In summary, thus far August remains a remarkably quiet month. Too quiet? Perhaps, but it's hard to put a finger on what the market could be missing with its extreme calm. Risk gauges at the Sovereign, bank and systemic banking levels all remain benign globally. The only red on our summary screen below is the WoW move in High Yield rates (+12 bps) and the upward sloping longer-term trendline in the Shifon Index (Chinese overnight lending rate).
US financial credit default swaps were modestly tighter. European financial swaps were also broadly, though narrowly, improved (average -6 bps). High yield rates posted another modest up week, rising 12 bps, following a +5 bps WoW change in the previous week. That said, MoM, rates are still down by 3 bps. The TED spread was lower (-2 bp), Euribor-OIS was flat and the Shifon Index tightened by 9 bps.
* European Financial CDS - Overall, the EU banking system continues to slowly heal. Systemic risk measures of Europe's banking system, such as Euribor-OIS, have been benign now for almost a year, having fully renormalized back in Sep/Oct 2012. The median European bank tightened by 6 bps last week and is tighter by 16 bps vs the previous month.
* XLF Macro Quantitative Setup – Short-term XLF upside trumps downside by 4 to 1. Our Macro team’s quantitative setup in the XLF shows 2.8% upside to TRADE resistance and 0.7% downside to TRADE support.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 5 of 13 improved / 1 out of 13 worsened / 7 of 13 unchanged
• Intermediate-term(WoW): Positive / 7 of 13 improved / 0 out of 13 worsened / 6 of 13 unchanged
• Long-term(WoW): Positive / 2 of 13 improved / 1 out of 13 worsened / 10 of 13 unchanged
1. U.S. Financial CDS - Credit default swaps for U.S. financials were broadly, but narrowly, lower last week. The average and median decline was 1 and 3 bps, respectively. The two companies that posted increases were Assured Guaranty (AGO) and MBIA (MBI). Overall, swaps tightened for 23 out of 27 domestic financial institutions.
Tightened the most WoW: AON, AXP, WFC
Widened the most WoW: MBI, AGO, PRU
Tightened the most MoM: MTG, GS, MS
Widened the most MoM: AGO, MBI, MMC
2. European Financial CDS - The median European bank tightened by 6 bps last week and is tighter by 16 bps vs the previous month. Overall, the EU banking system continues to slowly heal. Systemic risk measures of Europe's banking system, such as Euribor-OIS, have been benign now for almost a year having fully renormalized back in Sep/Oct 2012.
3. Asian Financial CDS - Chinese and Indian bank swaps moved wider last week by an average of 12 bps and 18 bps, respectively. Japanese banks swaps tightened by an average of 3 bps.
4. Sovereign CDS – Sovereign credit default swaps were mixed, though largely uneventful last week. Italy and Spain tightened by 7 and 9 bps, respectively, while Portugal widened by 4 bps. Elsewhere there was very little movement.
5. High Yield (YTM) Monitor – High Yield rates rose 12.1 bps last week, ending the week at 6.35% versus 6.23% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell -0.3 points last week, ending at 1805.56.
7. TED Spread Monitor – The TED spread declined 2.2 bps last week, ending the week at 21.2 bps this week versus last week’s print of 23.4 bps.
8. CRB Commodity Price Index – The CRB index rose 0.5%, ending the week at 285 versus 284 the prior week. As compared with the prior month, however, commodity prices are down -0.5% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
9. Euribor-OIS Spread – The Euribor-OIS spread was unchanged week-oer-week at 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. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 9 basis points last week, ending the week at 3.1641 bps this week versus last week’s print of 3.2539 bps. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
11. Markit MCDX Index Monitor – Last week spreads widened by 1 bp, ending the week at 96 bps versus 95 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 2.0% last week, or 70 yuan/ton, to 3517 yuan/ton. Since the start of July, Chinese steel prices have been gradually grinding higher. 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 228 bps, -2 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 2.8% upside to TRADE resistance and 0.7% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT