Key Takeaways:
Asia continues to be a rising source of risk with both China and India showing growing pressure in their respective banking systems. Chinese banks posted another week of sharp increases in their default swaps. Here are Keith's morning comments on Asia:
CHINA – ugly start to the week for Asian Equities, led lower by Indonesia -3.2% and China -2.4% (Hang Seng -1.3%); Shanghai Comp = -11.7% YTD and every Asian country is bearish TREND @Hedgeye other than Japan right now (Nikkei TREND = 13,668)
Domestically, things looked somewhat better for everything outside of the Treasury and gold market. One of our primary risk gauges, junk bonds, finally took a breather last week, cooling off by a modest 4 bps to 6.58%. 30-Yr conforming mortgage rates, however, climbed higher by 24 bps on Friday alone to 4.64% (Bankrate National Daily Average).
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 2 of 13 improved / 3 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
1. U.S. Financial CDS - Swaps tightened for 24 out of 27 domestic financial institutions. While there weren't many large moves, it is worth noting that Citi led the pack among the large caps with a 7 bps narrowing to 124 bps.
Tightened the most WoW: C, ALL, HIG
Widened the most WoW: UNM, COF, MMC
Widened the least/ tightened the most WoW: SLM, AON, MMC
Widened the most MoM: GS, MS, C
2. European Financial CDS - Bank swaps were narrowly tighter across Europe last week with negative divergences in Italy and Greece.
3. Asian Financial CDS - Chinese banks post another week of widening. All three major banks we track posted WoW increases of 15-17 bps.
4. Sovereign CDS – Sovereign swaps were mostly uneventful last week with two exceptions. Portugal widened by 73 bps to 474 bps, while Japan tightened by 5 bps to 73 bps. All other major markets were unchanged.
5. High Yield (YTM) Monitor – High Yield rates fell 4.1 bps last week, ending the week at 6.58% versus 6.62% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.5 points last week, ending at 1784.86.
7. TED Spread Monitor – The TED spread fell 0.8 basis points last week, ending the week at 23.19 bps this week versus last week’s print of 24.01 bps.
8. Journal of Commerce Commodity Price Index – The JOC index rose 1.4 points, ending the week at -2.59 versus -4.0 the prior week.
9. Euribor-OIS Spread – The Euribor-OIS spread widened 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.
10. ECB Liquidity Recourse to the Deposit Facility – Deposits rose by 11.5 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.
11. Markit MCDX Index Monitor – Last week spreads widened 2 bps, ending the week at 96 bps versus 94.3 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.
12. Chinese Steel – Steel prices in China rose 1.4% last week, or 48 yuan/ton, to 3406 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 234 bps, 14 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 1.2% upside to TRADE resistance and 2.1% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT