MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH

Takeaway: While China's deteriorating situation took a breather last week, India remains a total mess.

Key Takeaways:

Asia remains the most interesting focal area for global risk right now. After roughly a month of negative headlines and deteriorating conditions, China's situation has stabilized (for now). We saw a sharp reversal in Chinese bank swaps - the first since the crisis began. Meanwhile, Indian banks continue to look awful. The three major Indian banks are now all at or near 300 bps on their CDS and the rise has been remarkable. We think not enough attention is being paid to this situation. We've also been calling out High Yield as a key focal area. Fortunately, it finally settled out this past week, but it's less-often mentioned cousin, levered loans, continues to sell off.

 

* Asian Financial CDS - China & India divergence continues to grow. Chinese bank swaps reversed course last week, tightening significantly WoW, while Indian bank swaps continue to blow out. India's three major banks are all now above or near the 300 bps "Lehman line". Japanese banks were relatively uneventful on the week, posting small average increases.

 

* Leveraged Loan Index Monitor – The Leveraged Loan Index fell -6.8 points last week, ending at 1783.36.

 

* High Yield (YTM) Monitor – High Yield rates fell 1.3 bps last week, ending the week at 6.62% versus 6.63% the prior week.

 

* 2-10 Spread – Last week the 2-10 spread widened 28 bps to 220 bps. 

 

* XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.6% upside to TRADE resistance and 0.7% downside to TRADE support.

 

* Sovereign CDS – Sovereign swaps globally last week, with the exception of France, which saw its swaps widen 2 bps to 80 bps. Germany was unchanged at 32 bps. Japan tightened by 8 bps to 78 bps. 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 13 improved / 0 out of 13 worsened / 8 of 13 unchanged

 • Intermediate-term(WoW): Negative / 2 of 13 improved / 7 out of 13 worsened / 4 of 13 unchanged

 • Long-term(WoW): Positive / 4 of 13 improved / 1 out of 13 worsened / 8 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 15

 

1. U.S. Financial CDS -  It was a mixed week for U.S. Financials, although overall more reference entities tightened than widened. On balance, swaps tightened for 21 out of 27 domestic financial institutions we track. The large cap U.S. banks were largely uneventful with the largest move coming from MS (-7 bps).

 

Tightened the most WoW: PRU, MET, MMC

Widened the most WoW: AGO, MTG, JPM

Widened the least WoW: MMC, SLM, MET

Widened the most MoM: MBI, RDN, GS

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 1

 

2. European Financial CDS - Swaps were generally tighter among European banks last week, mirroring the trend we saw in EU sovereigns. We've been calling out Sberbank of Russia as a laggard in recent weeks with the commodity crack-up casting a shadow over its outlook. Last week we saw some reprieve for Russia's largest bank with swaps tightening 27 bps to 250 bps.

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 2

 

3. Asian Financial CDS - China & India divergence continues to grow. Chinese bank swaps reversed course last week, tightening significantly WoW, while Indian bank swaps continued to blow out. India's three major banks are all now above or near the 300 bps "Lehman line". Japanese banks were relatively uneventful on the week, posting small average increases.

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 17

 

4. Sovereign CDS – Sovereign swaps globally last week, with the exception of France, which saw its swaps widen 2 bps to 80 bps. Germany was unchanged at 32 bps. Japan tightened by 8 bps to 78 bps. 

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 18

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 3

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 1.3 bps last week, ending the week at 6.62% versus 6.63% the prior week.

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell -6.8 points last week, ending at 1783.36.

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 6

 

7. TED Spread Monitor – The TED spread rose 1.0 basis points last week, ending the week at 24.01 bps this week versus last week’s print of 22.975 bps.

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 7

 

8. Journal of Commerce Commodity Price Index – The JOC index fell -3.1 points, ending the week at -4.43 versus -1.4 the prior week.

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bp to 11 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: ASIA REMAINS THE PLACE TO WATCH - 9

 

10. ECB Liquidity Recourse to the Deposit Facility – Overnight deposits rose 7.1 billion 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.  

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened 12 bps, ending the week at 94.3 bps versus 106 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: ASIA REMAINS THE PLACE TO WATCH - 11

 

12. Chinese Steel – Steel prices in China fell 0.9% last week, or 32 yuan/ton, to 3358 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: ASIA REMAINS THE PLACE TO WATCH - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened 28 bps to 220 bps. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.6% upside to TRADE resistance and 0.7% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


Today 12PM ET: LIVE Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more

Premium insight

[UNLOCKED] Today's Daily Trading Ranges

“If I could only have one thing of the many things we have it would be my daily ranges." Hedgeye CEO Keith McCullough said recently.

read more

We'll Say It Again: Leave Your Politics Out of Your Portfolio

If your politics dictates your portfolio positioning, the Democrats and #NeverTrump crowd out there have had a hell of a week.

read more

Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more

Neurofinance: The Psychology Behind When To Sell A Bull Market

"Most momentum investors stay invested too long, under-reacting and holding tight after truly bad news finally arrives to break the trend," writes MarketPsych's Richard Peterson.

read more

Energy Stocks: Time to Buy the Dip? | $XLE

What the heck is happening in the Energy sector (XLE)? Energy stocks have trailed the S&P 500 by a whopping 15% in 2017. Before you buy the dip, here's what you need to know.

read more

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more