Key Takeaways:
While you were focusing on earnings from major banks last week, there were a number of notable developments on the macro risk front. In short, risk continues to fall globally. A client forwarded us this a while back and, frankly, it seems apropos for the moment. You Have to Admit ...
* European Financial CDS - Full disclosure, EU bank swap quotes are becoming more and more sporadic. We pull our data from Bloomberg and recently have been receiving a lot of "NA" data points on numerous EU banks. When we asked Bloomberg what was going on, they explained that they source quotes from multiple market makers and if they can't find at least two separate quotes for a security they don't publish. We think that it's a referendum of sorts on the declining risk profile of the EU banking system as a whole, that interest in insuring against default at many of Europe's larger banks has now slowed to a trickle. Overally, EU banks were little changed on the week, tightening by a median of 1 bp.
* Sovereign CDS – Sovereign swaps tightened across the board last week. Portuguese sovereign swaps tightened by -10.4% (-58 bps to 498 bps) after rising last week by 83 bps. Nevertheless, they remain 89 bps higher than levels one month ago. It's also worth flagging the U.S. U.S. default swaps are now at 24 bps, this is down 3 bps WoW and 6 bps MoM. For reference, U.S. default swaps touched their recent multi-year lows on 9/30/09 at 19 bps and their recent multi-year highs of 64 bps on 7/29/11. Within that reference frame (19-64 bps), we are only 5 bps away from the low, or roughly in the bottom decile of the trading range of the last several years.
* High Yield (YTM) Monitor – High Yield rates fell 35.1 bps last week, ending the week at 5.96% versus 6.31% the prior week. However, yields remain well above their recent lows of 5.17% on 5/9/13.
* Markit MCDX Index Monitor – In spite of Detroit filing for the largest municipal bankruptcy in U.S. history on Friday, Markit MCDX municipal default swaps were narrowly changed, rising a mere 3 bps on the day and actually falling 2 bps week-over-week. #PricedIn
* Chinese Steel – Steel prices in China rose 1.2% last week, or 41 yuan/ton, to 3450 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.
* XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TRADE resistance and 3.1% downside to TRADE support. #AsymmetricShortTermSetup
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 5 of 13 improved / 2 out of 13 worsened / 6 of 13 unchanged
• Intermediate-term(WoW): Positive / 5 of 13 improved / 2 out of 13 worsened / 6 of 13 unchanged
• Long-term(WoW): Positive / 3 of 13 improved / 1 out of 13 worsened / 9 of 13 unchanged
1. U.S. Financial CDS - Swaps were sharply tighter last week on the heels of stronger-than-expected earnings that also saw the XLF rise 1.9% (now up 8.1% MoM). GS, MS, BAC and C were the leaders, tightening 13-22 bps on the week. Overall, swaps tightened for 26 out of 27 domestic financial institutions.
Tightened the most WoW: GS, BAC, C
Widened the most/ tightened the least WoW: XL, ACE, CB
Tightened the most WoW: MET, PRU, AIG
Widened the most/ tightened the least MoM: AGO, CB, JPM
2. European Financial CDS - Full disclosure, EU bank swap quotes are becoming more and more sporadic. We pull our data from Bloomberg and recently have been receiving a lot of "NA" data points on numerous EU banks. When we asked Bloomberg what was going on, they explained that they source quotes from multiple market makers and if they can't find at least two separate quotes for a security they don't publish. We think that it's a referendum of sorts on the declining risk profile of the EU banking system as a whole, that interest in insuring against default at many of Europe's larger banks has now slowed to a trickle. Overally, EU banks were little changed on the week, tightening by a median of 1 bp.
3. Asian Financial CDS - Asia tightened across the board last week with Chinese banks leading the way. Chinese banks tightened an average 11 bps WoW, while Indian banks were narrower by an average 7 bps. Japanese banks tightened by 2 bps, on average.
4. Sovereign CDS – Sovereign swaps tightened across the board last week. Portuguese sovereign swaps tightened by -10.4% (-58 bps to 498 bps) after rising last week by 83 bps. Nevertheless, they remain 89 bps higher than levels one month ago. It's also worth flagging the U.S. U.S. default swaps are now at 24 bps, this is down 3 bps WoW and 6 bps MoM. For reference, U.S. default swaps touched their recent multi-year lows on 9/30/09 at 19 bps and their recent multi-year highs of 64 bps on 7/29/11. Within that reference frame (19-64 bps), we are only 5 bps away from the low, or roughly in the bottom decile of the trading range of the last several years.
5. High Yield (YTM) Monitor – High Yield rates fell 35.1 bps last week, ending the week at 5.96% versus 6.31% the prior week. However, yields remain well above their recent lows of 5.17% on 5/9/13.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 8.9 points last week, ending at 1804.75.
7. TED Spread Monitor – The TED spread rose 0.7 basis points last week, ending the week at 24.17 bps this week versus last week’s print of 23.46 bps.
8. Journal of Commerce Commodity Price Index – The JOC index rose 1.4 points, ending the week at -1.6 versus -3.0 the prior week.
9. Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bps 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.
10. ECB Liquidity Recourse to the Deposit Facility – Deposits fell almost 12 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 tightened 2 bps, ending the week at 93.03 bps versus 95.02 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 1.2% last week, or 41 yuan/ton, to 3450 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 tightened to 219 bps, -6 bps tighter 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 0.5% upside to TRADE resistance and 3.1% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
