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Takeaway: The intermediate term FIG setup remains favorable with only a handful of minor watch areas. Short-term XLF upside modestly exceeds downside.

***** EXPANDING COVERAGE TO U.S. ASSET MANAGEMENT STOCKS *****

CONFERENCE CALL TODAY 11 am

 

Please join us for a conference call today, July 29th at 11am EDT, to discuss our top ideas and the outlook for the

U.S. Asset Manager space. The dial-in and materials for the call are below.

 

This call will be the inaugural roll-out of Asset Management coverage by Jonathan Casteleyn, CFA, CMT.

Stocks that will be covered on today's call: (BLK, BEN, LM, IVZ, TROW, JNS) 

 

  (Toll Free) or (Direct)
Conference Code: 948342#

There will be a 90+ page slide deck for today's call. The link to the deck is here: Slide Deck

Key Takeaways:

Last week was rather unremarkable from a risk monitoring standpoint. We saw modest widening in US Financial credit default swaps (+4 bps) and a 21 bps increase in high yield rates to 6.17%. Also, there is a modest, but consistent, rising trend in the TED Spread over the last few weeks - a measure of systemic risk in the US banking system. Outside of these three areas, however, most of the rest of the world is behaving pretty well. On an intermediate term basis, we continue to see a lot of positives. Note the preponderance of green in the middle columns (MoM) of our summary table below. 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 3 of 13 improved / 2 out of 13 worsened / 8 of 13 unchanged

 • Intermediate-term(WoW): Positive / 9 of 13 improved / 2 out of 13 worsened / 2 of 13 unchanged

 • Long-term(WoW): Positive / 3 of 13 improved / 0 out of 13 worsened / 10 of 13 unchanged

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1. U.S. Financial CDS -  Bond insurer, Assured Guaranty (AGO) saw its swaps widen 48 bps last week as follow through the Detroit situation. Interestingly, the municipal bond credit default index, MCDX, actually tightened by 2 bps last week. Otherwise, swaps were generally wider, though for the most part only narrowly. Overall, swaps widened for 23 out of 27 domestic financial institutions last week.

Tightened the most WoW: MTG, SLM, JPM

Widened the most WoW: AGO, TRV, MBI

Tightened the most WoW: AIG, GNW, SLM

Tightened the least MoM: AGO, UNM, MBI

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2. European Financial CDS - Russia's megabank, Sberbank, saw its recent trend of tightening swaps come to an end, with a 17 bps increase last week to 224 bps. Sberbank swaps effectively reflect Brent crude oil prices. Bank swaps followed the lead of respective sovereign swaps, for the most part, with Spanish and Portuguese swaps tightening noticeably. UK bank swaps also tightened last week by an average of 7 bps.

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3. Asian Financial CDS - A relatively uneventful week for Asian Financials, with swaps widening by an average of 1 bp and a median of 2 bps. Daiwa saw the largest WoW move, at +6 bps.

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4. Sovereign CDS – Sovereign swaps were tighter across the board last week, led by Portugal (-53 bps), Spain (-19 bps) and Italy (-16 bps). The U.S., Germany and Japan were all tighter by 1-2 bps as well. 

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5. High Yield (YTM) Monitor – High Yield rates rose 21.2 bps last week, ending the week at 6.17% versus 5.96% the prior week.

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 0.5 points last week, ending at 1805.25.

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7. TED Spread Monitor – The TED spread rose 0.5 basis points last week, ending the week at 24.7 bps this week versus last week’s print of 24.17 bps.

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8. Journal of Commerce Commodity Price Index – The JOC index rose 0.9 points, ending the week at -0.33 versus -1.2 the prior week.

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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. 

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10. ECB Liquidity Recourse to the Deposit Facility – Deposits were essentially unchanged 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.  

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11. Markit MCDX Index Monitor – Last week spreads tightened 2 bps, ending the week at 91.05 bps versus 93.03 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. 

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12. Chinese Steel – Steel prices in China rose 0.6% last week, or 20 yuan/ton, to 3470 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

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13. 2-10 Spread – Last week the 2-10 spread widened to 225 bps, 6 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

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14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.7% upside to TRADE resistance and 1.4% downside to TRADE support.

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Joshua Steiner, CFA

Jonathan Casteleyn, CFA, CMT