus 6.23% the prior week. Not only is the trend still moving higher, the rate of change is accelerating.

 

* Asian Financial CDS - Chinese banking horror show. The three Chinese financials we track, Export-Import Bank of China, Bank of China, and China Development Bank, all widened 67-72 bps week-over-week (a 58-62% move). While the level of swaps is still low, the size of the move is unprecedented. For reference, swaps have roughly doubled in the past month for all three of these banks. Meanwhile, over in India, the blast-off continues. State Bank of India widened a further 38 bps week-over-week, bringing the MoM move to 88 bps (+49%).

 

* XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows the intermediate term TREND line of support at $18.87, which is 1.3% below Friday's close. This is a key support level to watch (which is currently being tested with the XLF at $18.79 as of 9:45).

 

* Markit MCDX Index  – Last week spreads widened 22 bps, ending the week at 106 bps versus 84.4 bps the prior week. Muni swaps continue to widen aggressively. Swaps have now widened by 63 bps off their May 3 low of 43 bps.

 

* Journal of Commerce Commodity Price Index – The JOC index fell -4.0 points, ending the week at -3.29 versus 0.8 the prior week. Commodity prices are falling at the fastest rate we've seen in a long time, both causing and reflecting the growing rout in emerging markets and China.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 3 of 13 improved / 7 out of 13 worsened / 3 of 13 unchanged

 • Intermediate-term(WoW): Negative / 3 of 13 improved / 9 out of 13 worsened / 1 of 13 unchanged

 • Long-term(WoW): Positive / 6 of 13 improved / 1 out of 13 worsened / 6 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: RISK ACCELERATING TO THE DOWNSIDE - 15.2

 

1. U.S. Financial CDS -  BBQ-central. U.S. Financial swaps are getting absolutely roasted. MS and GS widened by 37 and 31 bps, respectively, last week, followed by BofA (+27 bps). Mortgage insurers, MTG and RDN, widened by 69 and 44 bps. 

 

Widened the least WoW: AON, SLM, RDN

Widened the most WoW: PRU, MBI, MS

Widened the least WoW: UNM, AON, WFC

Widened the most MoM: MBI, BAC, MS

 

MONDAY MORNING RISK MONITOR: RISK ACCELERATING TO THE DOWNSIDE - 1

 

2. European Financial CDS - The good news is, the systemic gauge of EU banking system risk, Euribor-OIS, remains benign. The bad news is, individual company swaps look awful. The table below speaks for itself, but we'd call attention to Sberbank of Russia (+44 bps WoW), RBS (+47 bps WoW), and the UK banks.

 

MONDAY MORNING RISK MONITOR: RISK ACCELERATING TO THE DOWNSIDE - 2

 

3. Asian Financial CDS - Chinese banking horror show. The three Chinese financials we track, Export-Import Bank of China, Bank of China, and China Development Bank, all widened 67-72 bps week-over-week (a 58-62% move). While the level of swaps is still low, the size of the move is unprecedented. For reference, swaps have roughly doubled in the past month for all three of these banks. Meanwhile, over in India, the blast-off continues. State Bank of India widened a further 38 bps week-over-week, bringing the MoM move to 88 bps (+49%).

 

MONDAY MORNING RISK MONITOR: RISK ACCELERATING TO THE DOWNSIDE - 17

 

4. Sovereign CDS – Sovereign swaps widened across the board last week. Italy, Spain and Portugal blew out by 24, 32 and 38 bps, respectively to 284, 284 and 409 bps. Meanwhile, Japan widened a further 5 bps to 86 bps, Germany widened 5 bps to 32 bps and the U.S. added 2 bps to 29 bps.

 

MONDAY MORNING RISK MONITOR: RISK ACCELERATING TO THE DOWNSIDE - 18

 

MONDAY MORNING RISK MONITOR: RISK ACCELERATING TO THE DOWNSIDE - 3

 

MONDAY MORNING RISK MONITOR: RISK ACCELERATING TO THE DOWNSIDE - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 40.6 bps last week, ending the week at 6.63% versus 6.23% the prior week.

 

MONDAY MORNING RISK MONITOR: RISK ACCELERATING TO THE DOWNSIDE - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell -3.1 points last week, ending at 1790.14.

 

MONDAY MORNING RISK MONITOR: RISK ACCELERATING TO THE DOWNSIDE - 6

 

7. TED Spread Monitor – The TED spread was flat last week at 23 bps. As with Euribor-OIS, its EU cousin, systemic risk gauges for U.S. financials remain calm for now - a good thing.

 

MONDAY MORNING RISK MONITOR: RISK ACCELERATING TO THE DOWNSIDE - 7

 

8. Journal of Commerce Commodity Price Index – The JOC index fell -4.0 points, ending the week at -3.29 versus 0.8 the prior week. Commodity prices are falling at the fastest rate we've seen in a long time, both causing and reflecting the growing rout in emerging markets and China.

 

MONDAY MORNING RISK MONITOR: RISK ACCELERATING TO THE DOWNSIDE - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bps to 12 bps. This is another token silver lining to the current maelstrom. European spreads are at least contained from a systemic standpoint. 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: RISK ACCELERATING TO THE DOWNSIDE - 9

 

10. ECB Liquidity Recourse to the Deposit Facility – Deposits were down another 12 billion Euros last week, signaling relative calm in the European financial system (relative vs. rest of world). 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: RISK ACCELERATING TO THE DOWNSIDE - 10

 

11. Markit MCDX Index Monitor – 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. Last week spreads widened 22 bps, ending the week at 106 bps versus 84.4 bps the prior week.

 

MONDAY MORNING RISK MONITOR: RISK ACCELERATING TO THE DOWNSIDE - 11

 

12. Chinese Steel – Steel prices in China rose 0.4% last week, or 15 yuan/ton, to 3390 yuan/ton. Notwithstanding this small week-over-week improvement, Chinese steel prices are down 4.5% in the past month and are trending steadily lower. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: RISK ACCELERATING TO THE DOWNSIDE - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 192 bps, 6 bps wider than a week ago. This is one of the few silver linings to the current environment. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: RISK ACCELERATING TO THE DOWNSIDE - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows the intermediate term TREND line of support at $18.87, which is 1.3% below Friday's close. This is a key support level.

 

MONDAY MORNING RISK MONITOR: RISK ACCELERATING TO THE DOWNSIDE - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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SLOWER WEEK IN MACAU BUT NO CHANGE IN OUR FORECAST

Average daily table revenues were HK$775 million which is down considerably from last week’s ADTR of HK$1,094 million.  However, we were expecting the drop so our full month YoY GGR growth projection of +16-20% remains intact. 

 

We know there is a lot of focus in the investment community regarding the credit situation in China and the fairly dramatic stock market sell-off.  We would caution investors not to read too much into the weekly numbers as it relates to China macro.  There is typically a lag from the impact of tightening credit and liquidity on the Macau junkets.  No doubt there is reason to be concerned over the intermediate term but we are still expecting almost 20% YoY GGR growth in July.

 

It is likely that a sell-sider will run with a negative Macau call on one of these weekly releases with the declining credit narrative.  The fear in the investment community and the potential for the sell side to jump the gun should create more volatility and trading opportunities.  Our bias is on the long side of the trade FOLLOWING one of these negative calls/sell offs, again since we expect solid numbers through July.

 

MPEL is our favorite play on weakness given the earnings upside and solid market share gains.  Indeed, MPEL picked up share this past week and is close to its 3-month trend.  MGM also looks attractive on weakness and their Macau share is well above trend.  Galaxy also continues to outperform in June.

 

SLOWER WEEK IN MACAU BUT NO CHANGE IN OUR FORECAST - m1

 

SLOWER WEEK IN MACAU BUT NO CHANGE IN OUR FORECAST - m2


Morning Reads on Our Radar Screen

Takeaway: A quick look at stories on Hedgeye's radar screen this morning.

Keith McCullough – CEO

When the Ben and Beijing party comes to an end (via Reuters)

Rocket Fire From Gaza Shakes Cease-Fire With Israel (via New York Times)

Saudi Arabia Changes Weekend to Friday, Saturday (via Bloomberg)

 

Morning Reads on Our Radar Screen - asia

 

Josh Steiner -  Financials

Bankrate Mortgage 30 Year Fixed National Avg Hits 4.36%. Long bonds show no sign of letting up. Next stop: 4.5% (via Bloomberg)

 

Daryl Jones – Macro

Brent Trades Near Three-Week Low on China Growth Concern (via Bloomberg)

Jakarta Calm After Subsidized Fuel Prices Are Increased (via Bloomberg)

 

Howard Penney – Restaurants

Starbucks Pays $15.4 Million U.K. Corporation Tax Amid Backlash (via Bloomberg)

 

Matt Hedrick – Macro

Harvard Grad Swaps Morgan Stanley for Sheikhdom as Deals Dry (via Bloomberg)

Campari Blitzes Europe with Aperol Spritz to Boost Stock (via Bloomberg)


Witness the "Waterfall"

Client Talking Points

CHINA

Boom! An outright awful session for Asian equities overnight. The Shanghai Composite plunges -5.3% moving toward waterfall crash mode (down -19.3% since Feb 5, 2013)A massive PR effort is officially on by the People's Bank of China now that everything you can monitor from a market perspective is going absolutely haywire. (Yes - we were well ahead of consensus on this call.) If you’d like our bearish #EmergingOutflows and China slide decks, please ping us.

COPPER

The Doctor is in the emergency this morning as #BernankeBubbles continue to get crushed. Copper snaps $3.00/lb for the 1st time in 2013. It's down -3.4% this morning and down -18.1% YTD. Meanwhile, Gold and Silver continue to crash down -1-2% after being down hard last week. #CommodityDeflation anyone?

UST 10YR

It’s all about the VELOCITY – the water’s VOLUME (global leverage to sovereign debt) was never in doubt. Pardon our metaphor, but this is the best one we can find to explain the thermodynamic nature of markets as they approach their point of entropy, then crash. That bifurcation point in our model was 2.41% on the 10yr; 2.60% last.

Asset Allocation

CASH 61% US EQUITIES 13%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 20%

Top Long Ideas

Company Ticker Sector Duration
NSM

Financials sector head Josh Steiner is the Street’s head bull on residential mortgage originator/servicer Nationstar, projecting $9 in earnings for the company in 2014.  This is well above the company’s own guidance range, which tops out at around $7.50. NSM had a successful start to the year as it won servicing bids on substantial mortgage portfolios.  They also reported significant increases in their profit margins on those portfolios, and double-digit increases in their own originations.  Housing prices are ramping significantly higher, as Steiner predicted, as demand continues to exceed supply in both new and existing homes.  Steiner says this quality mortgage company could ride the crest of a sustained wave of sector improvement.

MPEL

Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016. 

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

Three for the Road

TWEET OF THE DAY

Whoever said buy Gold and Treasuries for the last 6 months = dead wrong #Macro

@KeithMcCullough

QUOTE OF THE DAY

"The best way to destroy the capitalist system is to debauch the currency."

- Vladimir Lenin
 

STAT OF THE DAY

The Shanghai Composite suffered its worst one-day percentage loss in nearly four years, plunging 5.3% to end at 1,963.24 — its first close below the psychologically-important 2,000-point level since December.


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